Cutting the rates will not stop the damage, but might slow it down. For adjustable rate interest only borrowers, the Fed has effectively doubled their house payments in the past 4 years plus the adjustment they expected w/o any Fed increases thank you very much.
But what the Hell Ben, I;ve got 2 arrows in my back you might as well shoot me too!
I think it's irrelevant at this point what the Fed does on Tuesday. The Fed failed to account for how the financial system has changed from the textbooks. They should have cut rates already because we've had a de facto rate hike by nature of tightened credit standards...maybe 2 or 3 hikes.
If they do cut now I excpect we will see more money flee from the US and make things even worse. Why would you want to keep your money in a country that is faltering and offering a low rate of return?
However, they need to address the current financial crisis in some other way. The solution is not to inject liquidity in the system...That's what got us here in the first place...too much liquidity.
Just cause the market is down we need to cut rates? A lot of people are makeing huge money on the downside. The hell with the morons who bought overpriced homes.It is not the feds job to prop up the overinflated housing market or save the stock market.Jim cramer was on drugs today.Give me a break here.
Sippn, I expect the Fed to move to a neutral bias on Tuesday and cut rates later this year if (when) job growth has clearly slowed down.
I'm very interested in the July Senior Loan Officer Survey (the Fed will see it before we do). That might help understand if banks are tightening everywhere (I think they are). Of course the July survey might already be out of date - so much has changed this week.
Deflation will be the problem going forward (see Japan). Rate cuts are needed not to lower rates or help the consumers and IB's but to provide financial stability.
They are coming or its deflation and possibly the D word. Never thought I would utter that word but this is a financial calamity much larger than LTCM.
If you believe rate cuts are not needed than I guess it's "contained" huh.
No. rates should not be cut. Look at where the dollar stands today. Cutting rates 25 bps ( let alone 50 bps ) would indicate panic on the Fed ( remember , everything bad has been contained , right ) , which would smash equities and also hurt the dollar. A rate cut will not change the present dynamics in housing or the mortgage markets. It won't change the capital markets either. A rate cut should have been implemented a year ago for it to having today , so window dressing is meaningless now
The Japan analogue has to be on folks' minds. IANE, but Greenspan's hikes smelled to me at the time like a valedictory effort build as much space as possible from "0".
From what I understand, cutting rates hurts the dollar. So you help out a percentage of the population that's stuck in bad mortgage situations and hit everybody with, what $5/gallon gas -- or more? Raise the cost of nearly everything that is imported or contains imported parts (which is just about everything).
Yeah, businesses that export will do well. But overall I see the effect on -- not just the economy but the average person -- as negative. Sure, you could use a low dollar as part of a plan to rebuild American industry. Part of a plan. But do you think the bozos we have in power, in the White House and Wall Street, are even capable of conceiving such a thing, even if they thought it was a good idea which they probably don't.
No the Fed will not cut rates until the economy slows enough to curb inflation. The stock & bond market is not the economy. It is only analogous to perceptions about the economy and those perceptions assigned a monetary unit value.
An actual loss to the real economy which causes larger flows of capital to stagnate and production and consumption rates to turn negative would justify rate cuts.
It seems to this undereducated reader that
1. There's an awful lot of money sloshing around with no Next Big Thing to invest in. It would seem that would depress interest rates even without the Fed's help and without a demand for investment capital, deflation is a reasonable concern.
2. A bit (or a lot) of inflation would sure help out the legion of strapped homeowners (though of course there is the problem of willing buyers)
3. Perhaps the issue lies not with monetary policy but with the lack of a sane fiscal policy (i.e. education, jobs, infrastructure investment etc.) that probably (in anticipation of a recession) should be at a deficit for the near future.
Therefore not clear to me that what the Fed does will make much difference.
A Fed rate cut would add momentum to the declining dollar, which would put huge pressure on the various pegged currencies, and help real home prices adjust more quickly, but no one in the US is going to see a rapid increase in wages so half of the necessary "inflationary" solution was shipped offshore and isn't coming back any time soon. Big debt in cheaper dollars ain't much help if wages never move.
If they raise rates, the credit markets collapse next week. If the rates remain the same, the credit markets get hammered next week. If they lower rates, the dollar gets hammered, oil goes up and the credit markets collapse next week.
They can't lower rates which will set high oil prices because that helps the terr'sts (and worse, the Russians). They can't support a strong dollar because they can't raise interest rates. They'll keep it the same, and spout lies about how the bubble ahs already collapsed and everything is contained.
I guess was easier when policy only depended on what was good for Halliburton.
What I'd like to know is if a general panic in the US credit/equity market will cause a series of circumstances which will force the Chinese to float/revalue the RMB...
The damage has been done. Those vacant McMansions is an enormous waste of capital and other resources. The utility is gone but the debt is still there. There is nothing that can save it. Cutting rates will just destroy the dollar and all the benefits from its reserve status and in long term would make matters worse.
Although Great Depression was deflationary, there can be an inflationary depression and several such events were throughout the history abroad.
Home prices have another 10% decline to go, regardless of the Fed's move. But we are in a recession that will take the innocent/uninvolved with them. You think that you are 'safe' because you rent? Think again.
I've seen the pricing sheets for a few fixed-income funds and it is grizzly to say the least. If you think the fed should hold rates, you are oblivious to how bad things actually are.
The Fed knows full well that inflation has run well above the 'acceptable' level for quite some time, in spite of the "core" number the quote. They also know that the present crunch is a long-building result of an overextended period of rates being held too low - their own fault. The also know that the uses of the liquidity that was provided by low rates were perverted into non-productive economic purposes. Now it is like they are being asked by a screaming addict for one more pop because this time he really is going to quit... right after this next one. At the same time, they know they are being set up as the symbolic cause if things go south for the economy (which has not yet happened).
Damned if they do; damned if they don't. But it is no surprise - people have pointed out on blogs like this for months that the Fed was heading into this trap.
The past couple of days it looked like the carry trade and junk bonds were starting to make a comeback.
There's all sorts of other opportunities for US busineses, hedge funds, and consumers to start a new speculative rampage in pursuit of fantasy paper wealth fueled by the atrophy of US human capital.
Why work or worry about the mortgage meltdown when your Brazilian ETF is going up 50% YoY?
They just need a "GO" signal from the Fed.
As we learned in the wake of the dot.com bust and even earlier this year (with the M&A hypo-bubble) as housing began to collapse:
The speculative-easy-money-get-rich-quick mentality has a demonic intensity and a vampiric resilience.
You have to kill it.
Then drive a stake through it's heart to make sure it's dead.
Then burn it.
Then create an effigy of it and kick it in the gonads.
Then put it on the FBI's top 10 most wanted list in case you did't do the job right.
Then have another go at the effigy.
Make sure the demon's dead.
Or plan on spending your retirement as a Wal-Mart greeter welcoming customers in a broken but functional Mandarin dialect.
We had too much liquidity. That brought us into this mess. Now we need more liquidity.
Let's sow the seeds for something serious, because we only like being in a market economy as long as everything goes up.
Raise rates if anything. That's been the general trend around the world. We have to keep our rates of return competitive. Nor, as CR pointed out earlier, would dropping rates help the status quo. Relative risk will continue to be relative risk, and the necessary magnitude of the risk repricing underway would require a drop of something like 150-200 basis points to free up the market much. Our economy cannot withstand that now.
Eventually property will drop down enough to become a bargain, especially for foreigners. As long as money keeps coming into the system it's okay. If it stops coming, it's a disaster.
To prevent the current situation the Fed needed to drop 50 bps in the first quarter. They didn't, so we are locked into this correction cycle. If I had to make the decision, I'd match the Bank of England and stay there regardless of the screaming.
The real problem is not liquidity but a situation in which it was impossible to make many good loans, and that is adjusting rapidly. Yes, it will be an economic shock, but there is no way of avoiding it. As long as the situation adjusts so that creditors can get a reasonable return for their risk going forward, the system won't lock up.
We will see quite a freefall in home prices in some areas, but there's no way of avoiding that either.
The Fed should hold for now, but issue a very strong statement such as: "Prospects for a severe financial dislocation have increased significantly. The Fed will closely monitor day to day events in the finacial markets, and will act agressively, if necessary."
Its been nice of the Fed to feed all you guys who consider a days work watching the interest checks roll in (wish I was there) but I'd rather be investing my capital in bricks and morter than interest payments.
The Fed dropped rates over 400 basis points and raised it back again this decade already, maybe they missed it by a few %.
Here's what the Fed announcement should contain: "the prospect of Jim Cramer having an explosive bowel movement on national TV has increased significantly.."
If raising rates will save the dollar then why has it been dropping like a rock???
Look ...the Fed has a lever that goes forward and backward. Lower rates and inflation rises. Raise rates and we might end up in a depression.
Bottom line is that Greenspan over reacted by lowering rates to 1% (40-50 year low). Talk about IRRATIONAL EXUBERANCE! Now Bernanke has nothing but BAD choices.
Oil and food prices keep rising ...yet recession seems emminent. Economics says you have to fight the inflation to avoid the stagflation (to avoid the death spiral).
It's like facing George Foreman with one hand tied behind your back though. This could get really really ugly.
I think the Fed is praying that inflation drops due to slowdown ...then drop the FF rate hoping to avoid a REALLY ugly down turn and miss the iceberg up ahead.
It will take at least 6 months to have significant impact though ...and the world may slide into recession if we do (making it harder to crawl out).
If raising rates will save the dollar then why has it been dropping like a rock???
Because foreigners know that Fed can drop the rates to 1% like Greenspan did and let the inflation eat your money. It's better to rush to the doors sooner.
In terms of the monetary base, which is the only measure of money supply that the Fed actually controls, the Fed's policy is currently tighter than it has been in at least 25 years, maybe longer.
