Will This Rate Cut Work?

Yesterday marked the 79th anniversary of the crash of 1929 … "Black Tuesday," they called it. It was one of the biggest market crashes ever, and it opened the doors to the Great Depression. While you'll be hard pressed to find someone who can describe what that day was like, anyone awake during the past month can tell you all too well what market crashes in general feel like.

But yesterday marks yet another familiar crossing, too: Ben Bernanke dropped interest rates by half a percentage point, slashing the fed funds rate down to the same pitiful 1% level many think helped fuel the crash of 2008 in the first place.

This time around, things are quite a bit different. When the Fed lowers interest rates, it makes it cheaper for banks to do what they do best: lend money. The problem is, banks don't want to lend money right now. To anyone. At any price. The cost of money isn't the problem; banks are more concerned with people's inability to back their loans.

At whatever interest rate they can borrow, even healthy banks like Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) and BB&T (NYSE: BBT  ) are still scared out of their minds. They won't resume lending at meaningful levels until markets mellow out, which likely means a stabilization in real estate. As JPMorgan Chase (NYSE: JPM  ) CEO Jamie Dimon put it earlier this month, "If you're not fearful, you're crazy."

Regardless, now that oil has plunged, inflation concerns have been pushed to the back burner, and the dollar has rebounded, the argument that Bernanke should cease slashing rates is losing steam. As long as the threat of a massive global recession keeps inflation in check, heck, he might as well use every weapon at his disposal to stabilize the financial sector.

And, boy, does it look like he'll be pulling out all the stops on this one. Bernanke's leaving the possibility of lowering interest rates even further, saying the Fed "will act as needed to promote sustainable economic growth and price stability."

Will it work? No one knows, but it's probably worth a shot. Be warned, though. Japan went the rate-cut route in the '90s, slashing rates down to nearly zero. Its quest to spur the economy turned into an anemic period they ended up calling "the lost decade," which you can imagine wasn't a raging success.

Care to share your thoughts? Chime in below in the comment section, or check out our bailout discussion board to see what others have to say about these extraordinary moves.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase, BB&T and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


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