Jim Cramer is doing jumping jacks on CNBC.

Poor Peter Schiff. He should be happy. Now he has an excuse why Financial Armageddon (wait, that's the other guy) hasn't arrived.

I'm still convinced that something big is going on that the fed knows about. It doesn't make so much sense, this 50 bps rate cut, unless one just thinks the FRB is just a bunch of cheezebag doofuses. (Maybe it is that simple..)

I fell for all that fed tough talk.. was it just some scammy headfake?

Since this is the internet.. where speculation is king.. is this smoke? Is there a fire? Is it a bigger fire than we have imagined?! Oh, so exciting! All this smoke and fire!

Ben just has to get us to the next election. From there it's no longer his problem as he will most likely be a one-termer.

It will be interesting to see how much the constipation in the banking system alleviates tomorrow, as this cut was clearly designed to re-liquify the banking system before it brings down the real economy.

In a single stroke the emerging market bubble is back and hitting new highs:

EEM

Never, ever underestimate the desire to "get rich quick" or the forces these desires create.

I suspect people who did have a lot less money today - if any at all.

michael,

peaked well over 700

And this cut won't help with all the debt currently being repriced. - CR

Can you explain your thoughts because I definitely think it helps the 'repricing' of bad debt - only way it doesn't completely help is if the cut wasn't enough to offset the discounting due to quality.

What am I missing?

CR,

I agree. People that say, "This won't help housing, so there's no reason to cut" are really barking up the wrong tree. It's not intended to help housing. The Fed is pretty clear with their intentions in its statement today:

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Based on their inaction this year (prior to today, of course), it was pretty clear that the Fed was more than willing to let housing go to hell unless it threatened the general economy. They now perceive that the risks of that happening are enough to warrant a cut.

dry,

This will help the repricing of debt has been priced - just not acceptably one of the parties of the transaction - what it seems it won't help is that debt that hasn't been priced because the issue has been uncertainty (simply unknown so how do you price) rather than risk (known in some fashion and hence priceable).

How is this NOT a bail out? Someone please explain this to me.

It's still possible that the situation is much more serious than we realize.

But barring that, this is a cave-in and effectively a "Bernanke Put".

This will help the repricing of debt has been priced - just not acceptably one of the parties of the transaction - what it seems it won't help is that debt that hasn't been priced because the issue has been uncertainty (simply unknown so how do you price) rather than risk (known in some fashion and hence priceable).

energycon - I understand the risk thing... and even the unpriceable do have a price, two to be exact a bid-wish and an ask-wish and they aren't close enough to consummate into a 'market price'.

This cut should make that process a whole lot easier if for no other reason the whole spectrum of available debt alternatives is also repriced.

A cut in the interest environment truly does shift the whole PV-I-FV relationship... even for debt that has been hung up. The question really is 'Was this cut enough to unhang a lot of that debt?' That I don't know - we'll see.

Is there any chance that the dollar is going to rebound with rate cuts and all the bad news coming out?

INO Equities Stocks Indexes - U.S $ INDEX (NYBOT:DX) Price Chart and Quote 

If the dollar breaks below 78, there's going to be a VERY sharp decline, probably bringing oil over $100/barrel, and pushing PM's to significant new $$ highs.

[everyone moved here, I see]

The positive spin is that the Fed lowered the burn rate of carrying junk on the off-balance sheet of Wall Street.

The negative is that they are devaluing the dollar.

CDs and Treasuries aren't likely to rollover as readily in the next 6 months. Higher interest rate frosting is about to be applied to our recessionary cake. Vicious circle, indeed.

ac:

I agree, but the eniter mantra was "no bail out". So much for credibility.

I'm not so much against providing some aid to housing - I don't think it helps much to allow a huge number of people to lose their homes that might otherwise keep them with slightly lower rates.

What bothers me is that US housing is only one of many bubbles in the global economy today. If the Fed had simply left rates at 5.25% for another week we might have seen most of these disappear.

They still might burst in the near future. But I think now there is the real chance of another economic and finacial plague on the horizon - this one much bigger than housing.

So far the Fed has cut at the end of every bubble and just replaced it with another bubble. I need to see some evidence that this isn't going to happen all over again.

I'm also wondering on the market psychology of the cut. The Fed previously (under Greenspan) seemed to take the view that, while you should keep the cards close to your vest and tip your hand, if you're going to cut you should cut big and in rapid succession to get the most psychological bang for your buck.

