You already have more knowledge than all the CEOs on Wall St.

That’s a pretty good question. One that I’m not sure I’m quite qualified yet to answer (note: I really only started paying close attention to this in the last year).

Unfortunately, to examine “why would they stop” requires that at least we accept for a moment what seems like a pretty outrageous postulate: They were trying to save the (big) banks. To back up this, maybe give it a bit more credibility. The rate cuts the fed makes to the banks are pretty much instant. Adjustable rate mortgages adjust 1-2 times a year (every 6-12 months). So, the ‘rate cut’ helps the bank first, and *maybe* 6-12 months later helps home owners. How many of them are too far underwater by then?

There’s a good reason I put ‘maybe helps home owners’ above. Anybody who’s ever had even just a credit card has heard the phrase ‘prime + XX%’. And if you look at ARMs, you see the same verbiage in those as well. The question is though: who’s prime? Most home mortgages prime means things like COFI, LIBOR, MTA, etc…not ‘federal fund rate.’ True, the fed rate effects these other indexes, but a lot of other things effect them too.

So, under some light shades of paranoia it’s easily possible to think that the rate cuts, lending directly to the hedge funds/investment banks, etc was all done to create moderate amounts of inflation. The idea was: print more virtual money (make M2 and mostly M3 larger), net effect is the sea of dollars grows larger.

The problem is: things have ‘real’ value. If we all woke up tomorrow and there was exactly twice the dollars everywhere (your bank account had twice the balance, your pay check was twice as much, etc) you’d see a massive spike in ‘inflation’ as very quickly the dollar figure on your house leapt to twice what it is today. The price of a box of corn flakes would do the same. Eventually everything would sort itself back out to similar ratios as what they are now.

When you hear people speculate that the rate cut was for the big banks, this is the line of thought they are following. The banks are holding notes that say these houses are worth $XX, what people are willing to pay for those houses is quite a bit less then that. If you could grow the sea of money, eventually the dollar figures on the debt and the dollar figure on the houses would match again, and the banks would become solvent again (on paper).

The problem is, Americans don’t like inflation anywhere other then their paycheck. And given that their paycheck will be one of the last things that’ll catch up with inflation, how do you prevent them from out right revolting until you complete the ‘inflate the money supply’ fix. Well…if you want to go further down crazy lane: you fudge the inflation numbers. You take things like ‘energy’ and ‘food’ out of them, all with the rational that ‘food and energy are too volatile, and make it hard to read real inflation.’ I don’t know about you, but those are a pretty significant portion of my budget, and fall into a category that I call ‘Non-optional variable expenses.’ The name says quite a bit: I have to buy these things, and I have no control over the price. If an iPhone gets too expensive, I won’t buy one. If food gets too expensive: I starve?

Anyway, the point is, when the inflation figures start hitting energy and food commodities, people sit up and notice *really* fast that something wrong even if their government is telling them that everything is fine. At that point, people like Ben who want to help his banking buddies have to start doing their real job, or worry that congress will do something drastic to him.

So, anyway, there’s your trip to crazy land for the day. The government/industrial complex loves you and cares for you deeply. All of the above is purely fiction. Any resemblance to persons living or dead is purely coincidental.

magic does good to people … manipulation not …

Even they found out, that if they keep doing wrong things, it will be WORSE

why would they undo their magic when it’s not through yet?

@ Zenki … use whatever language … I’m a trader … I know the “words” … No, I ‘m not kidding at all

@ Seth … 100% correct … rate cuts were tools to save the banks … nothing else …

Just…food for thought.

That said, I totally believe that we’re due to enter into some inflation. Producer Price Index (PPI, what the Manufacturers pay for their inputs for those of you who are learning like me) has been up for some time now. I think all the manufacturers are trying to keep their prices down, living on a lower profit hoping to undercut the competitors. The airlines did this for quite a while here a month or two ago. They would try to put fuel surcharges on, but one or more of them would roll it back to try and get a larger share of the customers. I suspect that there are a lot of industries out there like that, hoping their competitor raises prices first.

I think we could do with some interest rate hikes. At least some. I never fully bought into the idea that it was saving people from getting booted out of their house. Mortgages adjust slowly…I have this odd feeling that most of the really bad cases were already so far underwater by the time the rate cuts came through that it didn’t help them anyway.

There are days the paranoid and conspiracy theory part of my brain really thinks the rate cuts were for somebody else. Eventually Ben and friends will have inflated the currency enough that the dollar values listed on those mortgage CDO’s will match the values on the houses again. Tada! Problem fixed, right?

LOL, sorry for the language.