Fed Makes History: Shoots All Bullets and Lowers Rates to as Little as ZERO


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


12 comments on “Fed Makes History: Shoots All Bullets and Lowers Rates to as Little as ZERO

  1. designer handbagsp says:

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  2. ... says:

    0% interest didn’t work in japan and that was in a country where folks weren’t carrying the debt that they are in the us.. i don’t think it is going to work in the usa either, but since i think bankers and wall st. types are out to screw everyone including themselves, it is all making sense for them to be doing this…


  3. TonyForesta says:

    It’s only just beginning. We are entering a death spiral. Lost jobs leads to reduced consumption, which leads to reduction in corporate profits, which leads to layoffs. More lost jobs leads to more pronounced reduction in corporate profits,… and on and on. The Fed is running our of tools. The AltA and commercial real estate resets in the first months of 2009 will lead to more defaults, and more lost jobs. The Fed simply printing money and funnelling into the offshore accounts of the thieves, swindlers, and pathological liars on Wall Street does nothing to ease the credit markets, increase employment, or stimulate the economy in anyway. The predator class, the superrich are insulated and bailed out without review, recourse, or remedy for abuse and imponderable debt is heaped onto the shoulders of our children and todays taxpayers. One day, and hopefully soon, Americans will awaken from our collective torpor and realize that the government is robbing us blind to feed the superrich. Obama’s choices for the economic team (Wall Street insiders) do not provide any hope for the real change that America needs. The moment is fast approaching when a real horrorshow threshold is reached, and the savaged, bankrupt, oppressed, hungry, and hopeless public morphs from a stunned population to an desperate and angry population. Desperate people do desperate things.
    The government bailing out Wall Street and the predator class is the cause of, and only perpetuates the current economic crisis. If Obama does not get Americans employed, – there will be blood, a reckoning, and a brutal violent balancing.


  4. downtown says:

    “Yes, Wigwag, I too am puzzled at Merkel’s behavior.”
    Be puzzled no more. Maybe it’s because of this:
    “Germans are profoundly averse to debt and, since the collapse of the currency in the Weimar Republic in the 1920s, they have remained terrified of inflation. Nor do they trust pump-priming; they tried that after the 1973 oil shock, they point out, and all it did was drive up public debt. Their reaction to emergency spending by government is to save against the day when the bills come due. More debt today, they reckon, means higher taxes tomorrow. A Chancellor who keeps her powder dry is just their cup of chocolate.”
    “Andere Laender, andere Sitten”
    rough translation = “When in Rome…”


  5. erichwwk says:

    Yes, Wigwag, I too am puzzled at Merkel’s behavior. That having said, I am being to lose confidence in Bernanke, who seems to lower interest rates primarily to give a temporary boost to stock prices.
    In his testimony to the House Committee on Oversight and Gov’t Reform, Arnold King writes:
    “Even now, Paul Volcker, Eugene Ludwig, Ben Bernanke, Henry Paulson, and other important public figures view the crisis through lenses that are very different from mine. To me, this is not a re-run of the bank failures of 1932, nor is it a rerun of the savings-and-loan crisis of 1980. There is a new transmission mechanism at work, particularly in the form of credit default swaps.”
    I think he nails the incentive for securitization of mortgages- not because market allocated risk to those best able to bear it, but because of anomalies in how these mortgages are carried in the books. Along that line, the reason for government hiding of risk by accounting slight of hand is traced to the Vietnam War, where LBJ had a similar interest in hiding the cost of the war by moving the debt “off books”
    Also at play is the way new dollars are injected as the currency of global exchange, which makes the US uniquely vulnerable.
    Ive commented before about thefailure of the admin. to address the Reserve Fund fiasco, especially in the US Treasury Bills MMkt, which fully matured on Dec. 11, yet the fund is allowed to freeze these funds, perhaps for use in financing a defense against fraud allegations. If one needed clear evidence of who Paulson, Kashkari, and Bernanke are working for, this should provide it, as releasing funds belonging to shareholders imposes zero risk on the government, and puts funds backed solely by matured T-billd directly in the hands of taxpayers, at zero risk.


  6. questions says:

    If we lower interest rates, do we merely create a new bubble that’ll burst eventually? I though part of the problem was too much debt on too little income. Yes, lower rates will lower the payments significantly. They might also encourage more foolish buying.
    I think the problem is more fundamental — the wage structure is untenable, the lack of labor opportunities and the concentration of wealth in the upper and unproductive reaches of our society are killing us.
    It should be harder to collect huge fortunes, harder to borrow well beyond what you can pay, and significantly less crucial to go into debt to survive. No one should charge groceries or health care out of a need to spread payments out.
    A credit stimulus without an income stimulus is doomed — near as I can tell, at least. Feel free to correct this though.


  7. downtown says:

    “With the fed funds rate near zero, why exactly should credit card companies be permitted to charge rates of fifteen to twenty percent on outstanding balances? If those rates were brought down to single digits it might have a powerful stimulative effect. Is it really too much to ask that banks, which just received tens of billions of dollars in taxpayer money, to provide credit card loans at reasonable rates?”
    I don’t think that would sit too well with our VP elect. He’s got promises to keep.


  8. WigWag says:

    Can anyone say “liquidity trap?” The Fed has basically reached the point where traditional monetary policy has lost all traction. One additional step that Treasury could take is to implement a rule that eliminated the usurious rates imposed on credit cards. With the fed funds rate near zero, why exactly should credit card companies be permitted to charge rates of fifteen to twenty percent on outstanding balances? If those rates were brought down to single digits it might have a powerful stimulative effect. Is it really too much to ask that banks, which just received tens of billions of dollars in taxpayer money, to provide credit card loans at reasonable rates?
    What’s even more remarkable is that the fed lowered the fed funds rate to near zero in the same week that both the producer price index and the consumer price index fell by the largest monthly amount ever.
    At least in the United States, the incoming Obama Administration appears willing to use fiscal policy in a major way to try to improve the situation. This is in stark contrast to Europe where the Germans are single-handedly destroying Europe’s ability to reflate their economies.
    Do the Germans ever get anything right?


  9. Spunkmeyer says:

    We’re totally screwed. To hell with “savers” and look for
    hyperinflation on everything that comes from somewhere else.
    The United States of Weimar Republic.


  10. daCascadian says:

    After the current attempts fail and the “big shots” admit they don`t know what to do next maybe, just maybe, there will be a movement to implement a real currency backed by real stuff and rid ourselves of all the faux hocus pocus.
    And, NO, I don`t mean a gold based currency. Time to move your thoughts out of the 18th Century.
    HINTS follow :
    “it’s the end of the world as we know it and I feel fine…” – REM


  11. Sam Sherraden says:

    As you rightly point out dropping the federal funds rate has not been enough to stop the crisis. Indeed, the effective Fed Funds rate has been around a quarter point for a month and a half now, even though the target rate was at 1%.
    The truly unprecedented actions the Fed has taken have been to open currency swap agreements with the central banks of South Korea, Mexico, Singapore, and Brazil, as well as purchase billions of mortgage securities and consumer loans. Now many are speculating the Federal Reserve will issue debt. These are truly unprecedented changes for our central bank and worryingly, ones that are not discussed with open doors.


  12. JohnH says:

    If the Fed wanted to really make a difference, they would make sure that these rates “trickled down” to consumers–and not just on the CD rate side. There are lots of things I need to do to my house that I’d surely do if I could finance the improvements at 2% for as long as the Fed wanted to maintain these low rates. Unfortunately, we the people are not likely to see any reduction in the rates we have to pay.
    No economic stimulus here…


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