25 bp would have probably been too low for any meaningful market psychological impact. But was this 50 bp cut still mainly a psychological cut to help sooth the market liquidity constipation? The Fed's body language was and still seems focused on tough love and inflation vigilance, and their sudden cutting, to my way of thinking, probably blew their credibility on that point. At least for the moment.

If lenders scent inflation problems, interest rates will climb no matter what the fed funds rate is.

A lot of "lenders" are borrowing money directly or indirectly through the Fed. They don't really care about inflation because it devalues the money they borrowed as well as the money they lend. On net the inflation cancels out.

Such is the beauty of an infinite money supply.

I wonder if one of the objectives of Ben's movement is to force China to unpeg from the dollar.

Spot gold just jumped to 723.

24-hour Spot Chart - Gold 

ac wrote :

"A lot of "lenders" are borrowing money directly or indirectly through the Fed. They don't really care about inflation because it devalues the money they borrowed as well as the money they lend. On net the inflation cancels out.

Such is the beauty of an infinite money supply".

This is possible. But what this means that instead of being lenders of the last resort, central bankers become the only willing lenders. Other investors are not going to lend money at yields < inflation (reported or actual).

While what you say might come to pass, think that would be an unlikely scenario though, as it would constipate all private (non-central bank) lending.

Today's cut makes investing a very tricky business. All along I was sitting on a 50/50 allocation (50% equities/50% fixed income+cash). With strong International Exposure in both Equities and Fixed Income. I am not sure if I should shift my allocation in either direction. I have no idea whether the Fed will succeed in stretching out the bubbles out a few years or not.

The third guy made a remark that "Keynesians perceive monetary easing and fiscal spending as a free lunch". A comment that you took offense to

ba_lurker - it is still a bad analogy because it implies the other choice (do nothing) didn't have negative consequences either - it does.

Point is BB had to make one of two choices both bad: 1) do nothing and let a severe credit event take down output... or 2) cut and run the risk of inflation.

I wanted him to wait longer - see if the decline really was coming and then cut if data indicated it really was spilling over into the 'real' economy. They didn't take dryfly's advice though - the morons (sarcasm).

Anyway I don't have a lot of time for the lump of money theory any more than the lump of labor. I am perfectly comfortable with 'fiat' as long as they don't do completely stooopid things with it. Which appears to be exactly what they are doing. JMHO.

This is possible. But what this means that instead of being lenders of the last resort, central bankers become the only willing lenders. Other investors are not going to lend money at yields < inflation (reported or actual).

That's all you need if they can create an infinite amount of money.

Which they can.

This was the whole point of going off the gold standard.

It is now up to the currency markets to devalue a currency to reflect excessively low rates - I think both long and short rates can be artificially depressed.

Again, we have Japan as an example. Why should long-rates be so low there while they're piling up this mountainous national debt?

Lets get real here, if an institution is insolvent because the debt they hold is worth less than the money they borrowed, they are going to go BK or get bailed out eventually, no matter what the Fed Funds rate is.

There is not really much evidence that this rate cut is going to prevent or even seriously delay the fallout from the ABS mess, however, there is direct evidence that it is likely going to cause a serious decline in the US $, which will surely cause real rates to rise, along with costs of damn near everything.

So I don't see how anyone can take these cuts as a positive, though i agree that not cutting wouldn't really have helped the situtation either.

I guess my point is that the US is f*cked in a big way, gold and USD index are screaming this at the top of their lungs.

So if you are going to get mad about something, or discuss something to death, why not the focus be the existence of the fed and fiat, rather than the intricate details of their actions. It's market price fixing(price of short term interest rates), along with the fraud of fiat that IS causing the problems, so arguing what price to fix seems just stupid to me.

US Recession Probabilities: How much should we worry?  (pdf)

Very interesting profit margin chart on page 5. It's interesting that you don't hear about that as much in terms of recession indicators. It looks like it has a pretty good record.

At 4.75% is the Fed rate still not in a tightening bias? If we look at the yield curve would not 4% give us the normalized curve?

energyecon,

It might very well prove to be unnecessary. We'll see. It wouldn't be completely shocking to see the Fed take it all back in a few months, like they did after LTCM.

• The Fed may not want to bail out speculative investors, but that's bound to happen when policymakers look out for the health of the broader economy - as they did today, former Federal Reserve Board Chairman Alan Greenspan said today.

Asked if today's decision to cut the key federal funds rate by half a percentage point amounted to a bailout for hedge funds, the former central banker said elements of a bailout are "inevitable" whenever the Fed tries to keep the economy out of recession or keep financial markets from freezing up.