Adjusted for inflation, the real money supply has been shrinking -- biggest shrinkage since 1982. If you don't adjust for inflation, the money supply has been growing more slowly that it has since 1963.
This extremely tight policy has been sorta hidden by the fact that interest rates are still moderate-to-low from a historical viewpoint. But debt levels are at record highs. Multiply current interest rates by current debt levels and the cost of carrying that debt is higher than it's been since 1982.
Despite this extremely tight policy the US$ is falling to record lows on world markets, probably because of the recent string of record trade deficits, which have been financed by record debt levels. There's just too many dollar-denominated securities floating around overseas for the dollar to rise in value anytime soon.
I think the Fed needs to cut interest rates now to moderate the recession that is already baked in. Based on historical precedent, we'll probably start seeing a spike in unemployment by the end of the year, 5.0% by December, and then up to about 6.5% by next summer. The recession is already baked in, but the Fed can moderate the recession if it begins to cut rates now.
I don't expect the Fed to cut rates now, because Bernanke needs to establish his reputation as a tough inflation fighter first. All that "helicopter Ben" name calling has probably forced him to be tougher than he'd like to be. The Fed will wait until the rising unemployment rate is unambiguous before it acts.
Fed won't do anything and shouldn't do anything - not yet.
I think there will come a time in the not too distant future when the Fed will need to cut but that time is not here yet...
The data will tell them when and not just anecdotal bits-n-pieces from asset prices & credit jitters. Wait for GDP & jobs figures to really indicate contraction then jump on it... we aren't even close to that yet.
"Adjusted for inflation, the real money supply has been shrinking"
WTF are you talking about? Inflation is caused by an increase in the supply of money and credit. Which is the same as saying a loss of purchasing power of money because there is more of it. Money supply M3 while no longer provided by the FED is probably running about 10% annually or about the same as in England which, by the way does report the money supply which is one more reason along with higher interest rates to buy the pound and short the dollar. Its called transparency.
Uh, what in the world, exactly, in terms of positives, would a Fed cut achieve?
Let's see.... a cut now, out of the blue, would say, basically, "oh crap, we are screwed." In all likeliness, it would set of a panic attack in terms of a lack of confidence in the US outlook. The Fed can't go from "contained problems with some inflation risk" in one month, to "major problems, cut rates" the next without tipping that it sees some serious issues.
And what exactly would 25 basis points of liquidity do for ANYONE when you assume the above? The lack of confidence the cut would signal would swamp any intended liquidity effect. Who would decide to take on more debt when the Fed is cutting now? Crazy.
And like we dont already know here on CR...housing isnt a rate issue; it's an affordability issue that was papered over with toxic loans that are now proving how toxic they were. The only kind of rate cuts that even make a dent in this problem are the 400 basis point type that would send the dollar to 60 from 80 and basically have the unintended effect of pushing up import inflation and smashing long term rates as inflation goes through the roof.
This is just not a poll worth asking since everyone here knows it ain't gonna happen.
Vote yes. Be prepared to endure the I told you so pain from the inflationists as oil breaches $100 a barrel. Comfort yourself that although people still have jobs and places to live, they can no longer afford to eat food.
Vote no. Be prepared to endure the I told you so pain from the deflationists as the credit crisis continues. Comfort yourself that although people can afford to eat food, they no longer have jobs nor places to live.
For the record, I voted no. Maybe I'm just hungry though.
Is there any way you could add "Yes and No" as a choice? It would make it SO much easier.
(I posted this in the wrong place initially. Sorry for double posting.)
Well, I think the Fed should have stopped raising at 4.5% back in '06 and begun cutting when the unemployment rate stalled around the mid to upper 4% in late '06 early '07.
To reiterate what I said on the Cramer Goes Mad thread, the Fed sets the floor for the unemployment rate. The lower classes suffer disproportionately when unemployment rises, and they suffered from rising rental prices in places like Orlando where apartments were converted on mass into condos.
What the Fed should do and should have done a while ago about the housing bubble is a different matter. They have an 'open mouth policy' and they should have used it to talk down the bubble like economist Dean Baker has suggested for half a decade. Too bad they care more about appeasing bond holders, Wall Street players and millionaire real estate moguls.
I think the Fed needs to cut interest rates now to moderate the recession that is already baked in. Based on historical precedent, we'll probably start seeing a spike in unemployment by the end of the year, 5.0% by December, and then up to about 6.5% by next summer. The recession is already baked in, but the Fed can moderate the recession if it begins to cut rates now.
I agree with a lot of what you said mai_neh except the above.
I think a recession is baked in, many here think it is baked in... but those debt markets don't think its baked in else deals like the Chrysler LBO would've been 're considered'.
Nor do folks like Seb or Banker here believe a near term recession is likely. There are many like them.
The Fed needs to apply a little 'Missouri Persuasion' ('Show Me') before they act then act decisively. But not until the data tells them its time.
The Fed will have to do something- namely start jawboning operations after a token rate cut of 25 bp. The jawboning will be to open up the credit markets again- and the threat will be to the prime brokerages that make the money selling paper to the Fed- either start buying mortgage paper or start deleveraging rapidly in a panic environment. Take your poison- a nice orderly decline over the next year and change or a precipitous decline over the next month.
Nobody will have the balls to call them on their market power. I think Monday will tell the tale- either credit markets unlock or they don't.
If not, the Fed must act to preserve liquidity. You may still take large losses, but the markets must function, not lock up totally. On reflection, I believe invoking the discount window would be worse than taking conventional action- as it might provoke worldwide panic.
As for the stock market- so what? Housing on the other hand has a lot of voters connected to it- with a large chunk of their life savings attached.
A crisis of confidence is one thing, systemic lockup is another.
Someday this war's gonna end...as for the dollar- so what? When we pull out of Iraq the dollar is going to take a huge hit anyway.
I'm with mai_neh - Rate cut once unemployment levels get to 5%, end of the year. And of course that will be too late to turn the titanic US economy from running into the iceberg.
The FED is always behind the curve, chasing the economy with tools that have 1+ year of latency built in, so when they react and react they overshoot because the reports are ancient history by the time they're released.
Humphrey-Hawkins Full Employment Act set goals for the Federal Reserve to achieve for unemployment. It basically defines full employment as 4%. We reached that in the 90's cycle but not this decade's, and I don't think we will.
But they should have tried, and there's no reason to let unemployment begin rising to 5%, 5.5%, 6%... before they begin lowering the floor.
I'm of the opinion that this country should learn how to make stuff again, and that it needs to kick its oil habit ASAP. A weaker dollar would help both, but as someone said upthread, it has to be part of a larger plan. There will be no larger plan until the cultural of finance and the financialization of everything (even GM became a finance company for a while) is destroyed. And the best way to destroy the culture of finance is higher rates (along with raising the capital gains tax rate).
So I say bring on the higher rates.
I suppose more complicated policies are possible: raise rates AND target a higher inflation level (or report the real level of inflation); lower rates AND tighten margin requirements, tighten lending standards, and tighten reserve requirements; or some other combination. No idea if a more complicated option could work.
I believe Ben will hold steady until the banks deplete about 1/3rd of their required capital. A true visit to the woodshed for ignoring risk premia.
Corporations will have to use their bounty o'cash for day-to-day operations instead of M&A & stock buybacks (a much more productive use of capital)
The street, hedge funds & the housing speculators who have made pantloads of money for half a dozen years will disgorge some of their winnings. If several investment banks fail, someone always picks up the slack.
The mortgage industry will regain its reputation of being a cyclical business. Houses will no longer be short term investments. If all state-regulated non-depository lenders fail, someone will pick up the slack.
Ben will do the right thing. The responsible adults will be making the decisions again at the Fed for the first time since Volcker. Two or three years of austerity to lay the foundation for prosperity.
What do I know, but I would say a step towards neutral might be in order. Otherwise, I agree with MaxedOutMama - the liquidity should return when lending practices are clearly better. It sounds like they are getting down to writing some decent standards this week, about 5 years too late.
The bond holders, banks, hedge funds, everyone holding the bad mortgage related bonds all need to take a HUGE hit here. They need to feel serious pain for investing their money poorly in a bubble, into assets which have ZERO productive capacity.... unlike the internet bubble which actually paved the way for a real change in commerce. Who cares if a bunch of LBOs die on the drawing board.
The US can import its way out of the problem -- if we import about 7 million rich people to buy the vacant houses. I am sure that Congress will be able to quickly pass a sensible immigration bill that everyone can live with.
Everyone voting for austerity is quite conservative, and most likely wrong.
Volcker was the last one to make austerity stick- and the country was on the edge of the abyss for the pols to give up the stimulation stick and let him pound the markets into submission.
Right now the political will for austerity is lacking. It is 1973- not 1979. The Fed figures that it can always raise rates if it needs to put a panic into the markets about inflation, but BB has bought his inflation fighting spurs, now he needs his containment spurs.
This crisis must be contained or it will spill over into the election cycle, and the Fed might just lose it's independence- a fate worse than death as Bernanke sees it.
Remember his words to Uncle Milton- Yes we did it, we are sorry, and we will never do it again.
Cut off liquidity at a critical juncture that is.
Spice must flow! Credit is the lifeblood of this economy- drops in the amount provided quickly transmit in terms of panic. Now we can't have panic, can we?
See what was done after 9/11 to provide liquidity.
I have no problem with a move to neutral, but a rate decrease at this juncture would be a capitulation to the markets and result in an institutionalization of the Greenspan Put. It would also wreak havoc upon the dollar.
Oh, and since Ben won't be lowering because for one he can't be seen as relenting to the wishful calls of the Wall St brokers, we'll be entrenched in a bear market before we know it. Could be in one already.
AllenM - I think a lot of us agree with that... but we aren't to the 'critical juncture' yet. Like banker said a few days ago... wait to see what the markets look like after Labor Day. Let the data speak.
Agree with mp. However, I would have no problem with rate cuts if Dow under 12000 for more than a few days or in next month if credit markets are still a mess.
Let's see, wee can fix a problem brought about by too much liquidity by adding more liquidity. Its just crazy enough to work... NOT!
Maybe I'm looking at this the wrong way but I don't see this as a rate problem. It's a risk problem. After vanishing for 7 years, risk is back with a vengeance. The 10 year is down recently yet mortgage rates haven't budged. It's the risk and the associated spread, not the base rate.
No cut, defend the dollar. We're screwed and there's nothing that can be done about it.
"oblivious to how bad things actually are" -- Bad for whom exactly? I find it difficult to think believe that the cure for the disease is more disease. What is the cure for that? Death?
China and Japan need exports to the US to continue for now. That won't go to plan if the US goes into a credit crunch recession. If I were running Chinese investments, I'd make sure to keep buying whatver assets allow US consumers continue to buy my consumer goods. Needs a little coordination, but what else is that little group Paulson set up for anyway?
Yeh, I know they may eventually lose X% of those investments, but that's a small price to pay for transforming your country in real, not just financial, terms.
So my guess is that there will be no catastrophe. Fed makes modest moves, and Treasury coordinates continuing asset purchases with FCBs (modified some to allow some repricing of risk).
If "liquidity" is encouraging and/or propping-up the likes of New Century and the Wall St shops that purchased and sold off their worthless loans, then we need a new definition.
Nobody's buying MBS in the Secondary Market? Boo Hoo Hoo, cry me a river. Offer something for sale that isn't total crap, and you'll have plenty of buyers.
Not sure why you would want a rate cut to provide support to a market with flawed underpriced collateral, with credit enhancements sized by unrealistic rating models, only to reside in opaque CDOs that don't mark-to-market. Why don't we just resurrect Enron & Worldcom & let them go back to work?
Your logic escapes me. A broken market is locked, but you want to unlock it. As a jobs program? As a bailout for investors? You want the Fed to aid & abet the functioning of a flawed market. Don't listen to him Ben.
re inOrlando
"Humphrey-Hawkins Full Employment Act set goals for the Federal Reserve to achieve for unemployment. It basically defines full employment as 4%. We reached that in the 90's cycle but not this decade's, and I don't think we will."
I always thought that the act only required to Fed Reserve to report to Congress twice yearly.. So I looked it up a synopsis at
Nothing there about the Fed having to do anything other than establish long term growth, promote price stability and minimize inflation.. Nothing there about precise employment targets on the Fed - on the President sure.. but the Fed is independent( theoretically ) of the President and I'd read the intent as being that the President should be allowed to establish state-run employment programs if the unemployment rate dipped and private enterprise wasn't able to step in.
My recollection is that the original charter of the Fed. did tell them to go for full employment but no numbers
dryfly! Nice to see you posting again -- we were worried!
IMO the Fed created this mess, and (with the help of those idiots in DC) have effectively painted themselves into a corner. They're walking a tightrope between inflation & deflation, and a rate change either way is akin to intentionally stepping off the rope. If they're as smart as everyone hopes they are, they'll sit tight until the rest of the world is ready to cut rates, too; otherwise, they'll just do what we've come to expect -- take a bad situation and make it infinitely worse by "doing something".
No matter -- a depression is unavoidable. It's not a question of "if", just "when".
Clarify? Is there not one single official BLS unemployment rate released by Washington?
It depends on both defining who is employed (numerator) and who is in the workforce (denominator). Either can be fiddled. The bottom line is that the current low unemployment rate is as much due to the decline in workforce participation (which is highly unusual) as to post-2001 job creation (which has been poor compared to previous expansions).
A basic discussion of the problems of quantifying the unemployment rate can be found on Wikipedia under unemployment.
Clarify? Is there not one single official BLS unemployment rate released by Washington?
They've tinkered with the formula quite a lot over the years... typically by changing how the denominator in unemployment rate is calculated... the civilian labor force 'participation'.
Some say it understates unemployment some say it doesn't. Point is there is some debate over how good it is & while congress jaws the Fed over this - its mostly just jawing.
I mean if they didn't skewer Volker back in the 80s with almost 7-8% UE... I don't think they'll say much to Bernanke with 5% UE. H-H is pretty toothless.
"The Act set specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. By 1988, inflation rates should be 0%. The Act allows Congress to revise these goals as time progresses."
This provided a benchmark for future "full employment" at 4.0%. We achieved
dryfly! Nice to see you posting again -- we were worried!
I was not near the bridge when it went down - but like a lot of Minnesotans that work/travel through the city, it has complicated my life some. The last two days I was with my son at the U of MN just a half mile from the site... what a mess!
The popularly followed unemployment rate was 5.5% in July 2004, seasonally adjusted. That is known as U-3, one of six unemployment rates published by the BLS. The broadest U-6 measure was 9.5%, including discouraged and marginally attached workers.
Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year. As of July 2004, the less-than-a-year discouraged workers total 504,000. Adding in the netherworld takes the unemployment rate up to about 12.5%.
Perhaps they ought to call U-3 the "core unemployment rate".
"The Act set specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. By 1988, inflation rates should be 0%. The Act allows Congress to revise these goals as time progresses."
And what's the recourse if it doesn't happen? Other than the H-H committee hearings & squawking?
Huh? that's the link that I had just given ! including the bit about the goals that the PRESIDENT had to attain..
How about this as a resolution between us - I read that to mean that the PRESIDENT has to do stuff, not the FED - you reckon it applies to the FED as well.
In any case since neither the Fed NOR the President has abided by that Act - with no consequences at that - its all a moot point.
If they're as smart as everyone hopes they are, they'll sit tight until the rest of the world is ready to cut rates, too; otherwise, they'll just do what we've come to expect -- take a bad situation and make it infinitely worse by "doing something".
Ya the rest of the world does factor in doesn't it? It isn't 1956 anymore. BTW - that's what's got them in the jam in the first place... being complacent with the world funding our excess...
There is going to be pain... tax increases, further currency erosion, price increases, job loss... not so much fun. This is not going to stay a purely Wall Street adventure.
I'm with Clyde above...don't lower rates to protect jobs and house prices that are supported by a huge fraud of crazy loans packaged and resold at made-up valuations.
Why would you want to perpetuate a system that's so broken?
I'm for inlicting some pain to at least reduce the moral hazard that is loose in our financial markets.
Why not have the Saudis and the big oil companies inject some liquidity in this market. They are the ones who got us into this mess. Lets tax Saudi Arabia and tax the hell out of the big oil. Lets get the blood money for our siblings who have died in IRAQ caused by Saudi manupilations. its easy , will just take the money from these criminals,pay off the rest of the world and live in our oversupply of homes.
Policymakers of the 1930s observed the correlates of the monetary contraction, such as deflation and bank failures. However, they questioned not only their own capacity to reverse those developments but also the desirability of doing so. Their hesitancy to act reflected the prevailing view that some purging of the excesses of the 1920s, painful though it might be, was both necessary and inevitable.
A rate cut (aka Fed bailout via inflation of the monetary base) would signal that if you are a prudent, rational saver you are a fool in this new era.
Why should I ever save again if I know that this govt and it's puppet, wannabe independent central bank are just going to inflate my purchasing power away to pay for the sins of all those that instead chose to risk and spend without thought or care?
No Fed liquidity surge UNTIL it is clear that markets have corrected (think about the meaning of that word for a moment) and that there is enough recessionary momentum to clear the fat from this pig economy, containing wage pressures and keeping them from resulting in the evil of all evils...
The stagflation that results from a liquidity trap.
Printing more dollars into this mess won't cure the problems created by excess leverage, speculation and lack of saving for the future.
Stop trying to kill off the business cycle by abusing the trust that is so critical to the long-term functioning of a fiat currency based system. Once that trust is gone, it becomes very hard to regain.
Have we learned nothing from the 1970s???
Contrary to modern public belief, the Fed cannot and should not distort natural business cycles forever. Sooner or later, the pain comes home and the longer you delay it, the worse it becomes.
Stop being so afraid of economic downturns. Why exactly does GDP have to grow every freakin qtr anyway???
Why can't we regroup, retrench, retool and recover every once in a while?
We've survived them in the past and become stronger, more productive and more efficient as a result of each downturn. In the past, adversity has given our economy strength and fitness. More recently, lack of adversity has bred complacency and imprudence.
Inappropriate Fed cuts are like steroids. Short term gain, long term pain. It's not the natural way to grow and we need to get off the juice before our heart explodes.
No! This whole mess was caused by loose and unenforced lending standards (regulations are bad don't 'ya know). Now the market is going to enforce them with a vengeance regardless of what the FED does, or does not do. About all they can do at this point is make nice cooing sounds like you do to a child before they get a battery of shots at the doctor. They're going to have to sit tight and say "hey, if it was bad we'd do something, so since we're not doing anything it can't be that bad" in the hope that they can prevent a panic.
They should probably lower now, but on the other hand it will make foreign money flee. I stand where my mouth is, and will sell all my investments as soon as I see the fed lowering rates. When US goes into a recession and starts lowering, I might as well take short positions without the currency risk at this side of the atlantic.
If the Fed was going to help troubled borrowers they should calculate the risk of favoring a new increase on RE, CRE, LBO loan originations which may, in turn, be dangerous if lending standards get going like in the recent past.
Wait a second, I think that should be clarified. The above holds true only in cases where the name-calling is aired on domestic TV in an effort to boost Nielsen ratings.
They can't cut at the next meeting, but they can go neutral and cut later this fall. A cut would hardly help distressed home owners or potential buyers. It would lower the dollar and increase inflation. I agree with the Economist--sometimes a little squeeze is necessary. We are a record 51 months since the last 10% DOW decline. A 10-20% decline in the DOW is something that the economy needs to pass through every so often.
