Discount Rate Raised to 0.75%

The Fed surprisingly raised the discount rate by 25 basis points after the close on Thursday. Minutes from the meeting earlier this week showed the Fed favoring raising the discount rate as the first step toward monetary policy efforts. The discount rate is the rate charged to banks for emergency lending. The markets showed a mixed reaction as they opened lower in the morning but were able to end even on the day.

Raising the discount rate does not mean the Fed is going to start tightening the funds rate. Raising the discount rate is a good sign. It just means that financial conditions have improved to an extent that banks don't necessarily need emergency loans as frequently. The financial crisis was the first situation to cause a global meltdown and should be the first addressed to continue improvement toward getting out of it.

The Fed has continuously said that it will keep the fed funds rate lower for an extended period. With inflation under control and unemployment still high, we can expect this to be held true for another several months. There is no need to raise rates too soon, or we could be pushed back into a recession. Raising the discount rate is a first step toward implementing the recovery plan and will in no way hurt consumers.

As expected with a rise in rates, bonds prices fell. Equities were mixed as the surprise didn't take too kindly at first. We do have to remember that raising rates will admit an economic recovery is in the works. The dollar rose as expected. Maybe instead of making more cash money, we should just cash in on our cash money. Volatile times are ahead as the Fed is going to have to take this one month at a time as economic data rolls in. Since the dollar is going up, now would be a good time to take a vacation to the other side of the ocean before Europe gets its act back together.

Greek Debt Crisis: Part 2

Although Greece seems to be the underlying reason of the euro's rapid decline and Europe's inability to recover economically, problems are much much worse. The EU has a single montary policy for all its members. While Germany and France may be in a condition to start tightening monetary policy, Greece and Spain need the loose regulation a little longer.

It is important for the EU to either drop Greece as a member or help it out. If it leaves Greece behind, global markets and the euro will hit a brick wall. Spain and Portugal are two other countries who are also having trouble. Greece's problems are yet another extension of global worries following Dubai. If Greece is unable to lower its deficit, how many other countries may soon follow?

It is no longer a matter of what will happen to Greece. The new scenario is what will happen to everyone else in Europe who are somehow related to Greece in one way or another. It is important that Greece and the EU find a way to resolve these issues before the problems escalate. If Greece were to default, German and French banks would be the first to feel the effects. This is extremely bad news for the EU's biggest economies. In summary, Greece may be just the beginning of Europe's problems depending on how the situation is handled. Look elsewhere to make cash money.

Greek Debt Crisis: Part 1

The European Union has a policy that no member should have a deficit totaling more than 3% of its GDP. Greece is currently around 13% of its GDP. During recessionary periods, deficits should rise as governments initiate stimulus plans in order to get the economy up and running again. The real problem lies with the fact that Greece has only observed the 3% rule once in the past decade.

Greece has had a continuing problem with a higher deficit for some time now. As a result, many banks in Germany and France have lent Greece billions of dollars in support. The question has changed from "Will there be a bailout?" to "What are the details of the bailout?" A bailout is unpopular in Germany and France as they have both invested a fair amount in Greece and would shoulder a lot of the costs.

Greece is supposed to instill some clear cut ways to trim its deficit by 4 percentage points by March 16. If they are unsuccessfully able to do so, the EU will demand specific changes designed to bring in more tax revenue. Greece has already been selling bonds to raise money to pay off some of its short term debt. Its ability to continue to finance debt and install deficit reducing methods will determine how quickly Europe will emerge from financial and recessionary conditions.