The Federal Reserve Board just reduced the federal funds rate to a range between zero and 1/4 of a point. Unbelievable.
The Fed is also moving on a bundle of other fronts to hold this economy together and to try and get loans and financing moving again in the system.
We have become Japan. . .and Germany, except that they have current account surpluses and underconsume. But like them, we have banks and institutions now too big to fail.
I have been arguing for a while that the problem in the financial system today is not rate-related. Lowering rates is simply reducing to ever greater degrees the leverage the Fed might have when borrowing kicks back in. This is exactly what happened when the Bank of Japan reduced its rates effectively to zero in the 1990s.
The difference with Japan though — it must be said — is that Japan’s central bank authorities dragged out their response to credit implosion, and the Federal Reserve Board in the U.S. is actually moving at impressive speed. The problem is that the scale of the financial crisis hitting the American and global economies is significantly larger than that which helped “steal Japan’s last decade.”
I had a private dinner with a top tier Hong Kong business magnate last night, and while the dinner should be considered off the record — he made a comment that I think he won’t mind my sharing.
He said that what we have seen in America so far is just a “financial crisis. . .it is financial. . .but the impact we have to worry about is what will unfold in the real economy.” My only caveat is that we are already seeing it hit the real economy with projections of negative 5 to 6% GDP contraction annualized this quarter.
That part is still coming. This is big — and we are no where near a fix or a resolution to the hemorrhaging.
— Steve Clemons