I don't really see anything that the FED can do to help housing. Usually the third year of a presidential cycle is the strongest for stocks, but this time neither the incumbent nor his vice pres is running and not even the pres cares about his numbers. We need a recession during the GWB presidency.
I am writing without reading the earlier posts and will read the rest of this blog this afternoon. My wife and I are off for a 100 km bike ride and need to hit the road at daybreak to finish before it gets too hot.
What the Fed should do? Leave rates the heck alone.
So the housing market is cratering, bring it on. It's welcome medicine for sick society. Don't forget that there is a silver lining, many young folks will actually be able to buy a home a prices they can afford in a year or so. Our landscape has been blighted with malinvestments, as another poster pointed out, there is no utility in empty overpriced boxes (other than for copper thieves and squatters, perhaps.)
The marketplace will rectify this situation, given a chance. The worst thing the Fed could do is to try to stop it, although its' likely too late for that. The only thing they might be able to pull off is to manage a more orderly decline, but that would prolong it on the downside.
Another thought. Although they were perhaps complicit it the credit bubble, I don't blame the Fed for the debacle unfolding before us. Yes they panicked after 9-11 and cut rates much lower than needed, but last I checked it wasn't the Fed governors who:
bought and tore down perfectly good older homes and crammed multiple McMansions on 1/2 acre lots, speculating on huge future gains
tricked unsuspecting buyers into getting into loan products with future payments they knew full well they couldn't handle
approved developments for homes they knew full well wouldn't fit in with the community, leaving a legacy of rotting empty tract homes and making a joke of the term "community planning"
stood in line to pay tens of thousands of dollars for the rights to some pre-built condo, because they heard at a cocktail party that it's "easy money"
I could go on, but every bubble at it's heart can be clamed on stupidity, failure to undertand history, and a lack of ethics. Rather than blame the Fed, folks should take a good look in the mirror.
They definitely will not cut next week. As many have noted, the dollar will fall steeply if the Fed looks to be panicking, and that would be very inflationary. This guy is still living down the helicopter remark.
Gee the stock market is down what 6-7% from a recent all time high, still up nicely on a 52 week basis, unemployment well below its median rate over the last 50 years, and the Fed has to panic and cut rates in face of a $ that is already going through the floor. NOT Look the Fed will probably change the language a bit, move towards nutral. The current problem mostly stems from rates that were pushed way to low, and kept there far to long. Yes the next move by the Fed is probably down, but not until the 1st quarter.
"I don't blame the Fed for the debacle unfolding before us."
I do. Everybody else just responded logically to free money within a culture that values nothing other than money. If the Fed drives rates into dangerous territory - makes them negative in real terms - it has the responsibility to make sure that lending standards and the like don't fall by the wayside in the rush to put the money to use. Easy money applied to fixed-rate, fully-ammortized 90% LTV loans would not have created anything like the bubble we have now.
I think it was deliberate policy by the Fed & the powers that be to create the current housing bubble but that is minor when looking at the global picture. The global differential in wages will take many years to play out. I think our standard of living will gradually drop while others rise. Hopefully it will not be an abrupt process. I think the Fed holds on Tuesday.
Whether or not you blame the Fed comes down to philosophy, I suppose. Akin to the "guns don't kill people, people do" argument, I would argue that easy credit alone doesn't create bubbles, you also need stupidity and greed. Nobody held a gun to the head of these fliptards who went out and overleveraged themselves, speculating that the party would go on forever.
The logical extension of "the Fed is responsible for the bubble" is that they are in control of my life too. I don't want to base my success or failure in life to be based on the decisions of a bunch of cranky old hacks.
Does that mean they had no role in the thing? Of course not, they were part of the problem. I just
don't see how we can completely blame them. That sounds like scapegoating to me.
dryfly said: "...I think a recession is baked in, many here think it is baked in... but those debt markets don't think its baked in else deals like the Chrysler LBO would've been 're considered'.
Nor do folks like Seb or Banker here believe a near term recession is likely. There are many like them."
Just FYI, I've got the recession probability indicator (Wright Model "B") plugged into my stock-charting software. It's at 32%, and that's with a 12-18 month window.
Also, I don't see how we can be anywhere near a recession when the ISM manufacturing and services numbers are still in the 50's.
Also, I don't see how we can be anywhere near a recession when the ISM manufacturing and services numbers are still in the 50's.
I tend to agree with your analysis though believe things can sour faster than they have in the past... so while I don't see a recession NOW... I see how one could develop more quickly than say 12-18 months. The speed of this credit blow up as a testimonial.
But I'm going to have to see more concrete evidence of an immediate recession before I puke... too many times over the last few years we've seen the problems & they didn't fully blow up and everything kept marching ahead. I believe it can happen again though the credit crunch thing is the first tangible evidence (or symptom) that that some of the stuff I worried about (excessive leverage) will have real consequences.
But it's still too early to tell whether the problems are for real or how close they are to actually manifesting themselves into a contraction.
That's why I believe Ben needs to hold back for now - let the process unfold & the data speak. It's okay for us on a forum like this to speculate, it's a free country & everyone has an opinion. The fed on the other hand has real responsibility - it needs to act responsibly. I believe they will - for a change. They will cut - someday - but not until the data says its time... certainly not on Tuesday.
Agree with Kevin, the money supply is too high, running at more than 10.5% in the euro zone and about the same in England. This is a liquidity problem caused by total loss of confidence, the money is still here but no one wants to take the risk.
Cutting the rates won't help, it's too late, they should have been risen a LOT more to avoid the easy loans.
I do not believe it was greed that caused the majority of people to buy homes, unless you want to call the "propensity to save" greed. People were trying to save for their future by purchasing the commodity that showed the most consistent gains over the last thirty plus years. Housing is far more understandable and useful than financial instruments. Most couples primary goal of saving is to buy a house. If you are getting only 2-3% in a bank and house prices are appreciating at 10% you are being priced out. This is exactly why the FED cheapened rates to stimulated the economy. To make dollars depreciate against real assets. It has been known for hundred of years when you cheapen the cost of money you increase the chances of speculative bubbles. Stocks were out, post Dot-com so where else were people left in their efforts to save? They were in a sense forced to buy or be left out. I know several people who have bought this year who still believe this is the only avenue left open to them. They are not of the mind set that they are going to get rich off their house. The speculator was always the marginal buyer.
Cutting rates aren't the answer. Some of the best economical times in this country was not all that long ago, with avg savings rates given was 5.25%, while avg home mortgages were at 7.5-8%. Feds Lowering Interest rates to their current levels is what started this whole mess.. Interest rates got too cheap and therefore profit for mortgage companies slumped, so they decided to take on more and more "risky" loans to make up the $$$$ difference. Now they all (and we too) are paying for it... DON'T CUT THE RATES.......
Good Question
Cutting the rates will not stop the damage, but might slow it down. For adjustable rate interest only borrowers, the Fed has effectively doubled their house payments in the past 4 years plus the adjustment they expected w/o any Fed increases thank you very much.
But what the Hell Ben, I;ve got 2 arrows in my back you might as well shoot me too!
I think it's irrelevant at this point what the Fed does on Tuesday. The Fed failed to account for how the financial system has changed from the textbooks. They should have cut rates already because we've had a de facto rate hike by nature of tightened credit standards...maybe 2 or 3 hikes.
The FED's job is not to protect Cramer's buddies on Wall Street.
It's time for us to take our lumps, NOT defer them. That's how we created this ponzi scheme.
If they do cut now I excpect we will see more money flee from the US and make things even worse. Why would you want to keep your money in a country that is faltering and offering a low rate of return?
No, Fed will not cut the rates. They should not!
However, they need to address the current financial crisis in some other way. The solution is not to inject liquidity in the system...That's what got us here in the first place...too much liquidity.
Hell no!!!!
Just cause the market is down we need to cut rates? A lot of people are makeing huge money on the downside. The hell with the morons who bought overpriced homes.It is not the feds job to prop up the overinflated housing market or save the stock market.Jim cramer was on drugs today.Give me a break here.
Sippn, I expect the Fed to move to a neutral bias on Tuesday and cut rates later this year if (when) job growth has clearly slowed down.
I'm very interested in the July Senior Loan Officer Survey (the Fed will see it before we do). That might help understand if banks are tightening everywhere (I think they are). Of course the July survey might already be out of date - so much has changed this week.
Best to all.
Deflation will be the problem going forward (see Japan). Rate cuts are needed not to lower rates or help the consumers and IB's but to provide financial stability.
They are coming or its deflation and possibly the D word. Never thought I would utter that word but this is a financial calamity much larger than LTCM.
If you believe rate cuts are not needed than I guess it's "contained" huh.
The poll should be on the upper left of the layout now. I was having some problems with blogger.
Best to all.
They should raise rates and cut the bankers off at the knees. New York grifters and Harvard wise guys get no sympathy from me.
No. rates should not be cut. Look at where the dollar stands today. Cutting rates 25 bps ( let alone 50 bps ) would indicate panic on the Fed ( remember , everything bad has been contained , right ) , which would smash equities and also hurt the dollar. A rate cut will not change the present dynamics in housing or the mortgage markets. It won't change the capital markets either. A rate cut should have been implemented a year ago for it to having today , so window dressing is meaningless now
The Japan analogue has to be on folks' minds. IANE, but Greenspan's hikes smelled to me at the time like a valedictory effort build as much space as possible from "0".
No. Defend the dollar damn it.
From what I understand, cutting rates hurts the dollar. So you help out a percentage of the population that's stuck in bad mortgage situations and hit everybody with, what $5/gallon gas -- or more? Raise the cost of nearly everything that is imported or contains imported parts (which is just about everything).
