Here we are again, 1% Fed Funds target rate

Yesterday, the Fed lowered the target rate for Fed Funds by 50bp to 1%, matching the lowest level set in 2003-2004 time frame under Alan Greespan. US Libor dropped less than 10bp on the Fed move. Clearly, the Fed simply cannot control the price of credit.

Fed action was matched by similar rate cuts in China and Europe. Stock markets in Asia seem to like the move. Overnight HenSeng went up more than 13%. US large cap was slightly down yesterday, while mid to small caps were broadly up. Today, the market followed through with a broad rally in the 2-3% range.

The congress today was deliberating on a potential fiscal stimulate package. Nuriel Roubini, the crazy economist of NYU, was testifying for such a stimulative spending package. Roubini tends to make exaggerated statements. But so far he has been right about the economy.

US government policy largely favors big businesses and financial institutions. When banks are running into problems, meaning they are over-leveraged or borrowed too much, the Federal Reserve lowers interest rate and inject capital to save them. But when it comes to ordinary consumer, if he or she borrowed too much, no one would come to the rescue. You know the financial institutions have a perverted way of doing business: they tend to lend to the rich at low interest rate. But when they lend to low-income households, they charge extraordinarily high interest rate. The poor on average are paying much higher borrowing costs than the rich. Is that fair? I guess it is :)

I have been thinking about gold-standard monetary policy. I used to be very supportive of that. But the current financial crisis made me think again. I think a gold-standard, or silver-standard for that matter, will collapse in a financial crisis when everyone is selling out risky assets to demand for cash. Under stringent gold-standard, there would not be sufficient liquidity (in this case gold money) to meet the demand. The whole system would crash. In the fiat system, the central banks can print as much cash as the market demands. The critical issue here is at what point it is appropriate for the central bank to intervene? In many cases, the central bank should not intervene, and let the financial market to work the trouble out by itself. But in situations like now, the central bank has to take drastic actions. Though it is rather difficult to determine where to draw the line.