Fed slashes rates as US recession looms

The Federal Reserve has slashed interest rates for the second time in little over a week as the US economy stands on the brink of recession.

The Fed, which stunned markets with an emergency cut of 0.75 percentage points last Tuesday, reduced rates by 0.5 percentage points to 3pc.

Fed chairman Ben Bernanke and fellow members of the Federal Open Market Committee made their decision hours after figures from the US Commerce Department showed that gross domestic product slowed to its weakest level of growth in five years in the last three months of 2007.

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My Comment: The title of this article mentions "Recession Looms". Duh! US GDP growth down to 0.6% in the 4th quarter! What do you call that??? The Recession has already arrived in the US...for goodness sake..start calling a spade a spade man.

Meredith Whitney fears $70bn carnage on monoliners

The high-profile banking analyst who triggered the resignation of Citigroup chairman Charles "Chuck" Prince is predicting investment banks will need to take further write-downs of $40bn (£20bn) to $70bn as a result of the current crisis in the bond insurance market.

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Ron Paul Goes to The Zoo

UK house-price slowdown deepens

The slide in the housing market gathered more pace last month, increasing speculation that the Bank of England's Monetary Policy Committee will cut interest rates at its meeting next week.

Mortgage approvals slumped to just 73,000, the lowest level since records began in 1999, accelerating the downward trend. Approvals dropped from 113,000 in June to 99,000 in September and 81,000 in November.

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You say you want a revolution?

Every movement in history has faced some time of testing, some experience that either forges it into something strong and unified, or forces it to fade away into the history books as another failed experiment.

Dr. Paul has written to you that we are heading straight for Super Tuesday. Our opponents are free to beat up on each other and wear themselves down while we gather our supporters and prepare to storm the convention with delegates.

Last night, over 60,000 people stood up and asked for an end to the runaway violation of our liberties. But contrary to the impression you may be getting from the mainstream media, no national delegates have yet been won in Florida. Those delegates will only be awarded between February 6 and April 30 at delegate selection caucuses, and many of those delegates will be supporters of Dr. Paul.

Ron Paul is the only candidate not to give up on any state in the Republican race, and just as we competed strongly in overlooked states like Nevada and Louisiana, so too will we compete in Maine, Minnesota, and other states that the so-called "top-tier" candidates are content to ignore.

Now, as the focus shifts to Super Tuesday, Rudy's campaign is crushed, Huckabee is losing momentum by the day, and McCain and Romney are fighting over who is the most liberal.
We've been here before. In 1776, despite a courageous effort at holding onto the city, George Washington ceded New York and quickly retreated to New Jersey.

1777 brought the British recapture of Fort Ticonderoga, as well as American defeats at Brandywine and Germantown.

And then, during the winter of 1777-1778, Washington and his army faced perhaps their most humiliating moment, forced to endure a harsh Pennsylvania winter with limited supplies at Valley Forge.

The American revolutionaries dealt with their defeats, focused on their goals, and emerged from Valley Forge as a force that would defeat the most powerful nation on earth.

Our momentum is building. Each one of us, from Dr. Paul himself down to the grassroots supporter who donates the last $5 he or she can give, is focused on the goal.

Early in the struggle for American independence, George Washington wrote: "Perseverance and spirit have done wonders in all ages." Even then, Washington realized that a fierce struggle for self-government can only be won with a spirit of determination equal to the challenge.

Today, in the midst of our new revolution, let's consider Washington's words once again. The task before us is enormous. The foes of liberty are deeply entrenched, and they will not relinquish their power without a struggle.

But fighting in our favor is the unconquerable human spirit, the innate desire to be free. We must embrace this inner strength, dig in our heels, and persevere, just as Washington and his rag-tag colonials, the first American grassroots patriots, did before us. And if we must pass through a Valley Forge or two along the way to victory, let those times of testing temper the steel of our determination.

If Ron Paul is to continue his fight for liberty to the Republican Convention, we need your help in two critical ways:

1. Become a precinct leader today: It's easy, but more importantly, it's vital to Ron Paul's success: https://voters.ronpaul2008.com/.

2. Donate: Just as the Continental Congress supplied General Washington's troops in the field, we too must raise as much money as we can to equip our grassroots supporters.

Help us win this revolution and usher in a new era of freedom, peace, and prosperity. Donate today: https://www.ronpaul2008.com/donate.

Matthew Hawes, Policy Assistant

Daniel McCarthy, Internet Communications Coordinator

Jonathan Bydlak, Fundraising DirectorRon Paul 2008

Bank Reserves Go Negative

By Mike "Mish" Shedlock

I have been watching a chart of Borrowed Bank Reserves for several weeks. The action is unprecedented.

