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(No) End in sight for credit crunch |
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Written by Brian Williams
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Friday, 02 May 2008 |
* This article has been corrected.
The dollar rallied and commodity prices fell this week as the Federal Reserve cut the Fed Funds Rate by only 50 basis points to 2%, which some speculators in currencies have considered a sign the credit crisis is easing. All this happened as a torrent of bad economic news continues to pour from media outlets.
But I think the Fed had to cool its rate drops for two reasons. One: it hasn't helped. Despite banks being able to borrow cheaper from the fed, consumer interests rates for credit cards and houses continue to increase by as much as 100% in some cases.
Additionally, corporations such as Linens 'n Things and Sharper Image have filed bankruptcy protection under Chapter 11, and the Kuwaiti Minister is saying some Gulf states may in fact drop their peg to the dollar which has caused inflation in that region. And the subprime debacle that set the banking world on fire only continues to spread worldwide as the Arab Banking Corp posts a $587 million loss due to SIVs and CDOs.
Two: how low can they go? If they continued cutting as they have, pretty soon, the cost of borrowing money would be 0%. Besides, they have to leave some room to cut if things get worse.
[Bloomberg, USAToday, WSJ, ArabianBusiness]
 
Brian Williams, a TheSequitur.com senior editor and systems director, studies sociology at Morehead State University.
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