One World, One Rate Cut

Give them an "A" for effort. They're trying really, really hard.

A gaggle of global central bankers joined forces this morning, simultaneously cutting interest rates in a worldwide showing of economic force not seen since 9/11.

Ben Bernanke and friends cut the fed funds rate to 1.5% -- down from 5.25% last year -- in what amounts to a desperate attempt to get financial markets to stop hemorrhaging. Switzerland, Canada, Sweden, the Bank of England, and the European Central Bank all followed suit. Japan would have loved to join the party, but it's been on the rate-cut bandwagon for years. With its rate already at a dismal 0.5%, Japan ran out of bullets a long time ago.

Will it work?
With the Dow Jones crushing floors and digging itself deeper day after day, anything seems to be worth a shot these days. But, alas, the Dow initially shed another couple hundred points on the news. Companies that would seemingly benefit from the cuts -- the likes of Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) and Goldman Sachs (NYSE: GS  ) -- continued to fall, too. Nothing seems to raise their spirits these days. What gives?

For one, it's interesting to note that as the Fed aggressively cut rates in the past year, 30-year mortgage rates have barely budged. A 30-year fixed rate mortgage runs about 5.8% these days, down no more than a few basis points over last year, according to Bankrate.com. The Fed can do all it can to grease banks' lending capacity, but banks just don't want to lend right now. They're scared. They're injured. And there isn't much the Fed can do in short order to fix that.

It's also interesting to remember that we've almost come full circle to the ultra-low interest rates that got us into this mess in the first place. There are all sorts of debate topics over who's to blame for our economic mayhem -- lax regulation, corporate greed, predator lending -- but few disagree that interest rates were far too low for far too long. After the dot-com bust and 9/11 attacks, then Fed Chairman Alan Greenspan took rates down to 1%, letting the economy feed on artificially low rates until the party turned into the mother of all hangovers throughout the past year.

And look how that turned out
In 2003, Greenspan patted himself on the back, saying, "Last year was surely one of the most memorable years ever experienced by the home mortgage market. Owing largely to the lowest mortgage interest rates in more than three decades and rising home prices, close to 10 million regular home mortgages were refinanced." Eat your own words, Alan.

Well, here we are again. We may not have the lowest mortgage rates in three decades, and home prices certainly aren't rising, but super-low interest rates may be the impetus to fuel more absurdities -- a weak dollar, rising inflation, a slap in the face for those trying to save money, you name it. Enjoy the ride.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Bank of America is a Motley Fool Income Investor recommendation. Bankrate is a Motley Fool Rule Breakers recommendation. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (19)

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  • Report this Comment On October 08, 2008, at 2:54 PM, CapStepsFan wrote:

    OK, now I'm really confused. Weren't you (Morgan Housel) one of the Fools (as opposed to Alyce Lomax, for example) in favor of the bailout, er, investment, package passed last week? Why was that form of government intervention acceptable and this one inadvisable?

    I know I'm inviting a lecture on the difference between shoring up credit and cutting interest rates, but frankly, I need said lecture. Please remember to use really, really short, simple words.

  • Report this Comment On October 08, 2008, at 4:07 PM, damasterwc wrote:

    We need to nationalize the Fed, pass the American Monetary Act (monetary.org), and set the benchmark at 5%. No more inflation thru fractional reserve policies, I prefer my inflation to be solely in the form of government spending (preferably on healthcare and infrastructure). The American Monetary Act will allow no inflation and income tax, or inflation and no income tax. I prefer no taxes.

  • Report this Comment On October 08, 2008, at 5:05 PM, amylc wrote:

    Maybe if banks don't want to lend after they get their money cheaper! government should for a short time cut out the middle man and extend lower 30 years fixed loans through Fannie and Freddie to crediable borrowers.

  • Report this Comment On October 08, 2008, at 5:56 PM, Lynn02 wrote:

    If Andrew Jackson were still around, the banks would be shakin in their boots.

  • Report this Comment On October 08, 2008, at 6:03 PM, Lynn02 wrote:

    Eerily similar. Kinda.

    Panic of 1837.

    http://en.wikipedia.org/wiki/Panic_of_1837

    Jacksonian Democrats blamed bank irresponsibility, both in funding rampant speculation and by introducing paper money inflation. This was caused by banks issuing excessive paper money (unbacked by bullion reserves), leading to inflation.

  • Report this Comment On October 08, 2008, at 6:08 PM, USAeconomist wrote:

    Actually, the market did really well considering all of the adverse market conditions the market has faced. You have international markets responding to our bailout, you have financial advisors like Jim Cramer saying sell, you are faced with pre-foreclosures ( http://www.buymyhousebeforethebanktakesit.com ) and foreclosure news. There was some good real estate news in the mix and some stocks like GE actually had gains. You can’t expect the market to jump up and correct itself overnight. It will take a little time for the dust to settle and for the US economy to get back on course.

  • Report this Comment On October 08, 2008, at 7:10 PM, BrockMont wrote:

    You all should read a book called the dollar crisis (Revised edition) by Richard Duncan. The american government at the moment is using the same techniques used in japan that has ruined theyre economy. They can cut rates and bailout all they want if theres no way to invest to make money people arnt going to invest and they are def. not going to borrow money to do it. Less will be invested into businesses because they wont be able to make the sales to make it a valuble investment. stocks keep going down so you cant make money off them, real estate is going down you cant invest in that. Japan cant even cut rates any lower, theres nothing they can do now they are at a complete freeze and unless we do something different thats how we will end up its showing the the stocks even after fed cut stocks still plummet. Investing may have to evolve. Its def. time to learn about shorts untill they figure out a plan to recover that works. One thing that will work is printing more money and flooding the market with lots of money. But that will cause massive inflation still though better than the alternative. Investing oversees is dumb to do as well because without america fueling the global economy the other countrys will be far worse off. no one to buy all chinas plasma tvs and everything else they have to export to survive no exports=death. Why do you think theyre so willing to loan us money all the time? they need us economically. i am sure the us economy will snap back i just feel bad for the other countrys if it takes too long because theyre depression will last far far longer than how long it takes us to recover.

  • Report this Comment On October 08, 2008, at 7:12 PM, sharktrade wrote:

    from the outside Earth is a beautiful planet !

    from the inside it's a fool world ...

  • Report this Comment On October 09, 2008, at 7:48 AM, elijahrhino wrote:

    Check out the book "The Forgotten Man" Aminity Schlayes - It's about the great Depression and how government intervention (FDR) caused the Depression to go until the World War II. It's very similar to what;s happening today

  • Report this Comment On October 09, 2008, at 8:33 AM, macrophyllum wrote:

    I agree with damasterwc. We need to get rid of this crazy fractional reserve banking and stop pumping dollars into the economy.

  • Report this Comment On October 09, 2008, at 3:32 PM, RHaganC wrote:

    Where is President Andrew Jackson when you need him?

    Seriously, I do in a sick way love how the more the gov't gets involved the more nothing beneficial is accomplished.

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