By Shelia Watson

The half-point cut in interest rates by the Federal Reserve on Sept. 18, the first rate cut since 2003, is a good news/bad news scenario, said Tim Koch, a finance professor and chairman of the department of banking, finance, insurance and real estate at the University of South Carolina.

“If you’re a borrower and have a loan priced off the prime rate, it’ll go down, and that’s inherently good,” he said. “If you’re a saver and pulled some of your assets and CDs, then with the rates going down, you’ll be worse off. So the borrowers benefit and the savers lose.”

Koch, who holds the Moore School’s South Carolina Bankers Association Chair of Banking and who has written two textbooks on banking, said the larger concern is what the rate cut portends for the overall economy.

“In terms of policy rationale, it’s a little worrisome, because the Fed wouldn’t have done this unless (Ben) Bernanke and his group believed we were in real trouble and probably getting ready to fall into recession,” Koch said. “They’re trying to pre-empt it by delaying or mitigating the slowdown.”

Nevertheless, the news was greeted with joy on Wall Street, where there was a 3.5% surge in the S&P 500-stock index, a jump of 336 points for the Dow Jones Industrial average and a 70-point increase for NASDAQ in the first four hours after the announcement.

Koch said the reduction in interest rates will benefit housing overall, although the effect will take place over a long period of time and is not likely to be the boost that is hoped for.

“Here’s a different take on this situation: Basically, Bernanke and his group have bailed out the risk-takers,” Koch said. “So if you’re a private equity company, a hedge fund or a speculator, you win. Bernanke has made it so you can escape with minimum loss. All those whose lives are tied to speculation, they’re loving this because they’re winning. But ultimately this will produce higher inflation down the line.

“The problem is that if you bail out the risk-takers, you lose discipline in the market and you encourage risk. Now, Bernanke knows this. So that tells me that he and his group must have believed that the risks to the economy dominated or swamped any concerns over giving in to risk-takers.”