Yeah, businesses that export will do well. But overall I see the effect on -- not just the economy but the average person -- as negative. Sure, you could use a low dollar as part of a plan to rebuild American industry. Part of a plan. But do you think the bozos we have in power, in the White House and Wall Street, are even capable of conceiving such a thing, even if they thought it was a good idea which they probably don't.
No the Fed will not cut rates until the economy slows enough to curb inflation. The stock & bond market is not the economy. It is only analogous to perceptions about the economy and those perceptions assigned a monetary unit value.
An actual loss to the real economy which causes larger flows of capital to stagnate and production and consumption rates to turn negative would justify rate cuts.
It seems to this undereducated reader that
1. There's an awful lot of money sloshing around with no Next Big Thing to invest in. It would seem that would depress interest rates even without the Fed's help and without a demand for investment capital, deflation is a reasonable concern.
2. A bit (or a lot) of inflation would sure help out the legion of strapped homeowners (though of course there is the problem of willing buyers)
3. Perhaps the issue lies not with monetary policy but with the lack of a sane fiscal policy (i.e. education, jobs, infrastructure investment etc.) that probably (in anticipation of a recession) should be at a deficit for the near future.
Therefore not clear to me that what the Fed does will make much difference.
A Fed rate cut would add momentum to the declining dollar, which would put huge pressure on the various pegged currencies, and help real home prices adjust more quickly, but no one in the US is going to see a rapid increase in wages so half of the necessary "inflationary" solution was shipped offshore and isn't coming back any time soon. Big debt in cheaper dollars ain't much help if wages never move.
This shows how many here know whats going on. Talk about " the blind leading the blind"
If they raise rates, the credit markets collapse next week. If the rates remain the same, the credit markets get hammered next week. If they lower rates, the dollar gets hammered, oil goes up and the credit markets collapse next week.
They can't lower rates which will set high oil prices because that helps the terr'sts (and worse, the Russians). They can't support a strong dollar because they can't raise interest rates. They'll keep it the same, and spout lies about how the bubble ahs already collapsed and everything is contained.
I guess was easier when policy only depended on what was good for Halliburton.
What I'd like to know is if a general panic in the US credit/equity market will cause a series of circumstances which will force the Chinese to float/revalue the RMB...
The damage has been done. Those vacant McMansions is an enormous waste of capital and other resources. The utility is gone but the debt is still there. There is nothing that can save it. Cutting rates will just destroy the dollar and all the benefits from its reserve status and in long term would make matters worse.
Although Great Depression was deflationary, there can be an inflationary depression and several such events were throughout the history abroad.
Heck, they ought to raise rates so I have some incentive to save my money. I think I'm the only person in America with money in the bank....
Rates remain 'till September then 1/4 point increase. Can't afford not to. Another 1/4 increase in December
Anyone see the dollar/yen this evening?
If I've being Bernanke I would take 5-year sabbatical leave starting now. The situation is such that nothing Feds can do to fix it.
I think Bernanke knows that he can do nothing, which means he will concentrate on protecting the dollar from demise, to hell the economy.
I agree. I think theywill hint that the cut is possible.
They should lower rates by 50bps STAT!
Home prices have another 10% decline to go, regardless of the Fed's move. But we are in a recession that will take the innocent/uninvolved with them. You think that you are 'safe' because you rent? Think again.
I've seen the pricing sheets for a few fixed-income funds and it is grizzly to say the least. If you think the fed should hold rates, you are oblivious to how bad things actually are.
inverted yield curve here we come?
low inflation, low market rates, low currency, low equity market, low real estate market
wacky
The Fed knows full well that inflation has run well above the 'acceptable' level for quite some time, in spite of the "core" number the quote. They also know that the present crunch is a long-building result of an overextended period of rates being held too low - their own fault. The also know that the uses of the liquidity that was provided by low rates were perverted into non-productive economic purposes. Now it is like they are being asked by a screaming addict for one more pop because this time he really is going to quit... right after this next one. At the same time, they know they are being set up as the symbolic cause if things go south for the economy (which has not yet happened).
Damned if they do; damned if they don't. But it is no surprise - people have pointed out on blogs like this for months that the Fed was heading into this trap.
The past couple of days it looked like the carry trade and junk bonds were starting to make a comeback.
There's all sorts of other opportunities for US busineses, hedge funds, and consumers to start a new speculative rampage in pursuit of fantasy paper wealth fueled by the atrophy of US human capital.
Why work or worry about the mortgage meltdown when your Brazilian ETF is going up 50% YoY?
They just need a "GO" signal from the Fed.
As we learned in the wake of the dot.com bust and even earlier this year (with the M&A hypo-bubble) as housing began to collapse:
The speculative-easy-money-get-rich-quick mentality has a demonic intensity and a vampiric resilience.
You have to kill it.
Then drive a stake through it's heart to make sure it's dead.
Then burn it.
Then create an effigy of it and kick it in the gonads.
Then put it on the FBI's top 10 most wanted list in case you did't do the job right.
Then have another go at the effigy.
Make sure the demon's dead.
Or plan on spending your retirement as a Wal-Mart greeter welcoming customers in a broken but functional Mandarin dialect.
Assuming the computers haven't taken over...
Then you're really screwed.
We had too much liquidity. That brought us into this mess. Now we need more liquidity.
Let's sow the seeds for something serious, because we only like being in a market economy as long as everything goes up.
Nope. No cut. The Fed will hold the rate at 5.25% for as long as possible.
..and it it evens APPEARS that the Fed can be influenced by a TV Klown, this world will become ugly beyond belief.
If you think the fed should hold rates, you are oblivious to how bad things actually are.
svvandal | 08.03.07 - 10:35 pm | #
Finaly some sanity.
"...you are oblivious to how bad things actually are"
OK... How bad are they? Seriously.
Raise rates if anything. That's been the general trend around the world. We have to keep our rates of return competitive. Nor, as CR pointed out earlier, would dropping rates help the status quo. Relative risk will continue to be relative risk, and the necessary magnitude of the risk repricing underway would require a drop of something like 150-200 basis points to free up the market much. Our economy cannot withstand that now.
Eventually property will drop down enough to become a bargain, especially for foreigners. As long as money keeps coming into the system it's okay. If it stops coming, it's a disaster.
To prevent the current situation the Fed needed to drop 50 bps in the first quarter. They didn't, so we are locked into this correction cycle. If I had to make the decision, I'd match the Bank of England and stay there regardless of the screaming.
The real problem is not liquidity but a situation in which it was impossible to make many good loans, and that is adjusting rapidly. Yes, it will be an economic shock, but there is no way of avoiding it. As long as the situation adjusts so that creditors can get a reasonable return for their risk going forward, the system won't lock up.
We will see quite a freefall in home prices in some areas, but there's no way of avoiding that either.
MOM:
great point. the problem is not liquidity its a lack of good options for the loans.
interesting.
so the economy/housing market is driving the credit markets not the other way around? at least right now?
The Fed should hold for now, but issue a very strong statement such as: "Prospects for a severe financial dislocation have increased significantly. The Fed will closely monitor day to day events in the finacial markets, and will act agressively, if necessary."
One advantage of higher rates is that investors will view government bonds as a better investment.
It also safer too, which means that, over the medium to long term, higher rates will produce a more sustainable recovery.
No. don't cut. I'm short equities and its time they stayed out of it and let me feed off the pig trough for a while.
-K
Its been nice of the Fed to feed all you guys who consider a days work watching the interest checks roll in (wish I was there) but I'd rather be investing my capital in bricks and morter than interest payments.
The Fed dropped rates over 400 basis points and raised it back again this decade already, maybe they missed it by a few %.
Here's what the Fed announcement should contain: "the prospect of Jim Cramer having an explosive bowel movement on national TV has increased significantly.."
If raising rates will save the dollar then why has it been dropping like a rock???
Look ...the Fed has a lever that goes forward and backward. Lower rates and inflation rises. Raise rates and we might end up in a depression.
Bottom line is that Greenspan over reacted by lowering rates to 1% (40-50 year low). Talk about IRRATIONAL EXUBERANCE! Now Bernanke has nothing but BAD choices.
Oil and food prices keep rising ...yet recession seems emminent. Economics says you have to fight the inflation to avoid the stagflation (to avoid the death spiral).
It's like facing George Foreman with one hand tied behind your back though. This could get really really ugly.
I think the Fed is praying that inflation drops due to slowdown ...then drop the FF rate hoping to avoid a REALLY ugly down turn and miss the iceberg up ahead.
It will take at least 6 months to have significant impact though ...and the world may slide into recession if we do (making it harder to crawl out).
One final note ...I couldn't part with my BRK, but everything else I own right now is SHORT. I think it will get very very ugly in 6 months or so...
Consumers are running out of MEW, only fuel prices left to feed inflation - Fed can't affect it.
The Fed should not cut if it is serious about containing inflation.
If raising rates will save the dollar then why has it been dropping like a rock???
Because foreigners know that Fed can drop the rates to 1% like Greenspan did and let the inflation eat your money. It's better to rush to the doors sooner.
In terms of the monetary base, which is the only measure of money supply that the Fed actually controls, the Fed's policy is currently tighter than it has been in at least 25 years, maybe longer.
Adjusted for inflation, the real money supply has been shrinking -- biggest shrinkage since 1982. If you don't adjust for inflation, the money supply has been growing more slowly that it has since 1963.
This extremely tight policy has been sorta hidden by the fact that interest rates are still moderate-to-low from a historical viewpoint. But debt levels are at record highs. Multiply current interest rates by current debt levels and the cost of carrying that debt is higher than it's been since 1982.
Despite this extremely tight policy the US$ is falling to record lows on world markets, probably because of the recent string of record trade deficits, which have been financed by record debt levels. There's just too many dollar-denominated securities floating around overseas for the dollar to rise in value anytime soon.
