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Wall Street Tumbles After Rate Cut

Wall Street Tumbles After Rate Cut

AP
December 11, 2007

WASHINGTON (AP) – The Federal Reserve dropped its most important interest rate to a nearly two-year low on Tuesday and left the door open to additional cuts to prevent a housing and credit meltdown from pushing the economy into a recession.

Fed Chairman Ben Bernanke and all but one of his colleagues agreed to trim the federal funds rate by one-quarter percentage point to 4.25 percent.

The rate reduction, the third this year, was needed to energize national economic growth, Fed officials said. The deepening housing slump is affecting the behavior of consumers and businesses alike, the Fed said.

“Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks,” the Fed said in a statement explaining its decision to cut rates again. The three rate cuts ordered thus far “should help promote moderate growth over time,” the Fed added.

On Wall Street, stocks tumbled, reflecting disappointment among some investors who were hoping for a larger rate cut. The Dow Jones industrial plunged more than 200 points.

The funds rate affects many other interest rates charged to individuals and businesses and is the Fed’s most potent tool for influencing economic activity.

In response, commercial banks, including Wachovia and Wells Fargo, lowered their prime lending rate by a corresponding amount, to 7.25 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans.

The fact that the Fed’s key rate was lowered again marked an about- face for the central bank. At its previous meeting in October, Fed officials hinted that their two rate cuts probably would be sufficient to help the economy survive the housing and credit stresses. Since then, however, financial conditions have deteriorated, prompting Bernanke to signal before Tuesday’s meeting that another rate cut may be needed after all as an insurance policy against undue economic weakness.

As another bolstering move, the Fed on Tuesday also lowered its lending rates to banks by one-quarter percentage point. That was the fourth cut to the discount rate since mid-August.

“Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,” the Fed said in its statement.

Banks, financial companies and other investors who made loans to people with spotty credit or put money into securities backed by those subprime mortgages have lost billions of dollars. Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch.

Harder-to-get credit has thwarted would-be home buyers, intensifying the housing collapse. Foreclosures have soared to record highs. The number of unsold homes have piled up. Problems are expected to persist well into next year.

The 9-1 decision for a quarter-point reduction to the funds rate was opposed by Eric Rosengren, president of the Federal Reserve Bank of Boston. He preferred a bolder, half-percentage point cut.

“Fed’s language clearly reflects a heightened degree of concern about the economic outlook,” said Carl Tannenbaum, chief economist at LaSalle Bank. “They left open the possibility of additional rate reductions,” he added. If the economy were to take a turn for the worse, another rate cut could come before the Fed’s next scheduled meeting on Jan. 29-30, Tannbenbaum said.

The situation poses the biggest challenge yet to Bernanke, who took over the Fed in February 2006. Some analysts have questioned whether he waited too long to cut the Fed’s key rate and whether he has acted aggressively enough to the nation’s economic woes.

In September, the central bank dropped the funds rate for the first time in four years. Then it was a half-point drop; on Oct. 31 came a quarter-point cut.

The rationale behind the lower rates is that they will induce consumers and businesses to boost spending, invigorating economic activity. With Tuesday’s reductions, both the funds rate and the prime rate are now at their lowest levels in nearly two years.

From July through September, the economy logged its best growth in four years. But it is expected to slow to a pace of just 1.5 percent or less over the final three months of the year as the housing collapse and credit crunch chill consumers, sapping overall economic growth. The odds of a recession have grown.

With growth cooling, the unemployment rate, now at a relatively low 4.7 percent, is expected to rise. Analysts expect the jobless rate to climb to 5 percent by early next year.

High oil prices could complicate the Fed’s job of trying to keep the economy expanding and inflation low.

Oil prices, which had neared $100 a barrel, have moderated. But they are still high. High energy prices are a double-edged sword. They can slow economic activity and spread inflation if they cause the prices of lots of other goods and services to rise.

“Elevated energy and commodity prices, among other factors, may put upward pressure on inflation,” the Fed said. “Inflation risks remain,” the Fed said, adding that it “will continue to monitor inflation developments carefully.” Some economists believed the Fed’s decision to go with a moderate quarter-point cut was a nod to those inflation concerns.

 

Dropping dollar cramps the style of Americans abroad

LA Times
December 9, 2007

LONDON – Karla Keating and her husband had retirement on their minds in May when they got what they considered an offer too good to refuse: a three-year stint in London.

Coming from North Carolina, they knew it was going to be a bit of a financial leap. But the major US bank where her husband is an executive lured him with a 33 percent increase in pay. Within weeks, they had crossed the ocean and found a nice flat near Marylebone for 1,820 pounds – about $3,750.

