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Strategies & Market Trends : Coming Financial Collapse Moderated -- Ignore unavailable to you. Want to Upgrade?

To: Box-By-The-Riviera™ who wrote (324)	6/25/2001 10:54:47 PM
From: EL KABONG!!!	Respond to of 974

Some links to other interesting stories on this page... marketwatch.com IRWIN KELLNER How low can he go? Worries about banks makes 50 basis point cut likely By Dr. Irwin Kellner, CBS.MarketWatch.com Last Update: 9:02 AM ET June 22, 2001 NEW YORK (CBS.MW) -- There are 400 basis points between the Federal funds rate and zero, and Federal Reserve Chairman Alan Greenspan appears set to use as many of these as necessary to achieve his objectives. One important indicator of his intentions is his views of the banking system. In testimony to the Senate Banking Committee earlier this week, the Fed head pulled no punches, saying "bank asset quality is deteriorating," as problem loans have risen with "some further erosion...likely." (See full story.) To be sure, this is not the first time Mr. Greenspan has discussed the banking system. However, until recently, he seemed to stress that loan officers should not be so restrictive in their standards because doing so could cause a credit crunch. Now he appears to be concerned that lending standards have been too loose. At any rate, his stress on the health of the banks while downplaying the threat of both recession and inflation provides some insight into Fed thinking when it comes to interest rates. If Mr. Greenspan thinks that the banks need some assistance, he might lower rates by more than the markets currently expect. Let's go back to the early 1990s, when the economy had gone through the last recession. Like the current experience, the Fed was late in recognizing the need to ease. And similar to today, Mr. Greenspan became very concerned over the health of the banking system. The Federal funds rate stood at 8 percent on Aug. 1, 1990, the start of the last recession, and only 35 basis points below the yield on the 10-year Treasury note. Twenty-seven months later, on Nov. 11, 1992, the funds rate had been pushed below 3 percent. Even more important, it was four full percentage points below the 10-year Treasury's yield of 6.9 percent. This unusually wide spread between short- and long-term interest rates helped the banks get back on their feet. They paid relatively little for their liabilities (deposits and overnight borrowings in the federal funds market) while earning handsome returns on their assets (loans and purchases of government securities). What's more, they had years of this steeply sloped yield curve to work with. If Mr. Greenspan is truly concerned about the banks today, he has a lot more work to do on the yield curve. For while the spread between Fed funds and 10-year Treasuries is positive today, it has been so for only three months, and at midweek was a paltry 1.28 percentage points. See recent interest rate data. Of course, since the entire term structure of interest rates is lower today, it might not be feasible for the Fed to aim for the same four-percentage point spread today as it achieved in late 1992. And given the banks' better state of health today, not to mention the economy's, it might not be necessary. But Mr. Greenspan's concern over the banks does suggest another half-point cut is likely come June 27, bringing the funds rate down to 3.5 percent. And that may not be the end of it: a 3 percent Federal funds rate is now a distinct possibility. Dr. Irwin Kellner is chief economist for CBS.MarketWatch.com and is the Weller professor of economics at Hofstra University. KJC