On Sun, 12 Jun 2005 01:04:08 GMT, james wrote
in :

On Sat, 11 Jun 2005 13:01:52 -0700, Frank Gilliland
wrote:


The "prime rate" is set by Greenspan, not the banks -- it is the rate
at which the Fed loans money -to- the banks. Greenspan started cutting
the prime rate back in 1998 because the financial crises of Asia and
Russia threatened to destabilize the global economy. Ironically, it
was mostly because of those cuts that our trade with China turned from
a 300 billion dollar surplus into a 250 billion dollar deficit in just
a few years.
****
Greenspan is the chairman of the Federal Reserve System and also
serves as head of the FOMC. Grenspan himself does not change the
Federal Funds Rate, but instead it is a vote of the FOMC, Federal Open
Market Committe.


A vote based on the recommendation of the Chairman. And I might be
mistaken about this, but I don't recall the Fed ever voting against
any of Greenspan's recommendations.


The Federal Funds Rate may also be known as the
Discount Rate. The Discount Rate or Federal Funds Rate has three
categories. This is on money that the Federal Reserve System lends to
member depository banks depending on their dredit worthyness. The best
or primary discount rate is an overnight interest rate given to the
best banks. The Seconbdary credit is for a longer period, up to 30
days, given to banks with less than exemplary credit ratings. The
Secondary Credit rate is also higher. Then there is the sessonal rate
which is above the secondary credit rate and below the Prime Rate.

The Prime Rate is the interest rate charged by banks for short-term
loans to their most creditworthy customers whose credit standing is so
high that little risk to the lender is involved.

From that the rest of the interest rates are set.


I learned it a little different. I'll check my book-learnin' and get
back to you on this.


Yes you are correct that the Fed Funds Rates were cut 50 basis points
in 1998. Again it was with pressure from the Asian and Russian
markets. You also failed to mention that in 1999 and in 2000 the FOMC
raised Funds Rates 50 and 75 basis points respectively. I doubt that
these had much affect on the trade deficit.


That's why I didn't bother mentioning them. I also didn't bother
mentioning Greenspan's appointment and quick action after the crash of
1987 (during Reagan's term, just to refresh Dave's memory).


Instead I would more
attribute them to the fact that major high tech corporations and
automotive corporations were pumping well in excess of 100 billion
dollars in capital investments into China from 1998 to 2003. Add to
that the falling dollar with respect to the Euro and the Cinese Yuan
is pegged to our dollar has not helped the US trade deficit with
China.

Sorry I cannot accept the FOMC rate reductions in 2001 to 2003 as a
reason for the increase in the trade deficit.


Because too much of the money that's being borrowed at the lower rates
is being funneled out of the country as foreign investment capital,
which explains why it's having almost no effect at stimulating the
economy -- it's not ending up in the hands of American consumers as
was expected. This also explains why the rate has been held so low for
such an unprecedented length of time. But the Fed doesn't establish
foreign policy, and they can't hold the interest rates down forever.
Something has to break pretty soon. Kinda like the hoses in my truck
if I hadn't replaced them today.






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