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Why Is Bernanke Trying to Fight the Bear?

Last Tuesday, January 22, 2008, the US central bank lowered its federal funds rate target by a hefty 0.75% to 3.5%. The panicky decision to lower the fed funds rate target was made ahead of the Fed's meeting at the end of this month. Last Tuesday's cut by the Fed was the largest nonscheduled interest-rate cut in more than 20 years.

Let us say that the present aggressive interest rate stance by the Fed fails to prevent the economy from falling into a recession; what kind of action is Bernanke then going to undertake? In some of his writings, he has suggested that, under such circumstances, the Fed should adopt a very aggressive stance and start pushing money on a massive scale, i.e., helicopter money. Needless to say that if this were to happen, Bernanke would run the risk of badly damaging the foundations of the real economy.

FULL ARTICLE

Government Regulation vs Free Markets

Economic Outlook: More Darkening Clouds
by Dom Armentano

Every American, from the top Fortune 500 CEO to the youthful fast-food hamburger flipper, owes his standard of living – the highest in the world – to free market capitalism. It's capitalism – private property and free markets – that provides the information and the incentive that allows each of us to maximize the value of our economic activity. Yet to hear the (mostly) Democratic presidential candidates tell it, free markets are faulty, unfair, and inherently unstable; indeed, government should constantly regulate markets and ride to the rescue whenever recession threatens.

The overall economic ignorance displayed in this year's political campaign has been staggering. Instead of calling for balanced budgets, sound money, permanent tax reductions, and less regulation, most of the candidates have called for more inflation and more government intervention.

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Ron Paul KCPQ Fox Seattle Interview

The Sixty-Year Storm

by George Soros

Today’s financial crisis, triggered by the collapse of the housing bubble in the United States, also marks the end of an era of credit expansion based on the dollar as the international reserve currency. It is a much bigger storm than any that has occurred since the end of World War II.

To understand what is happening, we need a new paradigm. It is available in the theory of reflexivity, which I first proposed 20 years ago in my book The Alchemy of Finance . The theory holds that financial markets do not tend towards equilibrium. Biased views and misconceptions among market participants introduce uncertainty and unpredictability not only into market prices, but also into the fundamentals that those prices are supposed to reflect. Left to their own devices, markets are prone to extremes of euphoria and despair.

Indeed, because of their potential instability, financial markets are not left to their own devices; they are in the charge of authorities whose job it is to keep the excesses within bounds. But the authorities are also human and subject to biased views and misconceptions. And the interaction between financial markets and financial authorities is also reflexive.

Boom-bust processes usually revolve around credit, and always involve a bias or misconception – usually a failure to recognize a reflexive, circular connection between the willingness to lend and the value of the collateral. The recent US housing boom is a case in point.

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The Road to Hyperinflation - Part 2

Central Banking History of Failing to Stabilize Markets

It has been forgotten by many that before 1913, there was no central bank in the United States to bail out troubled commercial and associated financial institutions or to keep inflation in check by trading employment for price stability. Few want inflation but fewer still would trade their jobs for price stability.

For the first 137 years of its history, the US did not have a central bank. The nation then was plagued with recurring business cycles of boom and bust. For the past 94 years that the Federal Reserve, the US central bank, has assumed the role of monetary guardian for the nation, recurring business cycles of boom and bust have continued, often with the accommodating participation of the Fed. Central banking has failed in its fundamental functions of stabilizing financial markets with monetary policy, succeeding neither in preventing inflation nor sustaining growth nor achieving full employment. Since the Fed was founded in 1913, the US inflation has registered 1,923%, meaning prices have gone up 20 times on average despite a sharp rise inproductivity.

For the 18 years (August 11, 1987 to January 31, 2006) of his tenure as chairman of the Fed, Alan Greenspan had repeatedly bought off the collapse of one debt bubble with a bigger debt bubble. During that time, inflation was under 2% in only two years, 1998 and 2002, both times not caused by Fed policy. Paul Volcker, who served as Fed Chairman from August 1979 to August 1987, had to raise both the fed funds rate and the discount to 20% to fight hyperinflation of 18% in 1980 back down to 3.66% in 1987, the year Greenspan took over the Fed just before the October 1987 crash when inflation rose to 4.53%.Under Greenspan’s market accommodating monetary policy, US inflation reached 4.42% in 1988, 5.36% in 1989 and 6.29% in 1990. US inflation rate was moderated to 1.55% by the 1997 Asian financial crisis when Asian exporting economies devalued their currencies to lower their export prices, but Greenspan allowed US inflation rate to rise back to 3.76% by 2000. The fed funds rate hit a low of 1.75% in 2001 when inflation hit 3.76%; it hit 1% when inflation hit 3.52% in 2004; and it hit 2.5% when inflation hit 4.69% in 3005. For those years, US real interest rate was mostly negative after inflation. Factoring in the falling exchange value of the dollar, the Fed was in effect paying US transnational corporate borrowers to invest in non-dollar markets, and paying US financial institution to profit from dollar carry trade, i.e. borrowing dollars at negative rates to speculate in assets denominated in other currencies with high yields.