“The estate agent told me the price, and I said OK, I guess that’s kind of comparable to prices around Europe. And he said, ‘That’s the price per week,’ ” Keating recalls. Since then, it’s been all downhill.

The iPod Nanos for the children cost 99 pounds apiece (about $204), compared with $149 in the United States. Keating’s six-Diet Coke-a-day habit got shaved quickly to one, at $2 a can. They sit at the end of the day on their small balcony overlooking Great Portland Street, and her husband smiles (sort of) and says, “Here’s your $12 glass of wine.”

“When I got here I was like a deer in headlights. I was just, ‘Oh my God’ about everything,” Keating said. “We figured out that with the increasingly weakening dollar, in reality he is making less than he was making 20 years ago.”

Read Full Article Here

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The dollar’s decline accelerates


Ready for a rout? : The dollar’s decline accelerates – Economist

Economist
November 8, 2007

YOU know that nerves are taut when a couple of stray comments set off a flurry of selling. The dollar fell sharply on Wednesday November 7th after mid-ranking Chinese officials, not actually responsible for foreign-exchange policy, made remarks that were seized upon by already jittery markets. A Chinese parliamentarian called for his country to diversify its reserves out of “weak” currencies like the dollar and another official suggested that the dollar’s status as a reserve currency was “shaky”. The greenback reached $2.10 against the pound and a new record of $1.47 against the euro, before recovering slightly. A widely traded index, which tracks the dollar’s value against six major currencies, also fell to a new low.

The sliding dollar, along with record losses from General Motors, the threat of $100-a-barrel oil and more bad news from the mortgage industry, spooked Wall Street. On November 7th the Dow Jones Industrial Average fell by 2.6% and the S&P 500 index by almost 3%. To add to the worries, Nicolas Sarkozy, France’s president, ramped up the political rhetoric on a visit to Washington.

Alarmed that the weak dollar boosts America’s competitiveness relative to Europe’s, he told Congress that George Bush’s administration needed to do something about the dollar or risk an “economic war”. Wall Street seers wondered whether official intervention to prop up the dollar was on the cards.

A true dollar crisis has long been one of the more frightening possibilities for the world economy. If foreign investors suddenly abandon America’s currency and the dollar collapses, financial markets could crash while the plunging currency constrains the Federal Reserve’s ability to cut interest rates. That fear is exacerbated by rising concerns about higher crude oil and food prices.

For now, the dollar nightmare is still unlikely. The currency’s decline is neither surprising nor, at least until this week, alarmingly rapid. The gaping current-account deficit and interest-rate differentials between America and other big economies point to a weaker currency. The Fed has cut short-term interest rates by 0.75 percentage points in the past two months. Given the scale of the credit mess and rising fears of recession, expectations are growing that the central bank will cut rates once again when its rate-setting committee next meets on December 11th.

Elsewhere, central bankers have stood pat or tightened. The Reserve Bank of Australia raised short-term rates to 6.75% on November 6th, citing inflationary pressure. The European Central Bank and the Bank of England, meeting on November 8th, are both expected to keep short-term rates on hold, at 4% and 5.75% respectively.

If cyclical considerations point to a weaker dollar, the most recent nervousness seems to be driven more by structural worries. Judging by the dollar’s slump in the wake of the Chinese officials’ comments, investors are fretting that central banks in emerging economies will abandon the ailing greenback. In the short term at least, that fear is easily exaggerated. The share of global foreign-exchange reserves held in dollars has fallen in recent years, but only gradually.

Central banks are unlikely to accelerate a dollar rout by making dramatic changes in their reserve portfolios. That said, many long-standing dollar bulwarks are looking weaker. Many countries that link their currencies to the dollar, from Arab oil exporters to China, face inflationary pressure. As the greenback slumps, these countries have ever-stronger domestic reasons to allow their currencies to rise.

So far, the dollar’s decline has caused little alarm among American policymakers. There is scant sign that the depreciation has aggravated price pressures. And inflation expectations, though up slightly, have not soared. Instead, the weaker currency, along with strong growth abroad, has boosted exports, helping to support output growth and unwind external imbalances faster than many thought possible.

America’s current-account deficit fell to 5.5% of GDP in the second quarter, from a peak of 7% at the end of 2005. For all the official talk of a “strong dollar”, most American policymakers have lost little sleep over the sliding greenback. A dramatic fall in the dollar, however, would be a different story. If this week’s ructions are a sign of things to come, the weak dollar could become a big headache.

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Gloom & Doom Economist Says Worst Is Yet to Come

Gloom & Doom Economist Says Worst Is Yet to Come

CNBC
October 22, 2007

Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, thinks the worst is yet to come for the global economy.

