Fed screws US to save Wall Street

[bascule]

...again.

 

http://money.cnn.com/2007/12/11/news/economy/fed_rates/index.htm

 

Wall Street cries as the decrease was lower than expected. Well, that's certainly not in the spirit of Laissez Faire capitalism.

 

If you buy mortgage backed bonds, and they turn out to be worthless, isn't that sucks to be you?

 

Apparently not in America. Here the federal government bails out the rich, and the common joe eats the bill.

 

Suck it, America.

[CDarwin]

I think a lot of common joes suffer if you get a recession. I'm not necessarily defended the Fed's actions; I'm not an economist. I don't think that they're ethically sinister in motivation, though.

[swansont]

I don't see the connection. Saying the proposed bailout is screwing the average Joe probably has merit, but a rate cut by the Fed?

[iNow]

The "mortage crisis" is not so much a problem at the level of the homeowner. The great concern really isn't that "Average Joe" can't pay his own mortage... The great concern is that the bank who holds Average Joe's debt won't be able to pay *their* debts (if enough of their clients don't pay them).

 

It's the issue of large financial institutions and banks not being able to pay their debts to others that is the major source of concern, and the main reason rates continue to drop.

 

I do know Wall Street reacted quite poorly to the news of this. From the link in the OP:

But stocks plunged following the Fed's announcement as Wall Street was disappointed the Fed did not act more aggressively. The Dow dropped nearly 300 points, or 2.1 percent, while the S&P and Nasdaq each fell about 2.5 percent.

 

 

However, the Fed this morning made up for some of these concerns by a plan to inject serious cash back into the market:

 

 

http://www.marketwatch.com/news/story/us-stocks-jump-fed-allies/story.aspx?guid=%7B9C867456%2D3094%2D49F3%2D9935%2DD37F3529F9EF%7D

The Fed is coordinating its actions, designed to add $40 billion in liquidity, with the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank. See full story.

 

"Financial shares are surging as a result of this extraordinary measure," said analysts at Action Economics. Up more than 200 points early on, the Dow Jones Industrial Average ($INDU:Dow Jones Industrial Average Last: 13,562.99+130.22+0.97% / $INDU 13,562.99, +130.22, +1.0%) was in morning trade ahead 143.5 points, or 1.1%, at 13,576.2, with 25 of its 30 components moving higher, led by AT&T Inc.

 

 

 

http://www.marketwatch.com/News/Story/fed-other-central-banks-move/story.aspx?guid=%7B6FAFC482%2DF8E4%2D4F23%2DA021%2D52DC7DE8938C%7D

 

 

The first auction of $20 billion will be held on Monday. This auction will provide 28-day term funds maturing on Jan. 17.

The second auction of up to $20 billion is scheduled for Thursday, Dec. 20. This auction will provide 35-day funds maturing on Jan. 31. The third and fourth auctions will be held on Jan. 14 and Jan. 28. The amounts will be determined next month.

 

The Fed said it may conduct additional auctions in subsequent months, depending in part "on evolving market conditions."

 

U.S. stocks spiked higher at Wednesday's start after the move was announced

[swansont]

But if Joe can't pay, he defaults, and that ripples through the chain of mortgage-backed securities and whatever secondary or derivative or other financial vehicles are involved. Lowering the prime rate affects ARMs and should reduce the default rate on those, to some extent. That helps Joe, and anybody invested in those securities.

 

I don't see how Dick, Harry nor I are harmed by this, unless the Fed cuts so low that it fuels inflation. I'm not saying it won't happen — I just don't see the chain of events.

[Pangloss]

They aren't, unless Dick, Harry, or you took out a loan you couldn't afford (or as Bascule properly points out, if someone ripped you off). It's just necessary for some on the left (especially Democratic presidential candidates) to portray that everyone is harmed if we don't bail out every single person who took out a home loan mortgage who cannot afford to pay it back. It's nothing more than a blatant attempt to present a false dilemma and thereby purchase votes.

 

I agree with iNow. You're always going to have "Joes" failing to pay their debts. Sure, those failures always "ripple" through the economy, at least in the sense that somebody doesn't get paid because someone else made a bad decision at loan time.

 

But what's far more important is that we avoid allowing some people's bad decisions to harm others, and by that I mean allowing banks to fail en masse because of poor regulation decisions and poor banking decisions. We can smooth over this bump, and that's exactly what the Fed is doing (correctly, IMO).

 

Mind you, if I were a laissez faire capitalist I wouldn't do that either, I'd let those banks rot and come what may. I'm all for strategic bailouts and a carefully managed (but not overmanaged) economy, because it benefits most Americans while preserving our right to choose our fate, extend risk and (sometimes) fail without hurting others in the process.