It's very easy to find Poole's true intent.

Ignore all the crap and spin-doctoring that comes out of his mouth. Instead, look at what he does.

However, it is a fundamental misreading of monetary policy to believe that the stock market per se is an objective of policy.

So there is no PPT??

THE TREASURY'S MISSING MINUTES MYSTERY - NYPOST.com

So, if there is a liquidity problem why is it the stock market skyrockets with the mere mention of a rate cut? Apparantly, someone has plenty of cash.

He's claiming that the fed lowering because they're responding to a weakening economy.

The fact that the market perceives (this action) as a savior, and so rallies; is not the intention.

So what changed last month vs this month ? Last month - no more lowering vs now "possible lowering".

Real economy does not move that fast.

Unless they're admitting that they're incompetent last month vs this month; there's no reason for the change in views.. unless..

The only apparent left is that DOW has dropped since last month; housing is still as bad as ever, i.e. it weakened at the same rate as last month.

Everyone knows that Fed lowering has a delayed effect on real economy. Claiming that one month you're done, next one you're not is bullshit - unless you're looking at another data (hint: DOW) and trying to influence it.

Banker,

Re. eTrade, agreed. However, the broader point that there may be a price for many non-trading assets that the owners are simply unwilling to accept seems intact. It certainly seems to be the case w/ housing. You know, sticky downwards and all as CR has been telling us. Perhaps CDO prices are also stick downwards and it just takes a little time to overcome the irrationality of the asset owners.

He should just save us all some time and say "Don't you idiots understand that what's good for Wall Street is good for America?".

Banker,
Didnt' you once tell Tanta: "What's something worth? That's easy. It's what someone will pay for it."
?

i have asked this question on several boards and would like to throw it out here. what if the fed keeps lowering rates and nobody borrows the money or the sub-prime crowd are the only ones who take the bait?

To specifically not answer your question:

The speculators and pro-gamblers will always be there to borrow the money when nobody else is.

People are starting to figure this out, and that's why Poole has to get up and say they don't so he gets to keep his job.

OK Banker,
there is no PPT the way people think about it

Does the Fed [or what i call PPT] directly intervene to stabilize the stock market?

Cali: "Expect more cuts. Dollar be damned."

Have you been watching the dollar the last couple days? Even with the supposed confirmation of more cuts to come? I don't think the Fed is worried about inflation...

I wonder if this was partly motivated by the Fed contemplating the embarassinng prospect of a negative GDP reading while the stock market is setting new highs.

That might finally tip people off that they broke the financial system.

No chance of a negative GDP reading. Negative deflator? Well, yeah, that sounds plausible.

Thanks Banker.

Stick to the facts:
First, AG tells Congress to reduce our inflation measurement by 25%.
Then,AG tells Congress to deregulate our financial sector, but he does NOT mention putting in place single body oversight.
Then, the FED starts the printing presses.
And lastly, the FED stops counting the money it's printing.
Enough said?

What is "Mellon’s liquidationist view"?
GRL | 11.30.07 - 6:26 pm | # Andrew Mellon was Herbert Hoover's Treasury Secretary. Advised Hoover to let the downturn and subsequent purge/liquidation of assets to run its course. I believe that is "Mellon's liquidationist view".

Nemo,

The issue that you have not addressed is the Fed being gamed by market participants, whether willingly or no...

I KNOW I am not hearing "The right price is the market price except when I declare the market to be broken in which case it is the price I want it to be."

Banker,
I'll agree that the market is broken. That is because no one knows what's for sale. What's in those instruments? Those mortgage files? What is the real magnitude of fraud??Plenty of steaming piles to go around. Time will tell all we need to know at the macro level, but that will take years. Can the market wait?

I'm off for now.

So the logic is as follows

1. The Fed cannot act to burst an asset bubble because they are impossible to recognize in advance.
2. if and when an asset bubble does burst, the Fed can and should act to prevent any contagion to the general economy by injecting liquidity.

This policy can only work if asset bubbles only distort the economy when they burst but do not contaminate other parts of the economy on the upside. Clearly this is not the case. The end result is that the Fed is trapped in a cycle of ever larger asset bubbles and massively distorted capital allocation metrics.

banker, I agree that the market is broken, but not for the reason you mention. It is possible, and even likely that these CDO structures have negative equity value. If buyers are not prepared to pay zero, then maybe that is because the asset price is lower than the debt taken onto the structure.

