Tuesday, December 16, 2008

The Fed Makes Money Free

Lowering interest rates to 1% - as Alan Greenspan did earlier in the decade - seems to be not enough for current Fed Chairman "Helicopter" Ben Bernanke. Today's cut in the Federal Funds rate, from 1% to "0 to 1/4 percent" is an all-time low for the Fed, and sadly, for the United States. The absurdity of making more credit and money available when that is the reason for the problem defies all logic, yet that is the approach Chairman Bernanke and the Governors of the FOMC have chosen all along.

Additionally, the Fed cut the discount rate to 1/2%, making it easier for banks to borrow from the Fed.

Now, with all this extra dough floating around, shouldn't we all be living on Easy Street? One would assume as much, but there's a little problem which goes something like, "you get what you pay for." The banks, since they are not paying much for the opportunity to bolster their balance sheets, see absolutely no reason to lend out the money at anything approaching reasonable rates. Instead, banks are hoarding cash and have raised lending standards to abnormally high levels, so that unless you have near-perfect credit history, you can't borrow a single dime.

There are many mainstream views on the Fed's move which purport that the lowering of the rate is merely "window dressing" or that it is only "symbolic." As far as anyone can tell, the symbolism is that America is for sale to the lowest bidder, Americans need not apply. Accordingly, the dollar fell precipitously against the Euro and Yen while US equity markets soared on the news. Naturally, financial firms led the massive rally, which pushed the S&P 500 to a 5-week high.

Dow 8,924.14, +359.61 (4.20%)
NASDAQ 1,589.89, +81.55 (5.41%)
S&P 500 913.18, +44.61 (5.14%)
NYSE Compos 5,804.97, +307.07 (5.59%)

Internals confirmed that the rally was broad and deep, with advancers overwhelming decliners, 5552-1264. New lows, however, expanded to 223, to just 31 new highs. The rally was fueled in part by the inflating Fed, short covering and outright speculation with money borrowed at almost nothing. It goes to reason that the free-spenders on Wall Street would have a field day with all the free money they've been dealt over the past three months, regardless the actual state of the US and global economies. All this does is run the Fed out of one set of bullets (rate cuts) and set up a massive market meltdown by late Winter or Spring of 2009. Volume was, as one would expect, on the high side.

NYSE Volume 1,539,748,000
NASDAQ Volume 2,217,972,000

Despite the massive Fed cut and fall in the dollar, oil continued to slide, losing 91 cents to close at $43.60. The metals continued their rally, with gold gaining $6.20, to $842.70 and silver ahead 9 cents to $10.71.

Perhaps the most significant anecdotal evidence that the entire world economy is now running on fairy-tale, make-believe money was the activity in shares of Goldman Sachs (GS). The company posted its first loss since going public in 1999, a massive $4.97 per share, but gained 14% on the day (76.00, +9.54). But why not. Goldman recently was converted from an investment bank to a bank-holding company and received $10 billion from the US Treasury in November as part of the TARP welfare for banks program. We should all be doing so well, or, so poorly.

It's the last bullet for the Fed's rate policy unless they begin to believe that paying people to take money off their hands is a good idea. It may come to that, as the Fed expands its balance sheet by leaps and bounds, at the same time sinking the dollar and the world economy. It's a new world order, all right. The banks will eventually own everything, which, in turn will be owned by the central banks. Capitalism is over, democracy you can pretty much kiss goodbye. That will be gone in coming years when the federal government begins to dictate every aspect of our lives, and we're almost there now.

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