Tuesday, October 30, 2007

Helicopter Ben?

As an augmentation to my previous post, I'm going to outline the possibilities for the Fed's decision tomorrow, and the market's reaction.

In the past, Ben Bernanke, chairman of the Federal Open Market Committee, has been known as "Helicopter Ben." That nickname relates to an image of Ben hanging out of a helicopter, dumping out money over all the land. The ease of capital certainly can be a good thing, but is it needed now?

Our economy is growing strongly, and cutting rates just to try to ease the sub-prime woes is not necessarily helpful. Encouraging people to make risky investments because of bailouts will only promote economic irresponsibility, both in the stock market and in general spending.

At a time when the dollar is at multi-year lows against many major currencies, why cheapen it further? Yes, it does help exporters, but it also reduces the appeal of foreign investors, and as hundreds of billions of American dollars (and other wealth) are in the vaults of the Middle East, Asia, and Europe, we should pro-actively encourage reinvestment in America.

So what will the FOMC do tomorrow? I think they're going to cut rates .25%, simply to appease the market. Another .50% cut would be irresponsible, as the dollar would fall and oil would rise. Though keeping rates steady may be the ideal decision, the market has priced in a cut, and a non-action may have negative repercussions.

So, my extent of economic knowledge is a half-semester of Macro Economics, so take what I say with many grains of salt. But I think we'll see a small cut at 2:15 tomorrow.

A quarter-point cut will probably buoy the markets slightly; maybe we'll see a +100-200 point day on the Dow. If there's a bigger cut, maybe it will please the markets, but I think it would be a bad thing, and the reaction SHOULD be negative if such a drastic cut is made. If there's no action, the markets may be down a percent or two in the last two hours of trading, but the long term effects will probably be the most ideal.

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