Nanny Benny Comforts All With Short-Sighted Rate Cut

The kid cried and Nanny Benny was quick to wipe off the tears and say, "everything will be alright."

Only problem in the current Fed fairy tale: both parties involved have forgotten about the burning house!

Jim Cramer can uncork some bubbly. His outcry on tout TV was answered swiftly and generously by the Fed. Forget about $81 crude oil and fiscal philandering, let's keep the markets party going at truly all costs.

Tuesday's 50bp rate cut to a Fed funds rate of 4.75%, the first in 4 years, will backfire after an initial relief rally.

The aggressive move (on the wrong side) after 17 ascending baby steps may appeal to banks suffering from a credit crunch that is rather a credibility crunch. It will also appeal to debtors whose mortgage adjustment will be delayed for another year and may even offer the chance for some to refinance at a better rate. It will also appeal to the big spenders in the White House.

But will it also appeal to creditors financing the permanent US spending spree? Let's not forget that only a month ago the Fed's predominant concern was inflation. Oil was trading for a good $10 less than now.

Gold's surge to a new 16-month high proves this point.

This rate cut is a band-aid to a patient with gangrene. What was the cure after the internet bubble is now becoming the poison for markets where we find out that despite all the nice talk, there happened to be no real risk diversification but rather, almost everybody preferred to lean on the side of permanently low rates and rising house prices. Extending this excess will make the next big correction in stock markets only stronger.

This will probably only sink in once foreign investors begin to pick up their chips from the dollar table and wager them elsewhere.

Comments

[StreetSweeper:]

Bravo!! You are one of the few analysts who see the error in Ben's ways. The real question must be asked who influenced the Feds (unanimously, no less!) to cut the rates so drastically and completely reverse their thinking about inflation? Who, indeed?

2007 Sep 19 03:45 PM