Will the Fed Eventually Pay Banks and Brokers to Borrow Money?

by Florida's #1 Mortgage Planner on March 17, 2008

That question may become more of a reality than not, though it would spell the absolute uselessness of the dollar as any means of currency, even in the US. 

The Fed has come to the rescue yet again, doing nothing short of bailing out companies that would otherwise be insolvent and face liquidation.  In other words, the government is bailing out those who screwed up (I will keep CEO pay out of it).   Besides stepping in and loaning money to failing banks, they are no expanding their bailout programs to include broker dealers.

Adding to that, they simply cannot resist cutting rates further, yesterday slicing the Discount Rate by 1/4% in an emergency move, even though their normal decision comes in a meeting tomorrow.  It makes you wonder what their move will be tomorrow afternoon, not just on the Discount Rate, but also the Fed Funds Rate.  With the consensus being a .75% cut (some demanding 1.00%), that would put the FFR at 2.25% or less.  Remember that would be less than the inflation rate.

It also is important to note that Greenspan left the FFR at 1%, which many believe is what fueled the current crisis, so are we to believe that 1% is going to save it? 

What will the Fed do, since it is beginning to run out of room for dropping rates?  Everything they have done so far has proven basically useless in restoring faith in the system, even with their move to add the Term Securities Lending Facility (TSLF) on top of the Term Auction Facility (TAF). 

So, will they keep cutting the rate until it reaches 0%?  Even scarier, will they actually take the FFR into negative territory?

While I would like to say that answer would be a definitive NO, I, like most Americans, have lost faith in the Fed.  Need I remind you that Bernanke himself stated that inflationary pressures should ease “as long as the public’s confidence in the Fed is not shaken.” 

Since faith is being lost in the Fed, those inflationary pressures could build despite the recent CPI data.  In fact, just look at how much oil and food have increased in the last few weeks, not to mention how much the dollar has lost value against virtually everything.

What do you think?

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