Subscribe to Print Edition | Sun., October 12, 2008 Tishrei 13, 5769 | | Israel Time: 01:48 (EST+7) web haaretz.com   Back to Homepage Haaretz Toolbar Diplomacy Defense Jewish World Opinion National Print Edition Car Rental Books Haaretz Magazine Business Real Estate Easy Start Travel Week's End Anglo File

Hard landing / Will the rate cut help? Probably not By Eytan Avriel On Wednesday, the U.S. Federal Reserve joined central banks worldwide, including the Bank of Israel, and cut the key interest rate by half a percent - to 1.5%, in its case. Hong Kong cut its rate by 1.5% in two days. And yesterday, Britain announced that it's bailing out the banks by the very direct means of buying their shares. On Monday, the Bank of Israel astonished the market with a 0.5% cut of its own, to 3.75%. The move predated the next scheduled monetary meeting by three weeks. Advertisement We get it: What we have isn't a "subprime crisis" or a "real estate meltdown". What we have is global economic paralysis of historic dimensions. Governments and central banks have taken off their masks and stopped murmuring mealymouthed platitudes to soothe the masses. They're taking out the heaviest guns they have to stop the carnage before more victims are claimed. What haven't they tried? Gigantic loans and cash injections didn't work. The credit crisis just keeps growing worse. Nationalizing the banks or forcing them to consolidate in order to save them, buying up troubled financial assets - hasn't worked. Every day another bank starts to topple. Central banks have started to lend money not only to banks but to commercial companies, though it's too soon to say whether that step by the Fed will help. What's for sure, it did nothing to calm the stormy markets. Stocks spent the week plunging: General Motors stock dived to a level last seen in 1950. Yesterday morning Britain nationalized part of the banking system, pumping 50 billion pounds into the banks as their shares collapsed. Investors reacted with the vapors. Governments are vowing to guarantee civilian deposits at the banks, but investors evidently expected as much and the promises did nothing to rally share prices. The coordinated 0.5% rate cut throughout the west lowered American central bank rates to 1.5%, Europe's to 3.75% and Britain's to 4.25%. The markets had a mixed reaction. Investors typically applaud rate cuts, certainly when recession looms. But that's a knee-jerk reaction based on the rules of the way things had been. The sheer fact that interest rates were dramatically slashed throughout Europe and North America is an admission that the governments are worried. They're admitting that the situation is spiraling out of control and they're using every weapon at hand. Will the rate cuts help? They may not: Interest rates are secondary to the main problem, which is that confidence has been shattered. People and institutions don't want to deposit their money or lend it, for fear they won't get any back. It isn't a question of the price of money, or returns, or interest rates: The crisis is about the principal, not the profit. Is it safe to lend? So a half-percent rate cut may do much of nothing. What matters is that confidence returns and financial institutions start to feel that their investments are safe, not only the profit but the principal, too. Later, interest rates that low are likely to spur investors to undertake more risks (because interest on safe deposits will be too low for their tastes). But that's later. What might help? I don't know. Nobody does. It may be a question of time, of digesting the changes, of learning to live with them. Like in all traumas, time dulls the memories and the pain. Probably, meanwhile, the governments will continue to try this and that. They have a few fiscal and monetary tools left in their arsenals. Monetarily, they could lower interest rates even more, and indeed market pundits believe that more rate cuts are in the offing. Some see another cut on the 29th of this very month, when the U.S. Federal Reserve Board meets again. That would probably lead to another half-percent rate cut over here in Israel, too. Ultimately, the theory for dealing with, or preventing, recession is based on three foundations: lowering interest rates almost to zero, shoring up the financial system, and increasing government expenditure. The first two are already being wielded at full strength, and now America is considering partial nationalization of the banks, as Britain just did. The next move may well be a massive increase of the budget. Bookmark to del.icio.us   Produce problems Jordan Islamists protest imports of fruit grown on 'land taken by Zionists.' Payback time? America's opponents in the Mideast: Financial crisis is divine punishment.

Read & React Austrian far-right leader Joerg Haider dies in car crash Responses: 71 Livni tells residents of Acre: Don't take law into your own hands Responses: 291 2 Arab-owned homes torched, 12 arrested in Acre violence Responses: 155 Israel grants rare entry to cancer-stricken Iranian boy Responses: 117 Mideast Muslims hail U.S. financial crisis as divine punishment Responses: 72 More Headlines 22:38 Three Jewish rioters hurt, Arab home set ablaze as Acre violence resumes 15:56 Austria far-right leader Joerg Haider dies in car accident 21:14 Mideast Muslims: U.S. financial crisis is divine punishment 19:41 Jordan Islamists protest imports of fruit grown on 'land taken by Zionists' 19:42 Finance Minister: No Israel banks will collapse in global crisis 00:32 For U.S. Jewish groups, crisis means less in donations, more needy 21:51 Palestinian farmers, settlers clash near West Bank settlement of Yitzhar 23:20 Israel grants rare entry to cancer-stricken Iranian boy 01:41 After relenting on nuclear inspection, North Korea off U.S. terrorism list 08:03 Livni tells Acre residents: Don't take law into your own hands 13:55 Fatah welcomes Hamas assent of Egypt's reconciliation plan 21:24 Sarah Palin accused of improperly firing state worker Previous Editions Select Day 10 oct 09 oct 08 oct 07 oct 06 oct 05 oct 03 oct 02 oct 01 oct 30 sep 29 sep 28 sep

Special Offers Advertisement Fattal Hotel Chain Perfectly located hotels on best resorts of Israel. Dial 013 for your long-distance calls and get all your money back US CITIZENS Vote for real change. Request your ballot today! Eldan Rent a Car Israel's leading car rental company offers you a 20% discount on all online reservations Jewish Singles Personal Ads Find the love of your life on JDate.com Israel's Premier Real Estate Website www. israel-property.com Hebrew Summer courses From $39.95 Junkyard Junk a car - get free towing nationwide and a tax-deductible receipt

Home | TV | Print Edition | Diplomacy | Opinion | Arts & Leisure | Sports | Jewish World | Underground | Site rules |

Real Estate in Israel | Travel to Israel with Haaretz | Hotels Israel | Restaurants Israel | Tourist attractions Israel | Shops Israel

birthright Israel | Search engine marketing

Haaretz.com, the online edition of Haaretz Newspaper in Israel, offers real-time breaking news, opinions and analysis from Israel and the Middle East. Haaretz.com provides extensive and in-depth coverage of Israel, the Jewish World and the Middle East, including defense, diplomacy, the Arab-Israeli conflict, the peace process, Israeli politics, Jerusalem affairs, international relations, Iran, Iraq, Syria, Lebanon, the Palestinian Authority, the West Bank and the Gaza Strip, the Israeli business world and Jewish life in Israel and the Diaspora.

© Copyright  Haaretz. All rights reserved