"In order to punish those who are undeserving, you have to punish the whole economy and the deserving," Greenspan told Fox News in an interview after the rate cut announcement. The converse is also true, he said.

Greenspan said the root cause of recent market turmoil is the lack of information and the fear that counterparties in any transaction might be in financial trouble.

The result was "extreme stringency" in lending, he said, and "the way you deal with that extreme stringency is to remove its cause, which is the fear of default."
Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor

Metrics Wonk -

Heh, I think if energy prices continue to rise like they have been, it will become increasingly difficult to profit from mining PMs.

I think we need a free market when it comes to currency. Without the government bailouts, a lot of the problems would be gone. Bankers sure would be more careful about lending other peoples money if they are thrown in the slammer for fraud when their banks go broke, which is how it should be.

All this "credit" mess would be avoided if people were lending their hard earned money. They would be very careful who they lent it to, instead of the current situation where you have to find yield wherever you can because your wealth will be taken from you anyway through inflation.

Anyway, trying to "change" to a gold and silver based currency at this point will just bring on the inevitable that much sooner. But really gold IS money right now, in that it is both a store of value and a medium of exchange, something that can't be said about FRNs.

Democrat Hillary Rodham Clinton said Tuesday that a mandate requiring every American to purchase health insurance was the only way to achieve universal health care but she rejected the notion of punitive measures to force individuals into the health care system.

She said she could envision a day when "you have to show proof to your employer that you're insured as a part of the job interview — like when your kid goes to school and has to show proof of vaccination," but said such details would be worked out through negotiations with Congress.

Yahoo! 404 - Page Not Found

You just can't make stuff like this up, I think the whole damn country has gone mad.

America is hooked on quick cheap fixes for just about everything i.e. drugs, entertainment, and now dollars.....this country is going to hell in a handbasket.

The next bubble is oil and gold.

Especially if OPEC 'pegs to gold'... they might still price in dollars or euros or yen but target those prices to a de facto gold standard. If there is anywhere in the world where this is likely it has to be OPEC, especially the Gulf States.

Oh, and good luck with that theory about the resurgence of the Japanese consumer, because the government has lost a huge amount of pension records. article here. They are not feeling all that confident now.

"The next bubble is oil and gold."

Been waiting for it for a couple of years. I think of it as "The Last Bubble." Because after them, I can't help but think that the current financial system is going to run out of steam in some unpleasant way. And then Reforms Will Be Necessary, and not no little piddly reforms that look good for media but then it's back to business as usual after the cameras leave.

I really doubt that currencies will again be backed in gold; but in the meantime, it's going to be quite a ride.

I read many comments posted here and try to give weight to all views. To me, the great value of this site is not the individual views but the consensus. I have come to trust the consensus here, far more than I trust any professional economist. I don't think there's an economic analysis/forecasting group on the planet as accurate as this consensus.

So, I would like to paraphrase what I think the consensus was here to today's events:

We are still probably going to have a recession, although it's unclear how long or deep.

The Fed cut will have mixed effects, not all good for the economy, and may not ultimately be as impactful as Fed moves in the past, especially due to weak dollar and high oil. High oil is a serious headwind for the U.S. economy. Long Treasury yields may move up with weak dollar.

The cut(s) may help the credit crunch some, especially in ABCP, but they won't help mortgage lending, home prices, or homebuilders much.

The stock market continues to over-react to anything that sounds like good news and is driven by speculation, leverage and an unusual insensitivity to risk.

The Fed was privy to knowledge that probably left it no other choice but to cut hard.

In a post to follow, I will recount an e-mail exchange I had today with Dr. Irwin Kellner, Chief Economist at Marketwatch. He is actually better than some. But you will be dumbfounded by how myopic his response is.

I think we are looking at a new paradygm -- a collective economic (mostly) amateur think-tank without (many) rules, that does a far better job of consensus forecasting and analysts than those who have the degrees and get paid the big bucks. Thanks to all.

Sometimes a banana is just a banana...

MOM the data is very conflicted - if you go to Yahoo Finance today, it was all about companies beating the pants off earnings estimates... and we are just coming off a +4 GDP last quarter IIRC.

I mean look at Steve's link page 5 Corp Earnings... it just screams "Too soon to cut!".

Waiting one more month isn't going to make that much difference if we really are going into recession - it takes months for monetary stimulus to take hold - but if we aren't, a rate cut IS going to have a big effect on inflation.

