Marc Faber says rate cuts won’t work


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Artificially low interest rates are what got us into this mess. Why should we think that they will help us get out? That’s the question I ask myself and Marc Faber, otherwise known as Dr. Doom, answers that they won’t.

They certainly didn’t work under Greenspan. In fact it was the 1% Fed Funds rate that created a massive housing bubble. But, this time the Fed is pushing on a string. The drugs won’t work. Try something else, please.

Investor Marc Faber said a series of coordinated interest-rate cuts by central banks including the Federal Reserve to ease the economic effects of the global financial crisis won’t halt a worldwide slide in equities.

“Artificially low interest rates” that encouraged consumers and banks to take on more debt were the main cause of the credit-market turmoil that caused the failure of Bear Stearns Cos. and Lehman Brothers Holdings Inc., according to Faber, who predicted the 1987 stock-market crash.

“The slashing of interest rates will not help very much,” Faber, who manages $300 million, said in an interview in Manila. `They may cushion somewhat the decline but make matters worse.”

The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and Sweden’s Riksbank each cut their benchmark rates by half a percentage point in a bid to unfreeze global credit markets. The deepening credit crisis caused a worldwide sell-off in stocks that has dragged the MSCI World Index down by 35 percent this year.

The Bank of Japan, which didn’t participate in the move, said it supported the action. Switzerland also took part. Separately, China’s central bank lowered its key one-year lending rate by 0.27 percentage point.

Today’s decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937. Japan’s benchmark today had the worst drop in two decades. Policy makers are aiming to unfreeze credit markets after the premium on the three-month London interbank offered rate over the Fed’s main rate doubled in two weeks to a record.

Speculative Investments

Policy makers are reducing rates as economies weaken around the world. The International Monetary Fund said the global economy is heading for a recession in 2009 and increased its estimate of losses from the financial crisis to $1.4 trillion.

The Fed cut its key rate to 1.5 percent, a level last seen in September 2004. Low interest rates on deposits have pushed consumers to speculate on higher yields in other assets including stocks, real estate and commodities, Faber said.

“Had central banks around the world kept interest rates that encourage saving we won’t have these problems today,” the investor said.

Faber, publisher of the Gloom, Boom & Doom report, told investors to sell U.S. stocks a week before 1987’s so-called Black Monday crash, according to his Web site, and recommended buying gold at the start of its six-year rally.

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