Of course, I am not saying that anyone has to sell for that "price". I am saying that, a "broken" market is not in itself a reason to justify current fed policy. If the buyer won't buy at any positive price, then those that are desperate to sell as a result of their own irresponsibility, will have to bring cash to the table just like a short sale. That's a merket and we can use as much circular logic as we like to deny "market" and avoid its logic, but its not responsible and its not capitalism. Its dangerous BS.

I KNOW I am not hearing "The right price is the market price except when I declare the market to be broken in which case it is the price I want it to be."

Suppose nobody is willing to buy something for more than $20. Suppose nobody is willing to sell it for less than $80. Suppose this condition persists for weeks, then months.

What would you say is the market price? Why? (For example, suppose the "something" wasn't mortgages, but food...)

barely --

Nemo, Where was the fed since 2003 when they were tasked with regulating the financial markets and keeping inflation risks under control.

It is not at all clear -- to me, at least -- that they failed in either objective, never mind deliberately. The inflation measure they target has done fine, and the REAL banking system has not suffered any systemic regulatory failure that I know of.

If its needed, they will cut rates all the way to 0 . The Poole indicator says 50bps cut in Dec.

Where can i open a carry trade account?

So Nemo, how and why did we get where we are now?

The Fed held rates too low for too long and fueled a speculative bubble in housing and related derivatives. That bubble is now bursting.

Does I get partial credit, at least?

Clearly, you don't get anything we are talking about.

Of course I get what you are talking about. I just do not think it's that bad -- yet. And I certainly do not think it was the result of any conspiracy between Wall Street and the Federal Reserve.

There is always a contingent of noisy people who focus only on the negative, and treat every negative piece of news like it's the end of the world. (They tend to get loudest near the turn of each century, but they are always there.)

The reality is that life today for the average person is much better than it was 100, 50, or even 20 years ago, and every economic contraction since the Great Depression has been less wrenching than the last. And yes, the U.S. is the most productive economy in the history of the world. That is not blind cheerleading; it's fact.

Are we headed for a recession in the next year? Probably. Will stock prices go down? Of course, sooner or later. Is the whole system heading off a cliff? Always possible, and there are always (the same) voices proclaiming it, but it is unlikely.

We shall see in 2-4 years.

Well after Kohn repeated that they are Wall St's btch and Bernanke said-"what he said ", Poole adds " and don't you forget that we are Wall Street's btch".

The strangest things is that they gave away control over debt/credit-money a decade ago - and when I look at what they ACTUALLY can do - money creation - by monitoring the AMB, their temporary and their permanent operations they are not actually doing ANYTHING of any significance.

The puzzle then is why they have to loudly proclaim they are Wall Street's b*tch when there is no real action, just virtual stuff - like porn on TV or x-rated chat.

Its truly strange. But the fear that one day they will actually translate their online chat to r/l means I get even more out of the US $.

-K

So why has the dollar been up these last few days when it's become clear that we're in for another cut in December?

That is the 64K question. The technicals on both the US dollar and gold suggest that the former is about to stage a reversal up and the latter is gonna tank.

Has anyone considered the possibility that (a) Poole is saying what he means and (b) knows more than you do?

Well, that's true of most people on this blog. Surely they know more than I do and usually they mean what they say, but that doesn't mean they are correct. I think the same could be said of the Pope, but he's not going to convince me to follow his lead either. Hell, you could say the same about Hugo Chavez,...

let us not forget the great John Stewart interview with AG in which AG admits we wouldn't need a Fed if we were on the gold std. he tries to finesse that "people" wanted to go off gold in 1930 b/c it was strangling the system but this isn't factually correct. we went off in 1972 b/c Nixon and the banking system were losing all our gold b/c of chronic budget deficits.

Stewart nails AG on so many pts i cannot help but laugh. in another of his interviews recently he admits that the political pressure from gov't fiscal policy is imnmense and can influence monetary policy always in one direction, lower rates.

the Fed system favors the wealthy speculators no question.

Greenspan Cracks a Joke and Breaks It Down - Real Time Economics - WSJ

"...that there has never been a chance for one in the last decades nor will there be one for decades to come."

I disagree with you Joe, I have no idea what the chances are, but they are a lot higher today than they were 20 years ago. That's why I think the Fed had better be vigilant and not pay attention to their detractors.

==========================
If everytime the stock market goes down the Fed cuts rates, how can investors bet against it?

Isn't it a losing bet to short stocks if the Fed is directly telling the public that it has to inflate stocks in order to offset the housing crash?