The Discount Window is wide open - that should carry the banks through one more month, see what the data says and then go from there... if it confirms down turn, cut, if not let it go... what's wrong with that?

Now surely they know more than I know - but I have mfg'ing customers pushing up delivery dates... Meanwhile commodity prices are still sky high. That doesn't happen in recessions. Not the last 2-3 I've been through anyway.

IMO the should have done 1/2 to 3/4 cut in discount rate and held the line on fed funds...that would have sent the right message until we get some more data in Dec.

I'm reading Alan Greenspan's book right now. One thing that is clear is that the Fed as a lot more information at their disposal than we do. It's possible that the economy is really bad off, and we just don't know.

But even some recent economic data points are very bleak (like those forclosure numbers).

Alternatively, it's possible that Bernanke is capitulating to politicians and speculators.

Either scenario is bleak, though I think the latter has dire implications. So I'm hoping for the former.

dryfly,

Now all we can do is hope Bernanke was right. If he's wrong, and he's just given a green light to inflation, he's going to have a nearly impossible time living it down. The helicopter references will be the end of him.

BTW, when do my margin interest rates reset? I want my positive carry NOW.

CR, the lack of drop in consumption doesn't surprise me, the back-to-Visa binge is on. In another 8-12 months I figure we'll start seeing MSM attributions for why consumer spending habits have changed.

rich,

Well said! I got into a bit of a debate with Menzie Chinn over at Econbrowser about his take on tame inflation just a few months ago.

We had exactly the same conversation.

It is as if the entire economics world has buried its head in the sand about WHY our inflation is relatively tame year over year.

We might get another deflationary bout this fall, but sheesh, are we really counting on it?

They'll cut again. - Big V

I think you are correct, the markets will 'demand' it.

This cut is to prompt money market funds back into the commercial paper and asset backed markets. As one who reads prospectuses, the shift from GSE/Treasury assets to CMO, CDO and ABCP was swift and ruthless between 2002-2006 in the chase to higher yields. The recent discovery that all is not AAA, has frozen those once robust markets. This cut is about hope that the yield chase will begin again and if it doesn't then there things really get ugly in the banking industry.

BB just gave Wall St and financial scam America another hit of fresh air...

YouTube - Fresh Air

Ooo, have another hit of fresh air, ooo, have another hit of fresh air

He is looking backward and being skewed by a four-month rarity (deflation)

So rare, it happened the last two years in a row.

"This cut is to prompt money market funds back into the commercial paper and asset backed markets. As one who reads prospectuses, the shift from GSE/Treasury assets to CMO, CDO and ABCP was swift and ruthless between 2002-2006 in the chase to higher yields. The recent discovery that all is not AAA, has frozen those once robust markets. This cut is about hope that the yield chase will begin again and if it doesn't then there things really get ugly in the banking industry."

Maybe it will just flee a depreciating currency and go into Commodities, Weapons, Ammo, or maybe farmland. Screw paper and let the ugly begin.

O-Joe said,
“Amazing how some people can interpret such a genuinely bullish event today into something negative.

Fact is stocks rose way higher than oil and gold. Compare this to the stagflationary 70s.

If there was a hyperinflation now or coming, how can it be gold is still way lower than in 1980, after 27 years with positive inflation rates? (compare this to stocks!)”

Optimistic Joe,

I don’t understand your comments above. What’s so bullish (long-term that is) about stocks rising faster than oil and gold after today’s announcement? Do you really think that the relative prices of assets move short term with any rationality? Think about stock movements approaching the peak of the dotcom bubble, and explain to me how their rapid ascent was a bullish thing?

As for gold being lower than in 1980, I don’t see how that proves anything about the likelihood of hyperinflation. Gold experienced a manic bubble in 1980, so it was probably unnaturally high for a time. And now our monetary system doesn’t exactly allow gold and currencies to find their appropriate equilibrium points, given CB intervention, does it? But that doesn’t mean that the forces are not still there trying to correct all the imbalances. But the correction might happen pretty rapidly at a breaking point. The fact that it hasn’t happened doesn’t mean it isn’t a danger.

OT - But for you Greenspan masochists, NPR "Fresh Air" with Terry Gross broadcast today. It'll probably be on the podcast site.

More to the point, I'm a little amazed at the immediate anguish at the rate cut. You know that the other factors haven't changed, they always try to bust the bears, and US consumers are still maxed. It still doesn't look good for the economy. The stock market looks like the last (well, maybe the last) gasp as we lose all semblence of reality and stand in thin air with Wile Coyote. I'm going back to my library of Depression stories and review the history.

