Monday, November 5, 2007

41 billion dollar question


This past week, the Federal Reserve decided to cut the interest rate to 4.5% from 5.25% in two months. They also just put 41 billion dollars into the banking system.

Now, if you look at these two headlines, you might think that the country is headed for a recession and in big economic trouble. The problem is that the government just reported a GDP increase of 3.9%! How bad do they think the future will be economically? What exactly is going on?

I think these cuts are not to serve the country but to save those in the financial industry who made large bets and lost big. You need to look no further than the irresponsibility of the major financial firms like Merrill Lynch and Citigroup. Their earnings reports look so terrible, they had to give their respective CEO's severance packages worth over $100 million just to go away so the companies could clean up their mess. What do the other banks' earnings look like?

I am worried about the continued descent of the dollar. This action by the fed will undoubtedly help the dollar continue to fall against other major currencies.

Please add your comments as I am not sure if there is even a model that this current economic situation falls in.

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