Okay, you have to admit, I called that one.
In our last blog, I pointed out that a tight money supply could prevent companies, especially smaller ones, from getting money to grow their businesses, make new hires, do more research -- that sort of thing. I said that if companies couldn't get access to money, the economy would suffer. The Federal Reserve had to act (okay, I didn't mention the Fed specifically, but calling Batman wasn't going to help).
So what's the big deal with a tight money supple? Imagine you're a small web design firm looking to roll out a new service or product. You go to a lender to get a line of credit only to have the teller window slammed down on your fingers.
So, yes, lending decisons have a ripple effect that goes way beyond some poor guy who can't pay his mortgage.
But with lenders still smarting over the hammering they've taken in the mortgage market, banks and other lenders were reluctant to lend money to anyone.
Enter the Federal Reserve Board, which cut its key discount rate by 0.5 percentage points on Friday. In plain English, that means the rate the Fed loans money to lenders just got cheaper. That should alleviate some concerns on the part of lenders to lend money. It won't cost as much for them to do so, which is always a good thing in business.
So that small web design firm now has a better chance of getting that line of credit, allowing them to grow their business and contribute to the overall health of the economy.
It's also an emotional lift for investors, who drove the Dow Jones Industrial Average up 240 points after the Fed announcement. Says Jim Cramer, the CNBC investing guru;``They obviously heard us, they acted,'' he said on his show Mad Money. ``This is the beginning of the run to 14,500.''
``It's a brilliant move by the Fed,'' Cramer added. ``Two weeks ago they were doing the exact opposite.''
We'll see about that. Short term, no doubt the Fed rate cut stopped the bleeding on Wall Street. But long term, the Federal Reserve only has so many options.
Besides, why is the Fed bailing out rich bankers, anyway? Last time I looked, licking the boots of Wall Street lenders wasn't in the Fed's charter. Richard Yamarone, chief economist for Argus Research in New York sums it up well.
``My mother always told me those who play with fire get burned,'' he said. ``Here, that apparently doesn't hold true. Someone is making my mother out to be a liar, and that's not a good thing.''
But you have to walk in Fed Chief Ben Bernanke's shoes for a while. People were losing faith in the U.S. credit system. Not good. Investors were pulling money out of the stock market in droves. Understandable, but once again, not good.
A confidence boost was needed and that's just waht the economy got when the Fed cut its discount rate.
The questions now is . . . how long can that confidence last?