Duck & Cover

You should only play the shorting game being fully aware of the powerful institutional and "custom and tradition values" forces ranged against you. That includes the Fed, the idea that stable prices ( including asset prices) is a "good" thing and that bankruptcy, foreclosure are "bad" things.

The thing is that it still works DESPITE these forces. In the present situation strategically,I'd say we have the Minsky moment(The New School for Social Research :: Departments :: Economics :: Profiles
. Other ways of putting it is that the Fed can offer as much money as cheaply as they like but if the assets you can buy with it don't look like a good bet and they don't at the moment - you've heard of the economic slowdown - then few people will borrow.

Short-term, I think that since the S&P didn't break 1490, the market action today wasn't that hot considering ALL the good news and that its the end of the month, two day settlement periods notwithstanding - seasonality buy patterns included - I reckon we've just had the Xmas rally. Now we'll get the end-of-year tax loss selling. But that's just in-n-out wham bang trading - lots of excitement but nothing like a marriage. For THAT, stick to the strategic view and IMO, the Fed truly cannot do a damn thing about it( short of inflation but you can watch the AMB, the temporary and permanent operations and cater for that. If you feel truly adventurous you can also look at their weekly Assets and Liabilities report
FRB: H.8 Release--Assets and Liabilities of Commercial Banks in the US, Release Dates
).

Enjoy. Its all fun - all the venal aspects of humanity, including mine , are compressed in this stuff.

-K

Regarding Mellon's "liquidationist view", as I understand it this was ignored by Hoover. Hoover instead tried for voluntary agreements with business to maintain wage levels (something that sounds eerily similar to the current talk of freezing loan rate resets, something likely to succeed about as well) as well extending loans to businesses and later embarking on some New Deal-style programs public works programs. (Someone who knows more please correct me; my knowledge of this time is still spotty.)

I personally think that Mellon's strategy of "liquidate everything, and let more competent people pick up the pieces" would work if confidence could be maintained. (This was not possible then, as the FDIC was not around and the gold standard limited the Fed's ability to print.) The existence of the FDIC now, backed by the Fed's printing presses, may be sufficient to address this, especially if "known clean" banks are able to take over accounts in short order. I suspect that's a bet that few are willing to take.

What price the SIV's or the CDO's. Well its between -100 and +100 depending on the asset value of the MBS tranches and the level of debt that sits within the structure. I would bet that there would be a lot of buyers if the current owners of a CDO or SIV sold for 0 with a cast iron guarantee of the debt within it (that's the -100 price). That's a price, isn't it? what am I missing? we know the price of the ABS index by tranche (input A), we know the debt held in the structure (input B), surely the price is A minus B. Is this wrong?

If you split hairs by saying that e*trade is not a market transaction because its more like a divestiture, then why not call the short sale of a house with a "bring money to the table" closing a restructuring, but not a market transaction.

O'Joe- I understand that the Fed will act to save the system and I even get why they would do it to prevent systemic collapse. I am worried that the Fed is now 10 years into a cycle of bubble, collapse, bigger bubble, bigger collapse and that it has so capitulated to irresponsible financial interests that it can't escape. Everything they say sound more ridiculous and illogical to justify this stance. The end conclusion will be an uncontrolled collapse that the fed has made worse because it will have sacrificed its credibility to one interest group. At soe point the fed will have to say no to more rate reductions. If they did that now, we would see chaos in the market, but at least the Fed would have some fire-power in 2008 when the real liquidity crisis hits.

I get the feeling there are people here who think in an analogous fashion to Cramer and expect the Fed to sit by and watch to protect their own short positions....
Bob_in_MA

come on Bob. have some spine and defend your own position. the Feds actions should be symmetrical; defend against bubbles and then they can defend against deflation. they've stood by and done nothing leading up to this and look whats happening to the system. so many distortions and bubbles in the system that its threatening Florida pension plans, money markets via SIV's, savings accts via bank BK's (Netbank et al), record individual BK's, multidecadal records in poor housing performance. what more do u want?

shortsellers actually provide a crucial function to free mkts via a floor when stocks get oversold and we cover. if the Fed keeps destroying shorts the system becomes unbalanced and results in worse distortions.

There was one sentence in Poole's speech that I want to highlight because it jumped out at me:

"Exactly the same argument applies to central bank actions in response to events or shocks that might drive the economy into recession or into an unsustainable boom."

