Today the fed announced a 50 basis point (.5%) cut in rates.  The theory behind rate cuts is that it increases liquidity by making it cheaper for banks to borrow from the Federal Reserve.  The trouble is that the problem we're having at the moment is one of trust, not of liquidity per se.  People have money to lend and people want to borrow money, but we have a systemic fear that the folks those loans might go to will never pay them off.

The critical element right now is the TED spread:



This is basically the risk premium in the market on lending to corporations.  As long as this number is up high it means credit is more expensive and harder to get and that ultimately effects everything in the economy.  Right now the fed is effectively giving money away charging less interest than the current rate of inflation.  So that's not the problem, it's that the money is being horded rather than lent out for fear of debts never being repaid.

The bailout plan should help with this to a degree because it will begin to prop up assets as it will give banks a way to dump bad assets.  That is, of course, assuming the banks will even take advantage of it, which they may not due to the strings that are attached.  I honestly think those strings were a bad idea.

Look at AIG and Lehman for a sense of why this was a bad idea.  These two companies were flushed down the sewer by their executives and, the whole time, they were raking the money in.  So what's more likely? 

1. That the CEO's of these big financial companies are going to take a bailout, risk their golden parachutes and trips to the spa, but save the company
2. Flush the company down the toilet, along with the rest of the market, and just be sure to plunder the company as much as possible on their way out

I'm betting on option #2 and that means this bailout will do little to really fix the problem.  There will be billions waiting to be put to use while the companies collapse and the problem widens, increasing the likelihood that even more money will have to be dumped down this drain before it's over. 

Oh, on a related note, it occurs to me that this is going to have some interesting consequences for the christmas shopping season.  You see, retailers will take out short term loans to pay for the inventory they are going to cram into the store during the holiday buying season.  Then they pay back these loans at the end of the holiday season.  Currently these loans are either completely unavailable or only available at higher rates.  So that's going to seriously hurt retailers because they'll be going into a likely slow christmas season having to effectively pay more for their merchandise.

The worst part is some retailers who are struggling but might have gotten through for a while are going to be up a creek because of this.  So then we'll see store closings, layoffs, etc, as a direct result of the credit crunch.  So far the credit crunch has been a mostly abstract concept, but as it continues, it will begin to trickle into the rest of the economy in a big way.