Intersted in going broke? Should banks raise interest rates?

I had the pleasure of being on Newstalk last week with Eamon Keane and during our brief chat I had mentioned that banks are lending out money cheaper than they can buy it, this was mentioned back to me by a client and he wanted to know if it was simply a slip of the tongue, because banks of course, do not lend money at a loss.

In fact that is precisely what is happening at the moment because the 3 month Euribor – which is the rate banks generally are buying their money at- is at 4.742%. Several banks are lending at less than this price namely NIB, Halifax, Bank of Scotland, Bank of Ireland and PTsb. So how is this happening? How can any CEO let their institution lend money at a price that will cause shareholder loss?

I suppose it’s down to a few factors, firstly banks don’t HAVE to buy money at the 3 month Euribor rate, they may be operating on the 1 month money which is currently selling at 4.349%, or they may be …

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The ECB won't cut rates? A central bank doing exactly what it should.

The Fed is still trying to bail out the US economy, there must be a fundamental belief there that a recession is the worst thing in the world. Personally I would feel that the 1,000,000 lives lost in Iraq outweigh the damage a recession might do but for some reason the efforts to end the war pale in comparison to what politicians and policy makers are willing to do to avoid an economic downturn.

Bear Stearns was bought for $2 a share by JP Morgan Chase, their stock price was about $38 recently, and the money to do the bailout was Fed backed. In fact the Fed is evoking laws designed during the great depression to lend direct to banks.

The USA has recession aversion, it’s almost like the economy there is one giant dog dry heaving to Pavlov’s recession bell. The issue is that the budget still has to be met, these bailouts cost money and the money …

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The ECB won’t cut rates? A central bank doing exactly what it should.

The Fed is still trying to bail out the US economy, there must be a fundamental belief there that a recession is the worst thing in the world. Personally I would feel that the 1,000,000 lives lost in Iraq outweigh the damage a recession might do but for some reason the efforts to end the war pale in comparison to what politicians and policy makers are willing to do to avoid an economic downturn.

Bear Stearns was bought for $2 a share by JP Morgan Chase, their stock price was about $38 recently, and the money to do the bailout was Fed backed. In fact the Fed is evoking laws designed during the great depression to lend direct to banks.

The USA has recession aversion, it’s almost like the economy there is one giant dog dry heaving to Pavlov’s recession bell. The issue is that the budget still has to be met, these bailouts cost money and the money …

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US fed will inject $200 billion in cash in an effort to end the credit crunch

The United States Federal Reserve have announced that they will give a $200 billion dollar cash injection to ease the tensions in the credit market that are threatening to stall the wider US economy. They will buy mortgage backed security in return for cash and that will hopefully free up the credit markets and lending. Does that mean the Fed is taking on the risk the banks created? In a nutshell, yes, it does mean that, they are going to accept mortgage backed bonds from banks that were finding it hard to raise cash through the normal channels. So these institutions are not good enough for the market but they’ll do for the Fed.

The banks and financial institutions have taken a beating due to the credit crunch but it seems now that the fed is willing to stand up and be hit on behalf of the banks, so its like a guy who steps in to break up a fight and he turns out to be …

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Fed and ECB rates: What comes next?

It looks like the ECB will keep its rates where they are, the Fed is likely to cut their rates. I made a prediction that the US rates would go lower, down as far as 3.5% perhaps. The Fed rate won’t hit 3.5% this time but its only January! I have until December to be proven wrong! And if I am wrong I’ll do another roud up story of whether or not I’m an idiot.

On a seperate The Dow Jones has had it worst year start since 1904, the Nasdaq had its worst since 1971. A fear that a market driven by consumer spending won’t last is causing any stocks tied to these sectors to fall off.

It might be a good time for to move away from stocks and get into cash for two months to see how this plays out.

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