If you believed the hype in the media and the much of the financial world, the Fed has saved the world. By cutting the discount rate by 1 percent, financial Armageddon has been saved, and we can all go back to how well stocks will do. The media's largely been pushing this idea, the idea that somehow everyone got a little excited, so there was a correction, but now the Fed has acted and all's well.
It's easy to forget what started this in the first place. Financial institutions have a ridiculous amount of risky financial assets that have been blessed as risk-free, and the realization that the blessing was from a charlatan might mean at some point we have to realize the reality. In a classic problem of game theory, everyone's ok as long as no one brings the system down, but if the system were to collapse, it's best to be the first out of the building. So institutions and brokers and the press try to play down the CDO scam (for more on CDOs, read my previous postings, here and here)
And yet it's worth asking what indeed a Fed discount rate cut means (mind you, this is not a Fed Funds rate cut which would lower the rate consumers pay). If anything, it's cause for concern that the Fed, uptil now so concerned with inflation, suddenly perceives threats so great that it could substantially affect growth. And if the US and the world is indeed so robust, why should changes in a discount rate affect markets so radically? I would argue it's because investors today are asked to place their faith on a string on tenous assumptions, the failure of any one of which could produce severe consequences.
But ignore the killjoys like me. Believe the fantasy - the Fed has rescued the world. We can all go back to watching Cramer now. Thank you.