Federal Reserve Cuts Primary Discount Rate

The US Federal Reserve has cut its primary discount rate, which is the rate at which it lends money to banks, from 6.25% to 5.75%. The last time it made such a move was after September 11, 2001, when financial markets were closed. In a statement, the Fed said that there was a danger that the financial crisis could lead to slower economic growth.

So the Fed lowered rates to banks. Is the Fed lending more money, or trying to dictate the terms of other lending institutions? Isn’t that what started this crisis? Too, much “cheap” money, Federal manipulation, and a total lack of oversight and enforcement.

To whom are the banks going to lend the money or are they borrowing cheap to repay their own debts? I have to wonder “What were they thinking” when they made ARMs and Option ARMs available to the number of borrowers that have that type of loan. The lending standards are tightening. Many current borrowers do not qualify for loans to refinance out of the bad ones they have now. One report indicates more than 70 percent of sub-prime loans were made to people refinancing existing home mortgages.

Let’s face it, when banks could borrow money at those low rates, there was no profit in paying interest on individual savings accounts. Service charges would erode the savings unless depositors had minimum deposit and was capable of leaving it undisturbed for months at a time thus tying up their own liquidity. An individual could deposit $1000 in a standard savings account, leave it for a year and withdraw $880. People may laugh about keeping the money under the mattress or in the cookie jar, at least it was there when you needed it and it didn’t cost $10.00 a month in service fees.