Today the 'Bernanke helicopter' seems to have landed into uncharted territories. The chairman of Federal Bank who was expected to lower rates by 50 basis points actually reset it to 'ZERO'. Yes this is bizarre headline. The fed chairman set the fed target rate from zero to twenty-five basis points, effectively saying that banks will be able to borrow from fed at no price. If this is not enough to make banks lend, he announced something more, that it will buy mortgage back securities from banks.
The only other example in history of such low, or rather no interest rates is Japan. The example has not been successful. Money in USA now comes free. But think of this way, what if this does not work. Even if the cost of money is zero, no body wants it. There are two basic problems here
a) Even with money at no price, the banks don't want to lend it furthur. The balance sheets are so messed up that they need a clear head & some time to clean things up. Even in the case of America the previous cuts by the fed have not translated into lower interest rates for the end buyers.
b) Then there is the gradual unwillingness to spend, the shaken confidence in the system with a lower number every week. Job cuts & threats of job cuts have taken the fun of holiday season and consumption other-wise.
On top of that all this actually reeks of the policy that actually built the bubble from 2002-2007. Isn't this how the system built so much leverage in the first place. Years of administration policy providing people with easy money.America accounts for 60% of world's consumption and when the American consumer sneezes, no wonder the world catches a cold.
But to put this in a perspective of time. Monetary policy moves generally take about two quarters (12 to 15 months is the accepted time frame) generally or more to play out. So the affect of these policy moves will be felt at the earliest only, in third quarter of 2009. But the stock markets have already given a thump up sign. The DJIA & S&P 500 & NASDAQ were all up more than 4%.
Another point here is where will fed get the money. Will it keep printing dollars, till it runs out of green ink, as one analyst said. What happens to the exchange rates then ? As of today the European Central bank & central bank of England have both stayed short of both what the Federal Bank has does done. No wonder the dollar fell against both currrencies.
Movie Update :
'Gran Torino', (Clint Eastwood packs a so much straight forwardness , american-ness and intensity into this movie that even non-americans like me loved it). Read the new york times review here
Slumdog Millionaire (A great movie, with amazing potraits of everyday life from India packed into a dramatic story)