Fallout: The Financial Crisis

Coordinated rate cuts unprecedented

Steve Henn Oct 8, 2008
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Fallout: The Financial Crisis

Coordinated rate cuts unprecedented

Steve Henn Oct 8, 2008
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TEXT OF STORY

Kai Ryssdal: Closer to home, the day began on the early side for Mr. Bernanke and the Federal Open Market Committee. Never mind that they were scheduled to meet at the end of the month anyway. At 7 this morning in Washington they cut the Federal Funds rate half a percent…to just a percent and a half. Marketplace’s Steve Henn has more on how the day unfolded from there.


Steve Henn: It was a wild day — despite the big global interest rate cut this morning, the DOW fell 200 points before lunch. Then at 1 p.m. eastern, for no apparent reason , it shot back up. Then, right before the bell, it fell off a cliff again. It begs the question: what was going on?

David Wyss: Got me?

David Wyss is chief economist at Standard & Poor’s.

Wyss: I think part of it is the market doesn’t know what to do right now. Everybody is just plain scared.

Here’s what the Fed and the central banks were trying to do: Get banks lending again by lowering interest rates.

Ted Truman: What is necessary is to apply the Powell Doctrine — to use overwhelming force to stabilize the situation.

Ted Truman was a staff economist on the Fed’s Open Market Committee for 15 years. He says the Fed lowers interest rates we pay by creating money. Think of interest as money’s price. If the Fed creates more money, prices falls. Truman says right now, the Fed should create a lot.

Truman: Flood the economy with liquidity and worry about mopping it up later.

But there’s a problem. Banks are hoarding most of this new money.

Wyss: Basically, people are sitting on the cash. They are not using it.

Wyss says banks are scared to lend because other banks or businesses will default. And they want a big cushion of money in case they can’t borrow from anyone else. Truman says today’s coordinated rate cut is meant to signal that central bankers will keep creating money until commercial banks are so stuffed with it, they start lending it again.

I’m Steve Henn for Marketplace.

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