Appearing on CNBC’s “Squawk Box,” the economist and managing director of Marc Faber Ltd., explained his bearish outlook — and offered advice for how to play a glum market.

Faber perceives a “battlefield” between the Federal Reserve and other central banks, which had infused billions of dollars into the worldwide system to boost liquidity, and the counter-pressure of illiquidity brought about by market forces such as declining home prices.

Watch It:

http://www.youtube.com/watch?v=isD2aj3wh20

http://www.youtube.com/watch?v=YmORG10k71c

http://www.youtube.com/watch?v=VXsZu9oXCcg

But the economist fears that the Fed’s “throwing money at the system” will not help improve the fundamentals of the real economy. Instead, he believes, excessive monetary growth has merely driven excessive consumption in the U.S., with consumers living beyond their means and speculators “piling one bubble, housing, on top of the Nasdaq [tech] bubble” that popped in 2001-2001.

“The easy money, the easy credit — you can’t solve your problems with what caused them in the first place,” Faber declares.

He posits that a fully-realized recession at the turn of the millenium might have been for the best, restabilizing the world credit markets. “The longer you postpone the hour of truth, the worse it will be,” he augurs. “We will reach ‘zero hour,’ when more debt doesn’t help.”

How should one prepare for the full-fledged global bust Faber predicts?

Precious metals. He points to the traditional safe harbor, gold — but cautions that the precious metal is “a bit over-bought.” Construction-oriented commodities in general will continue to be driven by Chinese demand, he says, making mining companies a good bet. And he the one absolute essential: Food. “We all have to eat.”

Markets. As to national markets, Faber says that Japan and Thailand are “very reasonable.”

Currencies. He foresees the U.S. dollar remaining low against other currencies — but notes that “Euroland” is very expensive compared to the greenback.

Real estate. Faber’s outlook for real estate goes against the grain: Manhattan is the great exception to U.S. trends, continuing to rise in price even when strong U.S. regions show signs of decline. But Faber says that in the bigger perspective, New York property is as vulnerable to a credit bust as any major metropolitan areas, such as “Hong Kong, Zurich and Frankfurt.”

His real-estate advice: “Buy a farm and learn to drive a tractor.”

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Strong silence from U.S. on dollar’s weakness

Strong silence from U.S. on dollar’s weakness

Herald Tribune
October 10, 2007

The U.S. dollar is slumping near all-time lows against the euro and has weakened considerably against several other major currencies, but officials in Washington are reacting with almost contented silence.

Less than two weeks before finance ministers from the Group of Seven industrialized countries meet to discuss economic policy, European officials are grumbling about the weakened dollar because it makes U.S. exports cheaper in world markets.

Jean Claude Trichet, president of the European Central Bank, reiterated Monday that he was paying “great attention” – a week ago he spoke of his “extreme attention” – to U.S. statements in support of a “strong dollar.”

But while the official mantra of the Bush administration remains that a “strong dollar is in our nation’s interest,” this formulation has not changed during the past five years as the dollar gradually lost about a third of its value against the euro.

On Wednesday, the dollar was trading at about 1.408 against the euro – slightly off its all-time low earlier this month. In January 2002, the dollar was worth about 0.89 per euro.

Indeed, when the dollar’s slide accelerated after the U.S. Federal Reserve Baord lowered interest rates on Sept. 18, U.S. officials barely even repeated the mantra.

“They don’t really care what the dollar does, at least within a fairly wide range,” said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. “What the U.S. government cares about above all is that the changes are orderly.”

Since the most recent decline began three weeks ago, the U.S. Treasury secretary, Henry Paulson, has mentioned the strong dollar only once.

That was on Sept. 21, during a trip to Canada, just as the U.S. dollar was dropping to parity against the Canadian dollar for the first time in three decades.

“I feel very strongly that a strong dollar is in our nation’s interest,” Paulson said back then, “and we believe that currency values should be set in a competitive marketplace based on underlying economic fundamentals.”

In practice, analysts said, the administration’s position has been, effectively, that a “strong” dollar is whatever value the foreign-exchange markets settle on.

By contrast, Paulson has repeatedly expressed satisfaction that U.S. exports have climbed by about 15 percent over the past year – a trend that has been helped by the weaker dollar.

Analysts see little mystery in the U.S. position: At the moment, a weaker dollar offers more benefits than a stronger one.

The cheaper dollar offers a lift to American exporters by making their products more competitive in many parts of the world. And while a weak dollar usually makes imports more expensive, import prices have climbed far less than the other currencies so far because foreign producers have kept prices low in order to preserve market share in the United States.

