Will the Fed Turn to the “Last Resort” to Save Us?

Yesterday, the U.S. Federal Reserve lowered the Federal Funds Rate by 50 basis points to one percent. Basically, we are at the same place we were in the summer of 2004, when then Fed Chairman Greenspan announced a Federal Funds Rate of one percent.

In a nutshell, interest rates charged on overnight loans are back to the same level they were when this whole mess got started. (But if you are borrowing money to buy or refinance a house, it’s a different story. A U.S. 30-year mortgage will still cost over six percent, according to Freddie Mac.)

On the interest rate side, the Fed is running out of ammunition.Really, what else can it do? Bring interest rates to zero? While this list may be incomplete, so far I have the government doing the following:

— Sending $200 billion in checks to consumers (spring 2008)

— Saving Bear Sterns and saving AIG from bankruptcy

— Essentially taking over Freddie Mac and Fannie Mae

— Approving a $700-billion plan to buy “bad” loans from banks

— Investing money into banks to keep them liquid

— Buying commercial paper from big corporations (GE, GM)

— Aggressively expanding the money supply

Two other ideas being tossed around: A bailout for the automotive industry and a plan to stop foreclosures of homes by amending mortgage terms/obligations. But if the Dow Jones Industrials Average starts to fall again, I believe the “last resort” for the government would be to actually start buying stocks of large corporations on the open market. Some of my colleagues would think this idea absurd and not possible.

All I can say is that I’ve seen a lot of moves by the Fed this year that I thought would never happen. If the Dow Jones falls below 7,000 and gets close to 5,000…and millions of Americans are complaining that their retirement savings have been wiped out…why wouldn’t the government step in as a buyer of last resort? If that happens, all I know is that I’d hate to own American dollars at that time.

** What He Said **

“I think American consumers and investors have been painted into an unfair corner. Those that invested in stocks because they got caught in the tech boom have seen their investments go nowhere for six years. Now, those that have leveraged heavily to play the real estate game, because it is the place to be, could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi, May 27, 2005, issue of PROFIT CONFIDENTIAL