Friday, August 17, 2007

Newsticker: Half-percentage point cut in FED's discount rate on loans to banks (fg)

Here we go, FED officials just approved a half-percentage point cut in its discount rate on loans to banks, declaring that increased economic uncertainty poses risks for U.S. business growth. In addition, the Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Well, this sounds like a Lender of Last Resort. Alan Greenspan once did it and his follower Bernanke obeys. As a Lender of Last of Last Resort this action might souns reasonable, however, it will NOT cure conditions on financial markets. It might support the re-financing of positions. It might support asset valuations. Interest-rate cuts will be not the adequate instrument to decrease systemic risk, to remove the generated massive liquditiy from spring 2004 until now (this also holds for the Eurosystem) which induced asset price inflation and it will not forestall wealth effects and a potential shrinkage in U.S. private expenditures.