“Implicitly, Paulson and the Federal Reserve are happy with a gradual fall in the value of the dollar,” said Nouriel Roubini, an economist at New York University and president of Roubini Global Economics, a consulting firm that also operates a popular economics Web site. “They’ll never say they favor a weak dollar, but the benefits to the U.S. in terms of competitiveness are significant.”

Though Paulson has primary responsibility for U.S. exchange-rate policy, officials at the Fed have also made it clear that they are not worried about any imminent inflationary dangers posed by a weaker dollar.

The Fed chairman, Ben Bernanke, recently told a congressional hearing that the dollar’s value remains “strong” in other respects.

“The value of the currency can also be expressed in terms of what it can buy in domestic goods, the domestic inflation rate,” Bernanke said in response to questions about the dollar from Representative Ron Paul, a Republican of Texas, a long-shot candidate for the Republican presidential nomination. Noting that inflation remains low, Bernanke suggested that the dollar’s weakness was not a source of concern to the Fed.

Democratic lawmakers, who have been quick to attack the Bush administration about most other economic policies, have said almost nothing at all about the currency’s decline.

To at least some European officials, worried that the soaring value of the euro will hurt European exports, the U.S. silence has been thunderous.

“I would like very much to hear U.S. Treasury Secretary Henry Paulson repeat loud and clear that a strong dollar is good for the American economy,” said Christine Lagarde, the French finance minister, in an interview last week with the French business newspaper Les Échos.

Paulson has yet to respond. Left with his taciturnity, European officials have resorted to reminding Paulson about the one statement he did make.

“We agree with Mr. Paulson,” said Miguel Ángel Fernández Ordóñez, the governor of the Bank of Spain and a member of the European Central Bank board, after a meeting Monday in Luxembourg.

Yet even as European and U.S. officials warily circle each other on the currency, a bigger issue for both the United States and Europe is China, which continues to tether its currency, the yuan, closely to the dollar even as the Chinese trade surplus swells further.

According to recent data, the Chinese foreign reserves have been climbing at the pace of $40 billion a month – twice as fast as last year.

In recent days, European officials like Trichet have begun to focus more on demands that China allow its currency to float more flexibly.

That would be in line with long-standing efforts by the United States. But thus far, those efforts have had very limited effect on Chinese policy.

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Washington Mutual Sees About 75% Drop In Q3 Profit
Ohio Bank Fails
Canadian Dollar Reaches 31-Year High Against U.S. Dollar
Dollar’s double blow from Vietnam and Qatar
US economy, housing crisis to worsen
Weaker US Dollar is Good for the United States and its Trading Situation – Economic Myth Busters
Greenspan’s Dark Legacy Unmasked
JPMorgan, Bank of America May Write Down Buyout Loans
New data show housing market ‘in freefall’
Is the credit crisis over? Not so fast
Weak Dollar Prompts Record Foreign Buyouts of U.S. Companies
Europe Urges Tough Line on Dollar
Indian economy ‘to overtake UK’
Business calls for euro action
Why the US Dollar Will Continue Its Downward Trend
Weak dollar prompts record foreign buyouts of U.S. companies
Dollar Peggers to Stretch the ‘Impossible Trinity’
China $200B Superfund To Drain Dollars
Pending Home Sales Index Hits Record Low
Iran Slashes Oil Sales In Dollars
Greenspan Says Solution to Inequality is to Lower U.S. Wages
The Con That Turned the World Against America
U.S. Pending Home Sales Fall to Lowest Level in More Than Six Years
The Alarming Parallels Between 1929 and 2007
Big chill looms for the economy as new mortgages fall sharply
Greenspan Warns Good Times Are Over
Dollar Crunch Puts Gold Centre Stage
Euro Bursts To Fresh Dollar High
Dow surges to record high
The Worst Recession in 25 years?
Largest U.S. Bank: Profit Down 60%
U.S. $10 trillion in the red
Fears over cracks in Britain’s gold stock
Gold hits 28-year peak, platinum near all-time high
Gold rises as dollar sinks like a rock
How Economy Could Survive $100 Oil
Bush Disappointed Spending Bills Not Passed
Private Student Loan Bubble Could Burst
Greenspan on market upheaval
ING Direct steps in as US bank collapses
35K state workers get layoff notices
As Prices Soar, U.S. Food Aid Buys Less
Freddie Mac chief warns of recession
Oil Prices Rise As Dollar Falls
FDIC Shuts Down NetBank Due to Defaults
Gold Hits 28 Year High
EU’s Almunia Worried By Dollar’s Fall
New-Home Sales Tumble to 7-Year Low
U.S. Government About to be Broke