It has become clearly evident that the Fed works weekends.

Last night the Fed announced an emergency quarter point discount rate cut to 3.25%, and on top of that, offered to lend money to a longer list of firms than ever before.

The rare weekend move came as J.P. Morgan Chase (JPM: chart, web, Y!) sealed a deal to buy Bear Stearns (BSC: chart, web, Y!) for just $2 a share backed by up to $30 billion borrowed from the Fed. The Fed board gave its approval to that unique funding arrangement, which guarantees JP Morgan against losses from buying Bear.

I had a hunch that a buyout would be in the works, as it would be much more reassuring if one major finance player bought one on the brink of failure rather than just letting the Bear lose face and go extinct.

The Fed board also approved the creation of a special lending facility through the New York Fed that would be available to members of its primary dealers list, which includes both commercial banks and investment banks. Investment banks like Bear Stearns, have not previously been allowed to borrow directly from the Fed.

The Federal Reserve has announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (PDCF). This facility is intended to improve the ability of primary dealers to provide financing to participants in securitization markets and promote the orderly functioning of financial markets more generally. -Source

In other words, please come borrow money from the New York Fed so we can keep the financial markets liquid.

The Federal Open Market Committee meets on Tuesday and the consensus on The Street is a Fed funds rate cut by as much as a full percentage point to 2%, and an even deeper discount rate cut is also in the cards.

If it hasn’t been evident that the Fed knows how serious the financial sector is in, it’s clearly evident now.

I chatted with Winston (who operates out of a local board of trade) about this emergency rate cut last night. He seemed to indicate that the very fact that the Fed cut rates just two days before a FOMC meeting signals something big is in the cards for the first couple days of the trading week. It also serves to unnerve many traders into thinking we’re in for some major bad news when Goldman Sachs (GS: chart, web, Y!) and others announce earnings this week. Otherwise, why wouldn’t the Fed just wait till the meeting to make the rate cuts?

It’s gonna be a fun one this week my friends!

Economics, Finance, Market Trends BSC, Finance, FOMC, GS, interest rates, JPM

Today President Bush shed some light on how the government plans to artificially stimulate the economy.

The President said he’s looking for “direct and rapid tax relief” for both consumers and businesses. To achieve this, he plans on implementing an income tax rebate of between $300 and $600 per person, and depending on your circumstances, your rebate may be even bigger.

The white house is looking for a repeat performance from the plan implemented in 2001. It seemed to work back then, however I think the direct effect was a bit over inflated.

But this time it’s different.

We’ve got a different situation this time, with different economic pitfalls pushing the health of the economy down the tubes.

Housing is in the dumps, the stock market is sinking, interest rates are going down, and we’ve still got a credit “crisis” that I feel is under-reported and misunderstood.

The only way distributing an income tax rebate will work to stimulate the economy is if you turn around and spend your rebate. So the question really lies with the American tax payer. What will you do with a tax rebate?

Considering the credit crisis, the mortgage default rate, high energy prices, and the overall increase in consumer staples (like groceries, household goods, etc), I suspect that instead of stimulating the economy by going to Best Buy to buy that big screen TV you’ve always wanted, most people will use it to catch up on their mortgage payments, pay off the credit card, or help pay for gasoline or higher utility bills.

In no way will using this money to dig yourself out of debt help to stimulate the economy.

So the question lies with you.

If the government were to give you a check for $600 right now, what would you do with it?

Economics, Finance economic stimulation, Economics, Finance, rebates

President Bush is dreaming up ways to “stimulate the economy” as you read this. He will present his grand ideas on January 28th at the annual State of the Union speech.

This desire to stimulate the economy goes beyond the Oval Office, however. On Friday, Nancy Pelosi and Harry Reid wrote a letter to the President seeking cooperation in developing an economic stimulus plan.

As many of you know, I’m a big fan of letting a free market and free economy work. The last thing we want to do is watch the government try to stimulate the economy. Let the economy forces work and they will “stimulate” themselves.

Along these lines, it’s very interesting to read message boards in times like these. Typically I don’t dabble in stock forums, but its interesting to see the maturity level of many individual investors (or lack thereof) when a long duration bull market starts to moderate to the downside.

Case in point: Check out any of your favorite stock boards and count how many people are calling for company management to “Do Something” about the falling stock price. It’s incredible. In many investors minds, the stock market can do nothing but go up, and when it doesn’t, it’s someone’s fault that their portfolio is losing money.

Example: “Management has been too quiet during the last two weeks. They need to come out and reinforce sales numbers over the holidays. Tell big money why they shouldn’t be running from the stock. They have to do something to alleviate all this red from my portfolio, and now!”

I digress.

In a free market, any external influence will do nothing but exacerbate the problems, and potentially make a seemingly bad situation even worse. This is what bothers me about this latest push from President Bush (and the rest of Congress) to do something.

Excerpts from Pelosi and Reid’s letter, along with my comments:

Millions of Americans share our growing concern about the deteriorating state of the economy and are looking to their elected representatives to quickly provide assistance. Federal Reserve Board Chairman Bernanke warned yesterday that the economy is weakening and that the Federal Reserve Board would take appropriate action.

OK, so Bernanke warned that the Federal Reserve Board would take appropriate action. That’s his job. Why does the President and Congress need to provide further assistance?

Prominent economists associated with Republican and Democratic Administrations have called on us to supplement monetary policy with an immediate fiscal stimulus. These same economists have stated that the most effective and responsible stimulus policies adhere to three simple principles: they must be timely, targeted and temporary.

So we should artificially inflate the economy to bail out those that made poor investment decisions? That’s a bit like freezing interest rates, right? Freeze the rates of those who took a variable rate mortgage when rates were at all time lows, but those of us who were smart enough to realize that rates had nowhere to go but up…

We want to work with you and the Republican leadership of the Congress to immediately develop a legislative plan based upon these principles so it can be passed and implemented into law without delay.

If that isn’t a “feel good” statement that we’ve heard over and over again…

We look forward to working together to develop a sound plan that injects demand into the economy, restores consumer confidence and purchasing power, and addresses the severe strains being felt by millions of our fellow Americans.

Again, there is absolutely no way to inject long lasting demand into an economy and restore consumer confidence without creating more drastic problems down the road.

The term “recession” has been tossed around a lot lately, and it seems that many people are getting “recession” confused with “depression”.

A recession is good for an economy. A depression is what happens to an economy when the government steps in to help.

Economics, Politics artificial economic stimulation, Economics, Finance, Politics, recession