I think the Fed needs to cut interest rates now to moderate the recession that is already baked in. Based on historical precedent, we'll probably start seeing a spike in unemployment by the end of the year, 5.0% by December, and then up to about 6.5% by next summer. The recession is already baked in, but the Fed can moderate the recession if it begins to cut rates now.
I don't expect the Fed to cut rates now, because Bernanke needs to establish his reputation as a tough inflation fighter first. All that "helicopter Ben" name calling has probably forced him to be tougher than he'd like to be. The Fed will wait until the rising unemployment rate is unambiguous before it acts.
interest rates and thus interest rate differentials tell a different story now than they used to
Fed won't do anything and shouldn't do anything - not yet.
I think there will come a time in the not too distant future when the Fed will need to cut but that time is not here yet...
The data will tell them when and not just anecdotal bits-n-pieces from asset prices & credit jitters. Wait for GDP & jobs figures to really indicate contraction then jump on it... we aren't even close to that yet.
"Adjusted for inflation, the real money supply has been shrinking"
WTF are you talking about? Inflation is caused by an increase in the supply of money and credit. Which is the same as saying a loss of purchasing power of money because there is more of it. Money supply M3 while no longer provided by the FED is probably running about 10% annually or about the same as in England which, by the way does report the money supply which is one more reason along with higher interest rates to buy the pound and short the dollar. Its called transparency.
Uh, what in the world, exactly, in terms of positives, would a Fed cut achieve?
Let's see.... a cut now, out of the blue, would say, basically, "oh crap, we are screwed." In all likeliness, it would set of a panic attack in terms of a lack of confidence in the US outlook. The Fed can't go from "contained problems with some inflation risk" in one month, to "major problems, cut rates" the next without tipping that it sees some serious issues.
And what exactly would 25 basis points of liquidity do for ANYONE when you assume the above? The lack of confidence the cut would signal would swamp any intended liquidity effect. Who would decide to take on more debt when the Fed is cutting now? Crazy.
And like we dont already know here on CR...housing isnt a rate issue; it's an affordability issue that was papered over with toxic loans that are now proving how toxic they were. The only kind of rate cuts that even make a dent in this problem are the 400 basis point type that would send the dollar to 60 from 80 and basically have the unintended effect of pushing up import inflation and smashing long term rates as inflation goes through the roof.
This is just not a poll worth asking since everyone here knows it ain't gonna happen.
Vote yes. Be prepared to endure the I told you so pain from the inflationists as oil breaches $100 a barrel. Comfort yourself that although people still have jobs and places to live, they can no longer afford to eat food.
Vote no. Be prepared to endure the I told you so pain from the deflationists as the credit crisis continues. Comfort yourself that although people can afford to eat food, they no longer have jobs nor places to live.
For the record, I voted no. Maybe I'm just hungry though.
Is there any way you could add "Yes and No" as a choice? It would make it SO much easier.
(I posted this in the wrong place initially. Sorry for double posting.)
Hey Martin, are you Lindsey in disguise? Maybe you penned that pathetic op-ed in the WSJ? Hehe. Just kiddin.
Well, I think the Fed should have stopped raising at 4.5% back in '06 and begun cutting when the unemployment rate stalled around the mid to upper 4% in late '06 early '07.
To reiterate what I said on the Cramer Goes Mad thread, the Fed sets the floor for the unemployment rate. The lower classes suffer disproportionately when unemployment rises, and they suffered from rising rental prices in places like Orlando where apartments were converted on mass into condos.
What the Fed should do and should have done a while ago about the housing bubble is a different matter. They have an 'open mouth policy' and they should have used it to talk down the bubble like economist Dean Baker has suggested for half a decade. Too bad they care more about appeasing bond holders, Wall Street players and millionaire real estate moguls.
I think the Fed needs to cut interest rates now to moderate the recession that is already baked in. Based on historical precedent, we'll probably start seeing a spike in unemployment by the end of the year, 5.0% by December, and then up to about 6.5% by next summer. The recession is already baked in, but the Fed can moderate the recession if it begins to cut rates now.
I agree with a lot of what you said mai_neh except the above.
I think a recession is baked in, many here think it is baked in... but those debt markets don't think its baked in else deals like the Chrysler LBO would've been 're considered'.
Nor do folks like Seb or Banker here believe a near term recession is likely. There are many like them.
The Fed needs to apply a little 'Missouri Persuasion' ('Show Me') before they act then act decisively. But not until the data tells them its time.
The Fed will have to do something- namely start jawboning operations after a token rate cut of 25 bp. The jawboning will be to open up the credit markets again- and the threat will be to the prime brokerages that make the money selling paper to the Fed- either start buying mortgage paper or start deleveraging rapidly in a panic environment. Take your poison- a nice orderly decline over the next year and change or a precipitous decline over the next month.
Nobody will have the balls to call them on their market power. I think Monday will tell the tale- either credit markets unlock or they don't.
If not, the Fed must act to preserve liquidity. You may still take large losses, but the markets must function, not lock up totally. On reflection, I believe invoking the discount window would be worse than taking conventional action- as it might provoke worldwide panic.
As for the stock market- so what? Housing on the other hand has a lot of voters connected to it- with a large chunk of their life savings attached.
A crisis of confidence is one thing, systemic lockup is another.
Someday this war's gonna end...as for the dollar- so what? When we pull out of Iraq the dollar is going to take a huge hit anyway.
I'm with mai_neh - Rate cut once unemployment levels get to 5%, end of the year. And of course that will be too late to turn the titanic US economy from running into the iceberg.
The FED is always behind the curve, chasing the economy with tools that have 1+ year of latency built in, so when they react and react they overshoot because the reports are ancient history by the time they're released.
Humphrey-Hawkins Full Employment Act set goals for the Federal Reserve to achieve for unemployment. It basically defines full employment as 4%. We reached that in the 90's cycle but not this decade's, and I don't think we will.
But they should have tried, and there's no reason to let unemployment begin rising to 5%, 5.5%, 6%... before they begin lowering the floor.
Ah, here's the rate thread I was looking for.
I'm of the opinion that this country should learn how to make stuff again, and that it needs to kick its oil habit ASAP. A weaker dollar would help both, but as someone said upthread, it has to be part of a larger plan. There will be no larger plan until the cultural of finance and the financialization of everything (even GM became a finance company for a while) is destroyed. And the best way to destroy the culture of finance is higher rates (along with raising the capital gains tax rate).
So I say bring on the higher rates.
I suppose more complicated policies are possible: raise rates AND target a higher inflation level (or report the real level of inflation); lower rates AND tighten margin requirements, tighten lending standards, and tighten reserve requirements; or some other combination. No idea if a more complicated option could work.
I believe Ben will hold steady until the banks deplete about 1/3rd of their required capital. A true visit to the woodshed for ignoring risk premia.
Corporations will have to use their bounty o'cash for day-to-day operations instead of M&A & stock buybacks (a much more productive use of capital)
The street, hedge funds & the housing speculators who have made pantloads of money for half a dozen years will disgorge some of their winnings. If several investment banks fail, someone always picks up the slack.
The mortgage industry will regain its reputation of being a cyclical business. Houses will no longer be short term investments. If all state-regulated non-depository lenders fail, someone will pick up the slack.
Ben will do the right thing. The responsible adults will be making the decisions again at the Fed for the first time since Volcker. Two or three years of austerity to lay the foundation for prosperity.
Hey, that is kind of catchy. Go Ben.
What do I know, but I would say a step towards neutral might be in order. Otherwise, I agree with MaxedOutMama - the liquidity should return when lending practices are clearly better. It sounds like they are getting down to writing some decent standards this week, about 5 years too late.
The bond holders, banks, hedge funds, everyone holding the bad mortgage related bonds all need to take a HUGE hit here. They need to feel serious pain for investing their money poorly in a bubble, into assets which have ZERO productive capacity.... unlike the internet bubble which actually paved the way for a real change in commerce. Who cares if a bunch of LBOs die on the drawing board.
The US can import its way out of the problem -- if we import about 7 million rich people to buy the vacant houses. I am sure that Congress will be able to quickly pass a sensible immigration bill that everyone can live with.
Everyone voting for austerity is quite conservative, and most likely wrong.
Volcker was the last one to make austerity stick- and the country was on the edge of the abyss for the pols to give up the stimulation stick and let him pound the markets into submission.
Right now the political will for austerity is lacking. It is 1973- not 1979. The Fed figures that it can always raise rates if it needs to put a panic into the markets about inflation, but BB has bought his inflation fighting spurs, now he needs his containment spurs.
This crisis must be contained or it will spill over into the election cycle, and the Fed might just lose it's independence- a fate worse than death as Bernanke sees it.
Remember his words to Uncle Milton- Yes we did it, we are sorry, and we will never do it again.
Cut off liquidity at a critical juncture that is.
Spice must flow! Credit is the lifeblood of this economy- drops in the amount provided quickly transmit in terms of panic. Now we can't have panic, can we?
See what was done after 9/11 to provide liquidity.
Someday this war's gonna end...
No they won't and the idea has no merit.
I have no problem with a move to neutral, but a rate decrease at this juncture would be a capitulation to the markets and result in an institutionalization of the Greenspan Put. It would also wreak havoc upon the dollar.
I voted Yes but I don't think the Fed will cut until there's officially unemployment of 5% or more and that may not be until year's end.
The idea has plenty of merit if we believe the Fed should follow its mandate - full employment = 4%, not 4.6%
Oh, and since Ben won't be lowering because for one he can't be seen as relenting to the wishful calls of the Wall St brokers, we'll be entrenched in a bear market before we know it. Could be in one already.
Cut off liquidity at a critical juncture that is.
AllenM - I think a lot of us agree with that... but we aren't to the 'critical juncture' yet. Like banker said a few days ago... wait to see what the markets look like after Labor Day. Let the data speak.
