By Rick Glaze

After several years and a stream of continuous rate increases, the Federal Reserve Bank lowered the short-term interbank rates by half a percentage point last week.

This move was significant in two ways. First, most of the time the rate is moved up or down by only a quarter of a point. The half-point move is generally saved for periods of unusual stress in the economy. Second, this move came largely in reaction to the mortgage liquidity crisis, or, as I pointed out in last week’s column, a leverage (translation: too much borrowing) crisis by finance companies and high-flying risk takers.

This rate reduction is not the most significant remedy the Fed has implemented, but it is the most publicized. This may be a one-time move or the start of a series of rate cuts. But the effect on the stock market was clear and definitive: the Dow Jones Industrial Average rocketed ahead 400 points in the two days following the announcement.

Are these buyers crazy speculators, or do they know something we don’t? Keep this to yourself, but the stock market almost always responds positively to rate cuts. It’s because serious investors know that lower interest rates stimulate the economy, which in turn increases earnings and dividends - and that’s what makes stock go up. Automakers will offer cheaper financing to sell more cars, homeowners can refinance with lower rates and take the savings to buy more retail stuff. All this puts more people to work, who then spend more money.

An increase in economic activity increases Uncle Sam’s take, evidenced by the burgeoning tax revenue the federal government is experiencing. President Bush’s tax cuts from his first term have propelled the economy, providing jobs and higher wages as well as higher tax revenue.

It is perplexing that Sen. Hillary Clinton, running for the Democratic nomination, would propose a new health-care plan that would be paid for by eliminating Bush’s tax cuts. It is like owning a cow that produces great quantities of milk, then killing the cow so you can have a great steak dinner. After the steak is consumed, the party is over.

Rick Glaze is president of Glaze Capital Management Inc. of Los Altos and a general securities principal offering securities through First Allied Securities Inc. E-mail him at Rick@Glazecapital.com.