Emergency rate cut prevents market meltdown

In an emergency move, the Federal Reserve lowered its target rate for federal funds by 0.75 percentage points before the New York Stock Exchange opened this morning, hoping to ease investor fears of recession and prevent yesterday's global stock sell-off from spreading to the U.S.

In the first moments after opening, the Dow Jones Industrial Average plunged more than 460 points, dropping sharply to under 12,000. By mid-morning, however, it was trading down just 57 points and closed with a loss of 128.

The Dow finished at 11,971, the first time it has closed under 12,000 since Nov. 3, 2006. In the worst year’s opening in history, the index is now down 15.5 percent from the historic closing peak recorded less than four months ago of 14,165.

The Dow futures ended down 155 points, suggesting markets most likely would open down once again tomorrow.

Overnight, stocks closed sharply down in Asia for the second day in a row.

The Nikkei 225 in Japan closed down 5.7 percent, hitting its lowest level since September 2005.

In Hong Kong, the blue-chip Hang Seng index lost 8.65 percent, to close at 21,757.63.

The Bombay Stock Market in India suspended trading for an hour after investors lost some $160 billion in equity value within moments of opening.

European markets traded higher following the Fed's rate reduction. Britain's FTSE 100 finished up 162 points and Germany's DAX lost 21 points.

Central bankers are concerned that the worldwide stock sell-off could trigger a panic. Wall Street traders at the close of the market today were already jawboning for another 0.25 percentage point rate cut Jan. 31, when the Federal Open Market Committee holds its next scheduled meeting.

Lowering rates will pump more liquidity into the market and may take some pressure off homeowners who could face foreclosure as a result of increases in adjustable mortgage rates.

Still, major banks, such as Citibank, and brokerage firms – including Merrill Lynch, Bear Stearns and Morgan Stanley – have sought foreign capital investors, suggesting the crisis is an asset crisis, not a liquidity crisis.

Mortgage foreclosures have caused Collateralized Loan Obligations, or CLOs, held in bank asset portfolios to experience losses that have negatively impacted bank reserves.

Some analysts believe the global problem may not be too little money available to lend at relatively cheap rates. Instead, it could stem largely from the fraudulent and otherwise under-performing securitized loan obligations that Wall Street created and sold to financial institutions for their asset portfolios when former Federal Reserve Chairman Alan Greenspan held rates at historically low levels following 9/11.

Beginning in January 2001, the Fed under Greenspan cut rates 13 times, taking the discount rate, the overnight bank lending rate, from 6.5 percent to 1 percent in June 2003, a 46-year low.

Greenspan held the discount rate at 1 percent for one year, until June 2004, which many believe was behind the housing bubble that now has burst.

Returning to a 1 percent discount rate environment is now virtually unimaginable, especially after the U.S. Labor Department announced consumer prices rose by 4.1 percent in 2007, the fastest pace in 17 years, with increases spurred by higher gasoline and food prices.

As the Fed eases rates, it's likely the dollar will continue its downward spiral. The dollar ended lower today against most major currencies, reflecting the concern of world currency markets that lower U.S. rates would make dollar holdings less attractive worldwide.

Editor's note: The November issue of WND's monthly Whistleblower magazine, titled "HOW GLOBALISM IS DESTROYING THE U.S. ECONOMY" – focuses exclusively on the future of the U.S. economy, and answers key questions like: "If inflation is so low, how come food and energy cost so much?" "What is the 'housing bubble,' and why did it burst?" "What's really going on with the stock market?" "Is America heading into a recession?" "Will the dollar collapse in 2008?" and "What will happen to the price of gold?"

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