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The Great Depression - The Sequel ?

The D Bomb Is Dropped

It’s happened. One widely read financial daily very recently dropped the “D” bomb. The article compared today's economic situation not to the 1987 affair with a happy ending, but to the much “darker metaphor” of the Great Depression in 1929.

The main similarity, according to the article was this: The all-out rescue efforts of the financial powers-that-be to stop a downturn and push the economy onto solid ground. Then as now, two main bodies carry out the task: the central bank and the White House.

1929: The Federal Reserve promises “cheaper credit” and slashes the discount rate from 5.5% (1929) to .75% (1932). At the same time, U.S. President Herbert Hoover creates an “Economic Stimulus Plan” to provide $160 million in tax relief to the public.

2008: On January 22, the Federal Reserve approves an emergency 75-basis-point rate cut, the largest single reduction in 23 years (and fourth cut in four months). Days later, U.S. President George Bush encourages Congress to support a $150 billion “Economic Stimulus” through tax rebates.

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Merrill downgraded on bond insurers, subprime

BOSTON (MarketWatch) -- Oppenheimer & Co. on Wednesday downgraded shares of Merrill Lynch & Co. to underperform, saying bond insurers' problems could prompt more write-downs at the investment bank and noting the firm's exposure to subprime mortgages.

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UBS, BNP Paribas reveal fresh hits from credit crisis

LONDON (MarketWatch) -- Two of Europe's largest banks revealed fresh problems stemming from the U.S. housing downturn Wednesday. Swiss banking giant UBS extended its latest write-down to $14 billion and France's BNP Paribas said its quarterly profit will slump over 40%.

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Forex Market Update - 29/01/2008 - FOMC Outlook (2)

FX Insights Moderator,

Just a quick update on some things as we head in to the FOMC...

My short @ 4794 was closed @ 4793 this morning and I've not re-entered the market with any new shorts and will not re-enter with any new shorts at this point... at least not until I see what the Fed does...

I only have 1 open short and that is at 4714 and I will keep this short open for the time being... my overal bias remains euro long -- cautiously long -- I'm not adding any new longs at these levels and not adding any trades at all this close to the rate decision...

This morning's GDP data can certainly lend some credence to the possibility of at least a 50bps cut, as GDP had slowed considerably during Q4 and is presently showing signs of complete stagnation during this first quarter of 2008.

I'd like to caution against jumping into the market as soon as the rate decision is released... we could see a pull back on the EUR/USD when the decision hits the wires...

The pull back can occur as banks are either taking losses, taking profits, and or adding new long positions, which will be based on exactly what the Fed comes out with today...

Sometimes it's best to wait between 4-12 minutes to get a feel for how the price action will play out and to see how the banks will decide to respond and move the market... just some food for thought on that...

Please practice extreme risk and money management today... do not make a knee jerk trade on any of the pairs, especially the yen crosses... formulate a gameplan and stay consistent during these potentially volatile days ahead...

FX Insights

The Failure of Inflation Targeting

By Axel Merk, January 30, 2008

Inflation targeting is yet to be formally adopted by the Federal Reserve (Fed), but recent market and Fed actions already prove that it is a failure. At the whim of trouble in the markets, Fed Chairman Bernanke has made it clear that he is inclined to flood the markets with liquidity at any cost; he said: “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”

Contrast that with John-Claude Trichet’s comments: the head of the European Central Bank (ECB) recently said that during times of financial turmoil, it is imperative that inflationary expectations remain firmly anchored. The Fed’s increasing isolation is also apparent from recent comments by Mervyn King, the governor of the Bank of England who said that investors had been mispricing risk for far too long and that “the repricing of that risk … is not a process that we should try to reverse.”

