Even if the Fed lowered its target for fed funds to zero ... if the LIBOR rate fails to decline in tandem, or worse, actually goes up, the Fed's power to avert an economic decline in the U.S. will be shot to pieces : Martin Weiss and Mike Larson / Money and Markets
The Fed has lost control of a deterioating sub prime crisis, the Stock market knows it but most investors have no idea of the imminent danger ahead. The stock market does not like uncertainty and is already reacting.
Morgan Stanley issues full US recession alert 11 Dec 2007 Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a "perfect storm" for consumers as the housing slump spreads. In a report "Recession Coming" released today, the bank's US team said the credit crunch had started to inflict serious damage on US companies.
Stocks plunged following the Fed's announcement yesterday of a quarter point cut. The Dow dropped more than 290 points while the S&P and Nasdaq each fell more than 1.5 percent. The big money is bailing out because the Fed has lost control of the situation.
The Fed is now almost irrelevant compared to the London Interbank Offered Rate (LIBOR) which is now going in the opposite direction than the Fed ~ and LIBOR is the rate that drives most adjustable rate mortgages in the United States and also sets the standard for many corporate loans, a big chunk of the interbank borrowing by U.S. banks, even local government borrowing.
Martin Weiss, Ph.D and Mike Larson of Money and Markets who have been right for months spell it all out and declare " A U.S. recession is written in stone "
Allen L Roland http://blogs.salon.com/0002255/2007/12/12.html
Fed cuts rates only 1/4 point! Dow tanks! Yen soars!
by Martin D. Weiss Ph.D. and Mike Larson
Money and Markets 12/11/07
Excerpt: Now, here's what Wall Street has not yet figured out ...
Despite all the Fed's rate cutting over the past few months, the key interest rate the Fed does not control — the London Interbank Offered Rate (LIBOR) — is striking out on a different path.
Many years ago, this might not have mattered very much. LIBOR was largely irrelevant to American borrowers.
No more!
Today, LIBOR is the rate that drives most adjustable rate mortgages in the United States.
LIBOR is the rate that sets the standard for many corporate loans, a big chunk of the interbank borrowing by U.S. banks, even local government borrowing.
LIBOR is easily the single most important interest rate in the world.
But LIBOR is not controlled by the Federal Reserve. It's the rate international banks charge each other on short-term loans.
Those banks don't know where the bodies lie or who's going to be the next victim of the subprime disaster. So no matter what the Fed does or says, they're hoarding their capital. And they're not cutting their rates.
Here's the key:
Even if the Fed lowered its target for fed funds to zero ... if the LIBOR rate fails to decline in tandem, or worse, actually goes up, the Fed's power to avert an economic decline in the U.S. will be shot to pieces.
And that's exactly what's beginning to happening:
Until August, the LIBOR market was mostly in lock step with our fed funds rate.
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But then, when the subprime crisis burst onto the scene ... confidence shifted to fear ... the shift hit the fan ... and the LIBOR rate surged.
Despite the Fed's efforts to calm the crisis, the LIBOR market has slashed its umbilical cord to Fed-controlled interest rates ... broken off on a different path ... and set the stage for one of the greatest financial battles of the century.
This chart, showing the spread between the LIBOR rate and the fed funds rate, is the proof. This spread was virtually flat until the summer. Then it went berserk to the upside and has been on its own orbit ever since.
Bottom line: The Fed's .25% rate cut today is no longer the big issue.
The big issue is:
- What will happen in the LIBOR market tomorrow morning and in the days to come? And ...
- If the LIBOR rate continues on its own, separate path, how will that impact the U.S. economy, where so much borrowing is tied directly to LIBOR?
Our answer:
A U.S. recession is written in stone ...
Allen L Roland http://blogs.salon.com/0002255/2007/12/12.html
Freelance Online columnist Allen L Roland is available for comments , interviews and speaking engagements ( allen@allenroland.com )Allen L Roland is a practicing psychotherapist, author and lecturer who also shares a daily political and social commentary on his weblog and website allenroland.com He also guest hosts a monthly national radio show TRUTHTALK on www.conscioustalk.net
