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Non-Tech : Raptor's Den
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To: Joe Smith who wrote (5322)11/6/2002 2:57:24 PM
From: velociraptor_  Read Replies (2) of 10157
 
Rates were also higher last year then they were now. The difference is a significant factor.

The rate cut is obviously not going to stimulate borrowing because the debt load is already a problem so lowering from 1.75% to 1.25% is pretty much irrelevant. For house refinancings....it depends on how the long term yields react as the 1.25% rate is the short term yield rate. If the curve steepens, it won't do anything for long term rates either and that means little help for more refinancings. In general though, it is really not worth refinancing anyway unless you can get at least a fill point knocked off your rate. The costs of doing the refinancing make anything less than that prohibitive because it takes too long to recover the costs if you do it for something like 1/2 point.

The other source for stimulus is to force cash into the market by reducing the return on savings and money markets which are directly afftected by the FED rate. If you cut the return on savings, than people are going to be more likely to move that cash to a place for higher returns and the market is the most speculative. However, at 1.25% I would say that 90% of whatever cash shift from this perspective has already been done over the last 12 rate cuts.

The only other reason left to reduce rates is for the banks themselves to borrow money more easily. But to drop the rate by 1/2 point or almost 30% of what is left, that suggests to me there is something wrong in the banking system....something very wrong where banks are needing to borrow money for some serious problems coming down the pipeline. There are rumours of JPM having a massive 70 billion derivative fraud problem. If there is any truth to that, you can bet this rate cut has something to do with trying to solve that problem.
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