Let me be clear: we have no problem with a central bank to switch into emergency mode per se. But the way the Fed has wobbled into emergency mode, claiming to be vigilant on inflation while debasing the dollar in the process smells of hypocrisy. A central bank’s role is to keep the financial system running, not to run the financial system. Ben Bernanke has very clear views on how the financial system ought to be running. In February 2004, when he was freshly sworn in as a Fed Governor, Ben Bernanke published a report called “The Great Moderation.” In this report, he praised how monetary policy has contributed to a reduction in volatility of output and inflation since the mid 1980s. At first sight, it seems difficult to argue with such analysis; this work may have contributed to his appointment as President Bush’s Chief Economic Advisor, and subsequently to his current role as Chairman of the Federal Reserve.

While we do not deny that low volatility has positive implications, where there is sunshine, there is shadow: in our assessment, the seeds of the current crisis have been planted in the process. Even if you are not an economics Ph.D., you may recall the saying “if there is one thing the market does not like, it is uncertainty.” The less uncertain the world is, the more daring speculators become. Homeowners believing their jobs are secure, or their wages will rise, are more likely to take out a high mortgage. Any speculator is willing to take out more leverage when the future seems certain. Financial institutions have become increasingly “sophisticated” over the past decade and introduced widely acclaimed Value At Risk (VaR) models; these models assess the risk of loss given different scenarios. Put simply, the less volatility, the less uncertainty there is, the more capital may be put at risk. In recent days, there has been talk that banks may require over hundred billion in additional capital should mortgage insurers be downgraded. That’s because the banks’ models suggest that less capital is required for assets classified as safe; however, if someone spoils the party and says the world is a risky place, banks suddenly have a greater portion of their capital at risk, requiring them to either sell off risky assets on their balance sheets, or to raise more capital.

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Forex Market Update - 29/01/2008 - FOMC Outlook

FX Insights Moderator,

Because of the Fed's emergency rate cut last week, the market analysts and economists have been thrown for a loop as to what Bernanke will pull out of his bag of tricks tomorrow... I will not offer any speculations on what Bernanke will do, but I've been preparing accordingly and have tried to position my accounts for the "worst case scenario.

"Now, the "worst case scenario" can certainly carry different meanings to different traders, but to me, whatever the Fed does tomorrow is the worst case scenario, of which I see three worst case scenarios... so, lets take a look at each one...

And just as an aside... you might be wondering why I have three possible worst case scenarios... well, as a trader, economist, and a taxpaying U.S. citizen, the only best case scenario for the U.S. economic situation is for the Fed to begin raising rates, for the gov't to begin reducing the deficit, and for our trade balance to shrink and our GDP to expand, but this is a different conversation for a different time...

Worst case scenario #1:

25bps interest rate cut -- a cut of just 25bps would be just half of what the market is forecasting, and this would be slightly shocking to all markets, including our market... the equities market will likely take a hit and not only see stock sell-offs, but would also see less money flow into stocks, which would turn the USD supportive against the EUR. I think the dollar would actually gain some ground back on the EUR should the Fed only cut by 25bps.

Worst case scenario #2:

50bps interest rate cut -- all markets are forecasting and expecting a full 50bps cut from the Fed. Should the Fed come through with what the markets want and expect, I believe the equities markets all around the world would react very favoribly to this move, more specifically, the Dow and S & P would respond with upward gains and momentum, which would then correlate into the EUR gaining against the USD. In addition, should the Fed cut by 50bps, the interest rate differentials would then turn into 100bps in favor of the euro vs. the dollar... this cut would bring the Fed's rate to 3.00% against the ECB's rate of 4.00%... I think it's quite significant to have a full 100bps interest rate differential between the EUR and the USD...

As you know, bank money flows to the nation that offers the higher rate of return, so I believe would could see renewed upward momentum and upward gains for the euro vs. the dollar. I really cannot imagine why banks would buy up dollars and sell-off euros with a 100bps interest rate differential... of course, we can't always depend on logic in the spot FX market, but the Eurozone now offers a better rate of return and it actually pays to hold euro longs, which is something traders look upon with favor.

Worst case scenario #3:

No interest rate cut -- yes, I absolutely believe there's a reasonable probability that the Fed will keep rates on hold tomorrow. I think it's a distinct possibility because of the emergency actions the Fed took last week... Bernanke's move, in my mind, diminishes some of the need to hack up rates any further tomorrow...

I believe a no cut would be tremendously supportive of the dollar vs. the euro... you see, concensus continues to grow that the ECB will eventually have to cut rates later this year and I am one of those that feels this way... M3 money supply is falling in the Eurozone and that will put less inflation pressure on the ECB... plus, I think we'll see the Eurozone's CPI come down from the highs of 3.1%, but lets not get off track here...

Should Bernanke hold rates steady, this would be a tremendous shock to all markets... our market does not handle shocking interest rate policy with any degree of emotional stability... a no cut could easily send the EUR/USD falling back to support levels between 1.45 and 1.43 in the near-term...

