Tuesday, December 16, 2008

May be the U.S Fed has adopted the Islamic Model of Finance.

Moving a bit too far in Kynesian model that 'the economy' can be fine-tuned like tuning a 'violin' by manipulating the monitary policy, the U.S federal reserve , today annonced a near zero interest rate policy.

May be you might be wondering, whether the U.S has adopted the Islamic model of Sharia law ( interest rates being unethical). As per the U.S Fed, you should be a 'real fool' to save. Spend, Spend and Spend, the U.S is planning to 'spend' its way out of recession.

The interest rates are already near zero, i.e for overnight interbank rate it was only announced today. Even before today's announcement, the 3 month treasury yield has beeing trading with near zero for the past 2 weeks. It closed at zero in 3 out of the past 5 days.

How low can the interest rates go? If the ec0nomy does not recover before the next meeting, will the U.S fed announce negative interest rates?

You might wonder how can there be negative interest rate. here is the explanation: Under the negative interest rate, you need to pay the bank to deposit your money the bank. If you are lucky you will get your principal back. On your bank deposit, the bank will add its own share and pay the borrower. If the borrower wants $100 loan, the bank will pay $105. If at all he wants to repay it, the borrower needs to pay only $100.

All this loans will securatised and branded as 'highly sophisticated instrments' and sold around the words 'Debit default swaps' (like CDS) and sold around the world. There are enough number of idiots the world who will buy these DDS instuments.

If the borrower defaults then the U.S Treasury will buy those 'Toxic Assets' with 'Tax payers money'. I mean the money collected through taxation in foreign countries and invested in U.S Tresury notes.

Wow. What a special form of 'Capitalism'?

So, don't worry, if the U.S Economy does not recover before the next fed meeting, the fed exactly knows what to do?