The United States’ Federal Reserve has just cut base rates by a whopping 75 basis points or 0.75 percent, indicating that it regards recession as more likely than not.

Recession now seems inevitable

Syntagma has an in-depth analysis of the upcoming recession. Here’s a taster :

As we’ve been saying here in Syntagma for some months, a long, deep worldwide recession now looks more likely than not. Opinions are hardening among key players, principally in America and Britain.

Yesterday, the Wall Street Journal proclaimed : “U.S. warning signs point toward deep recession”.

Now even the insurance companies, or Monolines, that underwrite possible defaults, are also in trouble, with two of the biggest in the U.S. said to be close to Chapter 11 status (a form of bankruptcy protection against creditors).

Clearly, with the Fed in near panic mode something nasty is moving in the undergrowth.

The long-expected credit crunch linked to massive failure in the American sub-prime market really hit home yesterday.

The European Central Bank, regulator of the Eurozone group of countries, piled into the markets with $130 billion of cheap, emergency credit.

The move, the biggest central bank intervention since 9/11, came after reports that commercial lenders were desperately hauling back the supply of loans. The French giant BNP Paribas suspended withdrawals from three of its investment funds because of their exposure to the U.S. sub-prime market, saying “There has been a complete evaporation of liquidity” from credit markets, which could escalate into a worldwide credit squeeze.

Rumours were rife of impending fund meltdowns and banking collapses. Trevor Williams of Lloyds TSB said, “Liquidity has dried up basically. It’s a moment of panic.”

Nick Sparks, risk manager at F&C Partners, said, “People have got caught out. There will be more pain to come.”

You have been warned.

If you’re wondering what all the fuss is about concerning Private-Equity takeovers of blue-chip companies, here is an excellent explanatory article by Irwin Stelzer in the British Sunday Times. He takes a broadly favourable view of the venture capitalists and what he sees as their contribution to the economy. [Private Equity]

The nub of the problem?

The controversy began, in part, because company executives, unconstrained by the dispersed and therefore relatively powerless company owners (also known as shareholders), persuaded many supine boards of directors to award compensation bearing little relationship to performance.

So, all is forgiven, then?

That may seem a silly question since most people would answer : “In the local shopping mall”. But, if you’re reading this, you would probably give a different reply. Here’s our U.S. finance correspondent to give his answer :

What should you do with your idle cash? Let’s say you’re responsible and you’ve accumulated an emergency fund. This is money that you can’t take risk with, but it would be nice to earn something on it, right? Depending on what you want, the world is full of options.

You can always leave it in a checking or savings account. Of course, you won’t earn much. Most brick and mortar banks are still paying almost nothing on deposits. However, the internet bank accounts make it more appealing. HSBC, INGDirect, and Capital One all have competitive rates these days – with no fees or minimum balance requirements. Whatever bank you use, make sure it’s FDIC insured.

You can also use money market funds. These are technically mutual funds that invest in short term issues. The advantage of a money market fund over a bank product is that the interest rate will likely change more rapidly (of course, that’s only an advantage if rates are going up and not down). The disadvantage of a money market is that there’s technically a possibility that you can lose your money if the underlying “money markets” fall apart. Read the fund’s prospectus to see what it invests in, and how you feel about that risk.

With a money market, you can sometimes get a checkbook to access your cash. They don’t like for you to write small checks, so they impose a minimum check size (like $500 per check). With a bank product, you usually link your account to a checking account and move money electronically when you’re ready to spend it. With either type of account, you can make deposits by check or electronically.

Which is better? It depends. Look them both over, compare rates, and figure out what suits your needs.