Friday, August 17, 2007

Bernanke: Another Brilliant Move

Bernanke moved today and unlike the chorus of calls for a Fed Funds Rate cut we have heard, he moved both to calm markets and keep rates steady.

Saying, "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

Then they said "To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained."

What didn't they do? Lower the Fed target rate so Bernanke keep pressure on inflation. What he DID do was lower the borrowing rate for banks so that currently tight credit markets will loosen. Lenders like Washington Mutual (WM), Countrywide (CFC) and Thornburg Mortgage (TMA) will now have the systemic liquidity they need to continue loaning and functioning.

The move is also significant because it signals to the market that the Fed will not bail out poor lending practices but will prevent the market from seizing due to it and will protect the innocent from being swept away by the turmoil.

Now there are plenty of folks out there saying "he listened to us and lowered rates" but the reality is just the opposite. Nobody called for this particular move and if anything, those folks calling for Bernanke to resist a Fed Funds rate cut are in the correct camp. He did not give in the the market and this is good. What is even better is that the market now can be assured he will move to prevent the "crash" everyone feared was inevitable but will not, and this is even more important, subsidize idiocy.

I have been saying since he was appointed based on his past statements and actions that he will go down ad the best Fed leader of my generation. Today's action makes that case even stronger.

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