The idea has plenty of merit if we believe the Fed should follow its mandate - full employment = 4%, not 4.6%
There is a million and one ways to fudge that one... depends on the meaning of 'unemployment'.
Agree with mp. However, I would have no problem with rate cuts if Dow under 12000 for more than a few days or in next month if credit markets are still a mess.
dryfly,
"There is a million and one ways to fudge that one... depends on the meaning of 'unemployment'."
Clarify? Is there not one single official BLS unemployment rate released by Washington?
Let's see, wee can fix a problem brought about by too much liquidity by adding more liquidity. Its just crazy enough to work... NOT!
Maybe I'm looking at this the wrong way but I don't see this as a rate problem. It's a risk problem. After vanishing for 7 years, risk is back with a vengeance. The 10 year is down recently yet mortgage rates haven't budged. It's the risk and the associated spread, not the base rate.
No cut, defend the dollar. We're screwed and there's nothing that can be done about it.
"oblivious to how bad things actually are" -- Bad for whom exactly? I find it difficult to think believe that the cure for the disease is more disease. What is the cure for that? Death?
China and Japan need exports to the US to continue for now. That won't go to plan if the US goes into a credit crunch recession. If I were running Chinese investments, I'd make sure to keep buying whatver assets allow US consumers continue to buy my consumer goods. Needs a little coordination, but what else is that little group Paulson set up for anyway?
Yeh, I know they may eventually lose X% of those investments, but that's a small price to pay for transforming your country in real, not just financial, terms.
So my guess is that there will be no catastrophe. Fed makes modest moves, and Treasury coordinates continuing asset purchases with FCBs (modified some to allow some repricing of risk).
FWIW
I'll really take attention when the Dow drops below 12,000.
Panic when it drops below 10,000.
Otherwise only the froth is being eliminated.
If "liquidity" is encouraging and/or propping-up the likes of New Century and the Wall St shops that purchased and sold off their worthless loans, then we need a new definition.
Nobody's buying MBS in the Secondary Market? Boo Hoo Hoo, cry me a river. Offer something for sale that isn't total crap, and you'll have plenty of buyers.
AllenM,
Not sure why you would want a rate cut to provide support to a market with flawed underpriced collateral, with credit enhancements sized by unrealistic rating models, only to reside in opaque CDOs that don't mark-to-market. Why don't we just resurrect Enron & Worldcom & let them go back to work?
Your logic escapes me. A broken market is locked, but you want to unlock it. As a jobs program? As a bailout for investors? You want the Fed to aid & abet the functioning of a flawed market. Don't listen to him Ben.
re inOrlando
"Humphrey-Hawkins Full Employment Act set goals for the Federal Reserve to achieve for unemployment. It basically defines full employment as 4%. We reached that in the 90's cycle but not this decade's, and I don't think we will."
I always thought that the act only required to Fed Reserve to report to Congress twice yearly.. So I looked it up a synopsis at
http://en.wikipedia.org/wiki/Full_Employment_and_Balanced_Growth_Act
Nothing there about the Fed having to do anything other than establish long term growth, promote price stability and minimize inflation.. Nothing there about precise employment targets on the Fed - on the President sure.. but the Fed is independent( theoretically ) of the President and I'd read the intent as being that the President should be allowed to establish state-run employment programs if the unemployment rate dipped and private enterprise wasn't able to step in.
My recollection is that the original charter of the Fed. did tell them to go for full employment but no numbers
This is just to keep things straight..
-K
dryfly! Nice to see you posting again -- we were worried!
IMO the Fed created this mess, and (with the help of those idiots in DC) have effectively painted themselves into a corner. They're walking a tightrope between inflation & deflation, and a rate change either way is akin to intentionally stepping off the rope. If they're as smart as everyone hopes they are, they'll sit tight until the rest of the world is ready to cut rates, too; otherwise, they'll just do what we've come to expect -- take a bad situation and make it infinitely worse by "doing something".
No matter -- a depression is unavoidable. It's not a question of "if", just "when".
Panic when it drops below 10,000.
Not me. I'll be celebrating, since by DIA puts will be kicking ass!
Clarify? Is there not one single official BLS unemployment rate released by Washington?
It depends on both defining who is employed (numerator) and who is in the workforce (denominator). Either can be fiddled. The bottom line is that the current low unemployment rate is as much due to the decline in workforce participation (which is highly unusual) as to post-2001 job creation (which has been poor compared to previous expansions).
A basic discussion of the problems of quantifying the unemployment rate can be found on Wikipedia under unemployment.
Clarify? Is there not one single official BLS unemployment rate released by Washington?
They've tinkered with the formula quite a lot over the years... typically by changing how the denominator in unemployment rate is calculated... the civilian labor force 'participation'.
Some say it understates unemployment some say it doesn't. Point is there is some debate over how good it is & while congress jaws the Fed over this - its mostly just jawing.
I mean if they didn't skewer Volker back in the 80s with almost 7-8% UE... I don't think they'll say much to Bernanke with 5% UE. H-H is pretty toothless.
sk,
Why not look up the actual Act? http://en.wikipedia.org/wiki/Full_Employment_and_Balanced_Growth_Act
"The Act set specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. By 1988, inflation rates should be 0%. The Act allows Congress to revise these goals as time progresses."
This provided a benchmark for future "full employment" at 4.0%. We achieved
dryfly! Nice to see you posting again -- we were worried!
I was not near the bridge when it went down - but like a lot of Minnesotans that work/travel through the city, it has complicated my life some. The last two days I was with my son at the U of MN just a half mile from the site... what a mess!
Civilization is paper thin.
From ShadowStats.com ...
The popularly followed unemployment rate was 5.5% in July 2004, seasonally adjusted. That is known as U-3, one of six unemployment rates published by the BLS. The broadest U-6 measure was 9.5%, including discouraged and marginally attached workers.
Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year. As of July 2004, the less-than-a-year discouraged workers total 504,000. Adding in the netherworld takes the unemployment rate up to about 12.5%.
Perhaps they ought to call U-3 the "core unemployment rate".
the crisis won't be like japan in 1990.
it will be like thailand/korea in 1997.
i.e. balance of payment crisis
itay - we aren't Thailand and the dollar isn't the Baht. Not to say there won't be difficulties but that's not a good analogy.
"The Act set specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. By 1988, inflation rates should be 0%. The Act allows Congress to revise these goals as time progresses."
And what's the recourse if it doesn't happen? Other than the H-H committee hearings & squawking?
RE:
inorlando-
"sk,
Why not look up the actual Act? Wikipedia, the free encyclopedia
Ful...nced_Growth_Act
"
Huh? that's the link that I had just given ! including the bit about the goals that the PRESIDENT had to attain..
How about this as a resolution between us - I read that to mean that the PRESIDENT has to do stuff, not the FED - you reckon it applies to the FED as well.
In any case since neither the Fed NOR the President has abided by that Act - with no consequences at that - its all a moot point.
-K
YES!!!!
If they're as smart as everyone hopes they are, they'll sit tight until the rest of the world is ready to cut rates, too; otherwise, they'll just do what we've come to expect -- take a bad situation and make it infinitely worse by "doing something".
Ya the rest of the world does factor in doesn't it? It isn't 1956 anymore. BTW - that's what's got them in the jam in the first place... being complacent with the world funding our excess...
There is going to be pain... tax increases, further currency erosion, price increases, job loss... not so much fun. This is not going to stay a purely Wall Street adventure.
There is going to be pain... tax increases, further currency erosion, price increases, job loss... not so much fun. - dryfly
There is very little real interest in stagflation. boo
Nobody appreciates! Me! ouch
But seriously, I'm the real (but not nominal) death of a party I tell ya. ba dum, ching
Take my oil, please! hiss
You've been a great captive (contained) audience. Thank you. Thank you very much!
I'm with Clyde above...don't lower rates to protect jobs and house prices that are supported by a huge fraud of crazy loans packaged and resold at made-up valuations.
Why would you want to perpetuate a system that's so broken?
I'm for inlicting some pain to at least reduce the moral hazard that is loose in our financial markets.
Why not have the Saudis and the big oil companies inject some liquidity in this market. They are the ones who got us into this mess. Lets tax Saudi Arabia and tax the hell out of the big oil. Lets get the blood money for our siblings who have died in IRAQ caused by Saudi manupilations. its easy , will just take the money from these criminals,pay off the rest of the world and live in our oversupply of homes.
Policymakers of the 1930s observed the correlates of the monetary contraction, such as deflation and bank failures. However, they questioned not only their own capacity to reverse those developments but also the desirability of doing so. Their hesitancy to act reflected the prevailing view that some purging of the excesses of the 1920s, painful though it might be, was both necessary and inevitable.
Remarks by Chairman Ben S. Bernanke
At the Fourth ECB Central Banking Conference, Frankfurt, Germany
November 10, 2006
http://www.federalreserve.gov/boarddocs/speeches/2006/20061110/default.htm
No cut.
A rate cut (aka Fed bailout via inflation of the monetary base) would signal that if you are a prudent, rational saver you are a fool in this new era.
Why should I ever save again if I know that this govt and it's puppet, wannabe independent central bank are just going to inflate my purchasing power away to pay for the sins of all those that instead chose to risk and spend without thought or care?
No Fed liquidity surge UNTIL it is clear that markets have corrected (think about the meaning of that word for a moment) and that there is enough recessionary momentum to clear the fat from this pig economy, containing wage pressures and keeping them from resulting in the evil of all evils...
The stagflation that results from a liquidity trap.
Printing more dollars into this mess won't cure the problems created by excess leverage, speculation and lack of saving for the future.
Stop trying to kill off the business cycle by abusing the trust that is so critical to the long-term functioning of a fiat currency based system. Once that trust is gone, it becomes very hard to regain.
Have we learned nothing from the 1970s???
