Indy Telecom & Industrial Media

FT had an interesting piece written by the former Treasury Secretary Henry Paulson on reforming the architecture of regulation.

As Paul Kedrosky so rightfully observes, the most interesting aspect of the article is how seems to be asking for “ample and flexible authority” for the FDIC to deal with failing banks (through the Treasury and the Fed, of course).

I notice all the buzzwords (moral hazard, risk management etc); but what does scare me are the phrases “explicit federal authority” and “power” and “exigent circumstances”.

But of course.

Will the fed cut rates today?

My prediction is that a 50 bps is likely; however, a 100 bps is very unlikely. As it is, we are at record lows, so going any lower is more likely to hurt the economy than help it (all that cash running amok in the economy has to do something).

Then again, as Paulson and Bernanke seem to be fans of Keynesian economics, they may just hope to inflate our way out of all this bad debt. I mean, do you really see the US paying back the trillions in national debt?

A quick look at this graph from yesterday indicates that Bernanke seems more intent on cutting rates than Greenspan.

Then again, a lot of the problems today are because of Greenspan’s policies, so that may leave something to be desired.

Update: Fed cuts the rates by 1/2 point, and we’re at a record low of 1%.

A long, long time ago, BPSK and I had a conversation on the “capitalism” that UK and the US practice.

We made fun of the faux capitalism that’s in reality a Fabian-esque socialism that Britian practices, and how the US would “differentiate” itself by Paulson calling up Pandit to do a save.

Well, turns out that we weren’t too off. Paulson did not call Pandit, but instead called Dimon to do a save. Isn’t it a joy to be in a capitalist economy where the free market decides what needs to be done?

To this end, I recently came across an article that suggested that the Fed is considering Nordic-styled nationalization of US banks to help bail out the economy from its current crisis.

Let’s just say that I am at a loss for words.

As a lot of people predicted, the Feds have lowered the rate yet again by 25 bps.

While this may help the sub-prime and housing markets, it is probably going to be detrimental to other consumer-lending operations. And I think that this move is likely to have some rather severe ramifications for the US economy in other ways, as well.

For one, the USD slid to all-time lows against the Euro, with the Euro hitting 1.45 for the first time. On top of this, the cost of oil has hit all-time highs at close to $96/barrel.

Both of these are bad enough by themselves. But with the new rate cut, what’s likely to happen is that there is now more currency being pumped into the economy. This is only going to drive up the inflation further.

And given the state of the financial sectors today and given that every other i-bank (with the sole exception of my dream-company, Goldman Sachs, of course) is down in the dumps, this is probably not a good thing for the economy.

The other thing that I feel rather strongly about is that the economy probably needs a 10% correction that needs to happen. Now, you can artificially curtail that from happening, but doing so will work for only so long. Eventually, the numbers catch up with you.

Also, it’s been known that it takes longer than just a couple of months for such rate-cuts to seep through the market (I’d love to work on building models for this – ah, some day, when I have the time). So, it is probably too early to see an impact of September’s rate cut, leave alone the new one.

Given all this, the rate cut may help bail out the stock market for now, but it is probably going to be very short term. And since the feds don’t want to be seen to be bailing out the stock market every time, a rate cut will probably not happen in December (speaking of which, Business Week has a rather interesting list of reasons for this, as well).

But what does it mean for the consumers today? That’s the more important question, and the answer to that will probably not be known for a while.