If the Fed were to hold rates tomorrow, global equity indicies would take a hit and I think we'd see some intense sell-offs and losses, which would naturally lead to the euro dropping against the dollar, due to the correlation between the EUR/USD, the Dow, the S&P/500, the S&P/500 and Dow futures, and the EUR/JPY (yes, the connection can run that deep). Then, we'd see traders begin to liquidate gold and oil positions, and possibly take short positions on those commodities to catch the down move, and those short positions in gold and oil would basically equate to taking long USD positions, which would then correlate into more USD support vs. the EUR...

A no cut would lead to some big, nasty crap hitting the fan in all markets, and ultimately I could see the dollar coming out of this smelling like a rose...

Fed psychology:

First, there's quite a bit of speculation that Bernanke made a knee-jerk reaction to last week's global equities sell-off, which was triggered by the nutjob trader from SocGen in France. So, to save face on his move to do an emergency rate cut Bernanke could certainly give the markets the 50bps cut they want, and this would be his way of saying, "last week's cut had nothing to do with the equities issues."

If Bernanke wants to send the markets the message that his biggest concerns are the U.S. economic situation and the issues within the credit markets and with the bond insurers/bond rating agencies, the FOMC will likely "vote" in favor of the 50bps cut. Of course, that cut will do zero to stimulate the economy nor will it offer much relief to the credit market and the banks, again, that's another issue for another time... but at least it would help Bernanke and the Fed save some face...

A 25bps cut or a no-cut could and probably would send our market the message that the Fed is growing more and more concerned with U.S. inflation and less concerned about what's happening on Wall St. This perceived concern about inflation would be very supportive of the dollar vs. the euro. You see, much of the euro's strength against the dollar is due to the fact that the ECB is so hell-bent on keeping inflation under 2%, which equates to tight monetary policy and hawkishness on interest rate policy...

The Fed and the ECB operate on opposite ends of the spectrum... Bernanke and his henchmen at the Fed are nothing more than subservient slaves to Wall St. and the trillion-dollar banking conglomerate that basically control governments and world markets, and because the U.S. still has the most powerful influence over the global markets and global economies, the subservient slaves at the Fed must do two things:

1. Manipulate markets

2. Price fix

Market manipulation and price fixing is accomplished through the Fed's monetary policy... if you want a good example of what price fixing is, look at what happened when Bernanke cut rates by 75bps last week... that move "fixed" prices on all of the equities markets and kept them from continuing to sell-off... I could give hundreds of examples, but you get the idea...

Now, the ECB has a totally different mission and mandate, which is ensuring price stability -- Trichet is almost to the point of being neurotic when it comes to inflation and price stability, but you have to understand why... the German Bundesbank is very influential, and Europeans, especially Germans still remember the days of having to cart in heaps of cash to buy milk and bread... so because the ECB is coming from that angle, they are naturally going to be very tight on monetary policy and less likely to ease on rates even when growth begins to suffer, which is and will be the case this year... so as I said earlier, this is one of the main reasons why the euro has been so strong against the dollar for the past few years...

EUR/USD trading:

All possible scenarios for what could happen are stated above... now, how this translates into trading is a different story because no one truly knows what the Fed is going to slap us with tomorrow...

On last Friday's and this Sunday's updates, we gave the key level, on the downside of 4680 - 4660... it hit 4660 right on the dot on Sunday and has since move towards the top of the range, but unable to breach the 4800 level...

Clearly the market has fallen into a "wait and see" trading range because the banks are speculating just as much as the rest of us and will likely need to see what the Fed decides tomorrow...

It would not surprise me to see some movement out of this range as we draw closer to tomorrow's decision... don't forget that we have key GDP data tomorrow morning, plus, some banks may try to square positions ahead of the FOMC decision and these money flows could cause some movement...

As far as trading goes, I grabbed a 4794 euro short yesterday and will certainly hold this trade, unless of course the market moves against me, in which case the trade will be closed for +1 pips and I may look to re-enter short at a higher position...

On the long side, I am still long from 4385 and will hold all longs that are still in profit below the 4700 level... other than that, I've spent this week trying to flatten out and free up margin just to protect against the unknowns... this is not a situation where I really want to get caught going the wrong way because tomorrow could be monumental...

I'd really like to grab some better euro shorts should the market go up and give an opportunity to do so... as mentioned above, I think in the end of all this the dollar could come out smelling like a rose, even though fundamentally and logically it shouldn't be that way...

I encourage you to do your own analysis of the market and weigh each possibility against the other... I could be way out in left field, but I wanted to at least give you my view on things...

FX Insights