Contrary to modern public belief, the Fed cannot and should not distort natural business cycles forever. Sooner or later, the pain comes home and the longer you delay it, the worse it becomes.
Stop being so afraid of economic downturns. Why exactly does GDP have to grow every freakin qtr anyway???
Why can't we regroup, retrench, retool and recover every once in a while?
We've survived them in the past and become stronger, more productive and more efficient as a result of each downturn. In the past, adversity has given our economy strength and fitness. More recently, lack of adversity has bred complacency and imprudence.
Inappropriate Fed cuts are like steroids. Short term gain, long term pain. It's not the natural way to grow and we need to get off the juice before our heart explodes.
No! This whole mess was caused by loose and unenforced lending standards (regulations are bad don't 'ya know). Now the market is going to enforce them with a vengeance regardless of what the FED does, or does not do. About all they can do at this point is make nice cooing sounds like you do to a child before they get a battery of shots at the doctor. They're going to have to sit tight and say "hey, if it was bad we'd do something, so since we're not doing anything it can't be that bad" in the hope that they can prevent a panic.
They should probably lower now, but on the other hand it will make foreign money flee. I stand where my mouth is, and will sell all my investments as soon as I see the fed lowering rates. When US goes into a recession and starts lowering, I might as well take short positions without the currency risk at this side of the atlantic.
If the Fed was going to help troubled borrowers they should calculate the risk of favoring a new increase on RE, CRE, LBO loan originations which may, in turn, be dangerous if lending standards get going like in the recent past.
All that "helicopter Ben" name calling has probably forced him to be tougher than he'd like to be.
You know your monetary system is a fraud when...
name calling can lead to real-economy havoc.
BSC has the cooties!
I'm impressed that this community did a STFU on "no names"'s comment.
I did too.
-K
"You know your monetary system is a fraud when...
name calling can lead to real-economy havoc."
Wait a second, I think that should be clarified. The above holds true only in cases where the name-calling is aired on domestic TV in an effort to boost Nielsen ratings.
They can't cut at the next meeting, but they can go neutral and cut later this fall. A cut would hardly help distressed home owners or potential buyers. It would lower the dollar and increase inflation. I agree with the Economist--sometimes a little squeeze is necessary. We are a record 51 months since the last 10% DOW decline. A 10-20% decline in the DOW is something that the economy needs to pass through every so often.
I don't really see anything that the FED can do to help housing. Usually the third year of a presidential cycle is the strongest for stocks, but this time neither the incumbent nor his vice pres is running and not even the pres cares about his numbers. We need a recession during the GWB presidency.
I am writing without reading the earlier posts and will read the rest of this blog this afternoon. My wife and I are off for a 100 km bike ride and need to hit the road at daybreak to finish before it gets too hot.
I thought Cramer was the head of the Federal Reserve. That makes him important right?
What the Fed should do? Leave rates the heck alone.
So the housing market is cratering, bring it on. It's welcome medicine for sick society. Don't forget that there is a silver lining, many young folks will actually be able to buy a home a prices they can afford in a year or so. Our landscape has been blighted with malinvestments, as another poster pointed out, there is no utility in empty overpriced boxes (other than for copper thieves and squatters, perhaps.)
The marketplace will rectify this situation, given a chance. The worst thing the Fed could do is to try to stop it, although its' likely too late for that. The only thing they might be able to pull off is to manage a more orderly decline, but that would prolong it on the downside.
Another thought. Although they were perhaps complicit it the credit bubble, I don't blame the Fed for the debacle unfolding before us. Yes they panicked after 9-11 and cut rates much lower than needed, but last I checked it wasn't the Fed governors who:
I could go on, but every bubble at it's heart can be clamed on stupidity, failure to undertand history, and a lack of ethics. Rather than blame the Fed, folks should take a good look in the mirror.
clamed =blamed
They definitely will not cut next week. As many have noted, the dollar will fall steeply if the Fed looks to be panicking, and that would be very inflationary. This guy is still living down the helicopter remark.
Gee the stock market is down what 6-7% from a recent all time high, still up nicely on a 52 week basis, unemployment well below its median rate over the last 50 years, and the Fed has to panic and cut rates in face of a $ that is already going through the floor. NOT Look the Fed will probably change the language a bit, move towards nutral. The current problem mostly stems from rates that were pushed way to low, and kept there far to long. Yes the next move by the Fed is probably down, but not until the 1st quarter.
"I don't blame the Fed for the debacle unfolding before us."
I do. Everybody else just responded logically to free money within a culture that values nothing other than money. If the Fed drives rates into dangerous territory - makes them negative in real terms - it has the responsibility to make sure that lending standards and the like don't fall by the wayside in the rush to put the money to use. Easy money applied to fixed-rate, fully-ammortized 90% LTV loans would not have created anything like the bubble we have now.
cut rates = defend reckless greed
I think it was deliberate policy by the Fed & the powers that be to create the current housing bubble but that is minor when looking at the global picture. The global differential in wages will take many years to play out. I think our standard of living will gradually drop while others rise. Hopefully it will not be an abrupt process. I think the Fed holds on Tuesday.
Whether or not you blame the Fed comes down to philosophy, I suppose. Akin to the "guns don't kill people, people do" argument, I would argue that easy credit alone doesn't create bubbles, you also need stupidity and greed. Nobody held a gun to the head of these fliptards who went out and overleveraged themselves, speculating that the party would go on forever.
The logical extension of "the Fed is responsible for the bubble" is that they are in control of my life too. I don't want to base my success or failure in life to be based on the decisions of a bunch of cranky old hacks.
Does that mean they had no role in the thing? Of course not, they were part of the problem. I just
don't see how we can completely blame them. That sounds like scapegoating to me.
dryfly: Civilization is paper thin.
read Collapse of Complex Societies. Pretty interesting archaelogy (more analytical, not doomsday-y).
Can't wait to read Collapse of Complex Securities...
At just about every level these are absolutely joyless times.
dryfly said: "...I think a recession is baked in, many here think it is baked in... but those debt markets don't think its baked in else deals like the Chrysler LBO would've been 're considered'.
Nor do folks like Seb or Banker here believe a near term recession is likely. There are many like them."
Just FYI, I've got the recession probability indicator (Wright Model "B") plugged into my stock-charting software. It's at 32%, and that's with a 12-18 month window.
Also, I don't see how we can be anywhere near a recession when the ISM manufacturing and services numbers are still in the 50's.
FWIW.
Sebastia
At just about every level these are absolutely joyless times.
Doesn't have to be. Unless you are really destitute there are lots of cool stuff to do for cheap. Think about it for a minute & you'll see I'm right.
Key is to not let mass marketers set your standards for 'joy'.
Also, I don't see how we can be anywhere near a recession when the ISM manufacturing and services numbers are still in the 50's.
I tend to agree with your analysis though believe things can sour faster than they have in the past... so while I don't see a recession NOW... I see how one could develop more quickly than say 12-18 months. The speed of this credit blow up as a testimonial.
But I'm going to have to see more concrete evidence of an immediate recession before I puke... too many times over the last few years we've seen the problems & they didn't fully blow up and everything kept marching ahead. I believe it can happen again though the credit crunch thing is the first tangible evidence (or symptom) that that some of the stuff I worried about (excessive leverage) will have real consequences.
But it's still too early to tell whether the problems are for real or how close they are to actually manifesting themselves into a contraction.
That's why I believe Ben needs to hold back for now - let the process unfold & the data speak. It's okay for us on a forum like this to speculate, it's a free country & everyone has an opinion. The fed on the other hand has real responsibility - it needs to act responsibly. I believe they will - for a change. They will cut - someday - but not until the data says its time... certainly not on Tuesday.
Agree with Kevin, the money supply is too high, running at more than 10.5% in the euro zone and about the same in England. This is a liquidity problem caused by total loss of confidence, the money is still here but no one wants to take the risk.
Cutting the rates won't help, it's too late, they should have been risen a LOT more to avoid the easy loans.
Key is to not let mass marketers set your standards for 'joy'.
Correction -- Don't let anyone set your standards for 'joy'.
I do not believe it was greed that caused the majority of people to buy homes, unless you want to call the "propensity to save" greed. People were trying to save for their future by purchasing the commodity that showed the most consistent gains over the last thirty plus years. Housing is far more understandable and useful than financial instruments. Most couples primary goal of saving is to buy a house. If you are getting only 2-3% in a bank and house prices are appreciating at 10% you are being priced out. This is exactly why the FED cheapened rates to stimulated the economy. To make dollars depreciate against real assets. It has been known for hundred of years when you cheapen the cost of money you increase the chances of speculative bubbles. Stocks were out, post Dot-com so where else were people left in their efforts to save? They were in a sense forced to buy or be left out. I know several people who have bought this year who still believe this is the only avenue left open to them. They are not of the mind set that they are going to get rich off their house. The speculator was always the marginal buyer.
BB's hands are tied. Regardless of what he does, short spiders and diamonds, long GLD and OIL. Take two Xanax and call me in 6 mos.
Correction -- Don't let anyone set your standards for 'joy'.
Correction noted and agreed to. Hey... wait does that include you!?!
NO rate cut. That just keeps the bubble going. We need targeted fiscal stimulus and tight monetary policy right now. Good luck with Congress.
A neutral monetary policy would be the best monetary policy.
Cutting rates aren't the answer. Some of the best economical times in this country was not all that long ago, with avg savings rates given was 5.25%, while avg home mortgages were at 7.5-8%. Feds Lowering Interest rates to their current levels is what started this whole mess.. Interest rates got too cheap and therefore profit for mortgage companies slumped, so they decided to take on more and more "risky" loans to make up the $$$$ difference. Now they all (and we too) are paying for it... DON'T CUT THE RATES.......
The fed has no choice at this point. It is jsut a matter of how f-ed they want the economy to get.
drbrightside