More Interest Rate Cuts

Having woken up to the fact that inflation is not the thing to be worrying about, the UK, Eurozone (European Central Bank), and Switzerland all cut interest rates, the Bank of England by a completely unexpected 1.5 percentage points to 3.0%. Disappointingly, the ECB only cut rates from 3.75% to 3.25% (we earlier recommended an immediate cut to 2.0%), although Jean-Claude Trichet did leave open the possibility of further cuts in the future.

In the US, the low Fed funds rate (currently 1.0%) limits the potential benefit of further rate cuts. Europe still has a ways to go; so far, with the UK and the Eurozone set to contract in 2009, there’s no evidence that they couldn’t go further.

Update: What he said. (He, in this case, being James Surowiecki of The New Yorker.)

2 responses to “More Interest Rate Cuts

  1. Does the US government have the power to force banks to open their books? In other words can they force transparency? I’ve been hearing that some banks in business today are insolvent. This makes sense with all the cash injections going on. Looks like they are just throwing air in the tires without fixing the leak. Does the government hold this power? Could this be considered a national security issue?

  2. I’m sure that the government could pass a law to force transparency. What information companies have to provide in their annual and quarterly filings with the SEC is governed by Congressional statutes or by SEC regulations. These are designed to protect investors. There are certainly details that are not currently required; if you read a bank’s 10-K, it does not include a list of every trading position it holds.

    There are at least two arguments against increased disclosure. First, it increases cost for companies. There has been a huge backlash against Sarbanes-Oxley because it increases compliance costs, especially for small companies. (We certainly talked about this at my company.) Second, there are competitive reasons why financial institutions would not want to disclose all of their positions. In particular, they would be at a huge trading disadvantage relative to other institutions (foreign, or private, like hedge funds) that did not have to disclose their positions.

    So I doubt we will ever get to full transparency. More than we have now is certainly a possibility.

    As for inspecting the books on an emergency basis – the bank’s regulator may have that power; I just don’t know.