Monday, September 10, 2007

Fed Rate Cut Can Help Market?

Analyst: Fed rate cut won't help markets
Lower interest rates will not bring in money but instead send dollar into a tailspin, says Punk Ziegel banking analyst.

NEW YORK (AP) -- A widely watched banking analyst said late Sunday the best solution to the crisis plaguing financial markets is to let cash-strapped borrowers default and their lenders go bankrupt, rather than slashing interest rates.

Punk Ziegel & Co. analyst Richard X. Bove wrote in a client report the hoped-for cut in interest rates this month will do nothing to bring money back into the U.S. financial markets. Instead, Bove said, lower interest rates will send the dollar into a tailspin and wreak havoc in the job market.

Many investors believe the Federal Reserve will cut its target for interest rates next week by at least 25 basis points, from the current benchmark 5.25 percent federal funds rate.

Investors have clamored for Fed Chairman Ben Bernanke to cut rates to stabilize financial markets, which have been in turmoil since July amid decaying credit quality and a flight to safer investments like Treasury bonds.

Bove cautioned that cutting rates will not lure investors back into troubled markets. Investors and banks already have the cash to buy risky loans and investments, he said.

"There is no liquidity problem, but a serious crisis of confidence," Bove said. "In a financial system where there is ample liquidity and a desire for higher rates to compensate for risk, the solution is not to create more liquidity and lower the rates that are available to compensate for risk. ... (The Fed) cannot reduce fear by stimulating inflation."

In fact, cutting interest rates will only encourage investors to borrow dollars at the lower rate and bring the cash to places like Europe, Bove said.

"It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value," he said. "By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets."

Bove said the solution to this crisis is to allow people who cannot repay their debts to default and allow the companies that issued bad loans to fail.

No comments: