While I was having dinner with my father last night, the Federal Reserve lowered the interest rate at which it loans money to central banks. While my family and I were discussing the economy (among a number of other more interesting topics), Ben Bernanke was actually doing something. Will the move help? It will be good for JP Morgan Chase, who will likely use the Fed’s funds borrowed at this rate to buy its collapsed rival, Bear Stearns.
Do these bail-outs send the right message? To me, in the interest of saving our faltering economy, the message to banks seems to be, “Feel free to lend to risky customers. If the worst happens, we’ll bail you out.” The message to consumers seems to be, “Buy more on credit than you can afford as long as everyone else is doing so.”
Sunday surprise: Fed steps into credit crisis [CNN Money]
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and the message to people in foreclosure or nearing foreclosure is “we can’t help you for taking out more then you can afford.” Some of the borrowers probably were working the system. But the majority just wanted a home and probably didn’t know what types of loans they were being given. The banks definitely knew what they were doing and taking extraordinary risks with people’s money.