I mean at some point you’ve got to endure some pain, don’t you?

Well, see how pretty the first chart looks. Almost like how my hard disk looks after I defragment it.

BR,

It could also mean that we're too big to fail, um, to have recessions, um, ouch, well, maybe I should just stop here before I say something I'll regret.

I mean at some point you’ve got to endure some pain, don’t you? If you just keep pretending that the bad debt can be paid back (by issuing more bad debt), you’re just going to make the problem worse, aren’t you?

First rule is there is no rule saying you HAVE to experience (let alone endure) pain. It might happen but it doesn't have to happen and it doesn't make you 'better'... if you really believe that go out and do some really destructive behavior now, hurt yourself and become 'better'.

Having said that you are likely to experience some pain even if you avoid it - that's life. And some activities ('work') is painful and derives benefit and some painful activities are just painful and pointless.

If you are smart and careful you will maximize benefit, minimize pain, always. A balance.

But once hurt for whatever reason realize that some things cure by themselves, some sort of cure but leave you maimed, and some kill you ought right.

There is nothing wrong with getting treatment if you will likely benefit from the treatment. In fact it is stupid or even masochistic to not get it.

However taking treatment before you are injured or sick is a waste at best and can be destructive. You don't want to take Chemo or have radiation if you don't have cancer. Side effects suck.

Now that is an analogy - how does it play to economics.

Stag Mark,

CPI increased by 3.4% in the first 8 months of 2007. With today's CPI release + Fed rate cut, I think we are looking at a full year 2007 CPI increase of at least 5.0%. How would that compare to recent history?

You can see the whole picture at
http://www.nwmcog.org/data/economic/ConsumerPriceIndex.pdf

Let's use December-over-December CPI data to calculate.

A 5.0% CPI increase for 2007 would be the highest since 6.11% in 1990. The average increase in the 16 years since 1990 (1991-2006) was 2.60%. So, it would be almost double the long-term average. The highest CPI in any of those 16 years was 3.42% in 2005.

This is "moderate inflation?"

How bad would 5.0% CPI be? I think it is more severe than 6.11% in 1990, because the biggest long-term threat the U.S. economy faces is the cost of entitlements, and this cost has soared since 1990.

Social Security benefits are indexed dollar-for-dollar to the CPI under the COLA. What most people don't know is that CPI indexing of Social Security benefits begins at age 61. (Technically, your minimum earned benefit is locked in by the National Average Wage Index that applies when you turn 60. Thereafter, you get COLA until you die.) So, high inflation will be hugely expensive for decades for all Boomers now retiring. Also, it's well known that Medicare spending is basically CPI+.

High inflation has never been more costly for future generations of U.S. taxpayers. I feel sorry for them.

rich & BR,

There should be some reduction in the inflationary pressures in the fall if recent history is any indicator. On the other hand, this fall does not include the normally deflationary Christmas. Well, assuming this Christmas even is deflationary now that toy prices are going up. Unless we get a recession that is.

Oh, heck if I know!

I can say this though. Here's a chart (and commentary) I made back in August (and no, I did not have an advanced copy of Greenspan's book!).

Long-term Inflation

Misean,

I agree with you and dry both - first let's define our terms lol - pain in itself does nothing for anyone (dry's point I believe), but the only path to breaking the misallocation of capital that past Fed policies has created is going to be painful...it is the rare addict who voluntarily detoxes and this is the credit junkie economy in spades.

Misean,

LOL to mash the metaphors a bit more, perhaps today was intended as some Fed defibrillation ("Give me 50/50 more milliamps! Clear! BZZZZZT!) and then the patient bounces off of the gurney ("I'm feeling much better I think I will go for a walk" ala the old Monty Python skit).

Must be getting late...

Steve,

He is looking backward and being skewed by a four-month rarity(deflation)

So rare, it happened the last two years in a row.

Steve

Yes, it did happen two years in a row.

But going back to the 1950's, mini-deflation has happened only twice before, in the early 80's.

To see it, go to:
St. Louis Fed: Series: CPIAUCNS, Consumer Price Index for All Urban Consumers: All Items

Click on the "% Chg." graph option.

Gold is easy enough, but what is the best way for an individual to invest in oil?
s pearman

There are several ETFs that go long near-term oil futures while investing your money in T-bills and adding the interest. Historically, oil futures have tended to outperform spot oil.

The most liquid of these ETFs is USO.