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Econ Textbook Scifi Come to Life

The last time I heard things like “The Fed’s discount window” was about 4 years ago in college for econ class.  The text only glanced over it as part of the FED’s mandate…or rather maybe I glanced over it.  But I’m sure the text didn’t talk about the effects of such moves like the FED did on Friday because frankly, the FED hasn’t had to be the lender of last resort much and each instance and the following effects were different.  Now that people are losing homes, funds are blowing up, and my portfolio’s taking hits- econ textbook’s coming to life!

What I’m wondering is, what would happen if the FED did cut, but only 25 basis points (bps) or 50bps just to give people confidence (since I believe rate moves by the FED doesn’t filter through the system for 6-12 months???).  Then, after things settle down, they bump it back to 5.0% or 5.25% where they’ve held it thus far?  I feel like the FED was reluctant to do what it did on Friday, but HAD TO follow suit of the other central banks.  Or maybe because some AXA money market fund in Europe dropped 20% and the savings of people who have nothing to do with the U.S., let alone U.S. mortgages, got destroyed.  Just feels like the FED was pressured in after their statement on Tuesday…and FED governors coming out on Friday saying “oh we inject liquidity into the system all the time” to save face.  Maybe the FED thought the U.S. economy was strong enough to weather the storm, and let some hedge funds and mortgage companies blow up would rid the U.S. of weak links.  But I suppose the EU didn’t think it’s financial system is as strong, because that was some ginormous bailout by the European Central Banks.

I don’t know if lowering rates is the right answer…if there is such a thing as a right answer.  Might things already be at the point where a rate cut wouldn’t solve the immediate problem?  Maybe the right thing to do was not to raise rates to 5.25%.  So what happens now?  Do we go down with or without a rate cut, and only hoping rate cut would limit the damage and make the bounce come sooner?

…confused and uncertain about the road ahead.  Appreciate everyone’s comments and thoughts!

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