Rethinking the rate cut

[HereWeGo]

I thought the 50 bps cut was the right move, not so much from a housing point of view but rather a commercial paper point of view. The idea is to push investors out of treasuries, into CP.

But, with the tanking of the dollar, foreign investors will be much less enthused with the idea of owning CP. With the concurrent skyrocket of the stock market, investors in general will be more likely to own stocks than bonds.

Is it possible the 50 bps cut actually hurt the CP situation?

[LA_Renter]

“Sept. 20 (Bloomberg) — The U.S. commercial paper market shrank for a sixth week, extending the biggest slump in at least seven years and signaling Federal Reserve interest rate cuts haven’t yet drawn investors back to short-term debt.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4qdfKzkKHX4&refer=home

So far not so good. The bond markets are kind of giving Benny the finger right now.

I read this article a few weeks ago in the Asian Times about a potential rate cut;

“On the surface, the global financial system is in the midst of a liquidity crisis – but it is really in the throes of a confidence crisis. The lack of confidence in the rating and derivative systems led to the seizing up of the financial system. No one knows how to price the trillions of dollars in collateralized derivative structures.

As a result, no one can move the paper off their books. Last week, a European financial institution sold a AAA tranche at a price of 78, forcing it to assume a huge writeoff. This means that lower-rated tranches will result in even larger discounts. With billions of US dollars in open derivative contracts, much of it in the form of collateralized obligations, the global financial system is bracing for massive writeoffs. It is for this reason that credit evaporated.

Banks are slashing lines of credit, paring back trading positions and refusing to roll over commercial-paper obligations because they must husband their cash. That is why a 50-basis-point cut or a 400-basis-point reduction in Fed Funds will not do anything to restore confidence. It is also the reason the markets will panic the day after the Fed’s hand is forced on September 18, when they realize that financial institutions will still be unable to move the collateralized derivative structures off their books.”

http://www.atimes.com/atimes/Global_Economy/IH29Dj01.html

I guess the term “markets will panic the day after” is more of a metaphor here but it makes you wonder how the markets are going to react when they see CP is still plummeting. IMO we are really seeing exactly how stuck in between a rock and a hard place we truly are.

[bsrsharma]

Well it happened! Canadian $ touches US $ after 30 years.

http://biz.yahoo.com/ap/070920/dollar.html?.v=19

[HereWeGo]

LA,
The first article you linked was the impetus for my post. I suppose next week’s numbers will tell the tale.

[PadreBrian]

Down down down, into the ring of fire. Heck’a job dubya.

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