The last part is what's noteworthy. The entire speech talks about how the Fed should not sit idly by while a financial crisis and/or asset liquidation phase threatens the entire economy. Then in this one throwaway line, Poole seems to imply that the central bank should and will react to events or shocks that might push the economy into an "unsustainable boom." But when in the history of mankind (or at least the last 30 years) has the Fed acted as aggressively to prevent asset bubbles and unsustainable booms as it has to prevent asset busts and/or recessions? The answer: never.

As the dot-com/Nasdaq boom crossed over into bubble land, there was no super-aggressive rate HIKING campaign like there was a rate CUTTING campaign after the bust. Yes, rates were raised, but at nowhere near the pace and magnitude they were cut by afterward.

And as the housing boom (begat by -- you guessed it -- the post-dot-com bust policy of extremely low rates) crossed over into bubble territory, did the Fed attack it with gusto, either on the regulatory or monetary policy front? No. We got a bunch of mealy-mouthed "guidances" that said "You know Mr. Banker, 100% LTV mortgages to janitors with 500 FICO scores, six 'investment' properties, and a strong desire to 'state' that they earned $200,000 a year aren't exactly a good idea." -- but which had no teeth. Nor did we get 50 basis point "surprise" hikes right after news came out that home prices had jumped at 14% YOY rates, or that the MBA's loan application index had jumped another 10% in a week. Instead, the Fed dragged its feet forever before normalizing ratse. And then when it started the process, it did so with a bunch of always-telegraphed, "we promise never to hike more than 25 bps at a time" moves. The result was the asset bubble wasn't nipped in the bud early enough, virtually guaranteeing a painful bust.

In other words, the real problem/moral hazard the Fed creates is simple: It does NOT act sufficiently to prevent asset booms from becoming asset bubbles, with all the attendant economic consequences. But it DOES act each and every time one of those bubbles pops ... thereby perpetuating the boom/bust cycle. That's the real problem with the Fed's policy approach and logic, in my view.

I got into Beanie Babies big time, but now I'm not getting any acceptable bids! Come on, Daddy Poole, save my assets!

Why doesn't the Fed just expand their scope and ensure that no business enterprises fail? That would only be fair I think. I wonder how that would turn out?

This system will destroy itself eventually. This an objective fact.

Journeyman: I KNOW I am not hearing "The right price is the market price except when I declare the market to be broken in which case it is the price I want it to be."

That's the whole problem with this mess. As long as everything is fine, they suck billions out of the system with "sophisticated" statistical models of price movements. But as soon as the black swan comes, it's time for Joe Public to pick up the tab. It is a crime against the public good. Eventually, the asymmetrical gaming of the system will lead to such a large Gini coefficient that Joe Public will fix the problem -- the old fashioned way.

"Poole's Law"

The more obsessed people become with the Fed and what Fed governors say, the closer we are getting to economic meltdown.

O-Joe said, "Oh, please. Now it's the FED's fault that all the absurd bear dreams of a next Great Depression have not materialized? Stop the whining and start waking up to the reality that there has never been a chance for one in the last decades nor will there be one for decades to come."

O-Joe, you sound extremely intelligent making such a bold statement about past decades and about future decades too! Thanks for putting my mind at ease.

I wonder though...

Why in this decade did the Fed drop rates to 1% and make reassuring speeeches about money raining down from helicopters? Think perhaps they detected a chance of a deflationary depression?

Why today do we seeing rising homeowner defaults, massive write-offs by financial institutions, all WITHOUT any significant loss of income by businesses or households (yet!), but immediately BEFORE an imminent recession? Don't you think maybe their fear of a deflationary depression is exactly why they are lowering rates in the face of a dollar collapse and obvious signs of exploding commodity inflation?

Truth is, I think it's you who puts too much emphasis on the Fed if you think they are the wild card that can trump anything else in the financial deck of cards.

A traditional bailout involves governmental assistance to a particular firm, group of firms or group of individuals. For ease of exposition, I’ll concentrate on bailouts of firms, but the same issues apply to bailouts of households. There may be occasions when a government infusion of capital to save a firm is justified, such as a bailout of a major defense contractor during wartime. However, most economists believe that bailouts are rarely justified and only in compelling circumstances should the government bail out individuals or firms.

No, you monetary hack, the real bailout is your manipulation of the price of risk. It is a much more subtle and indirect bailout of the financial system as a whole. It is not about specific firms, it is about the economy as a sustainable ecosystem and the sum total accumulation of your interferences. Much like a feeding wild animals, preventing failure among banks will lead to disastrous consequences. Your pet bear outside is getting hungry and you are running low on berries. You decided to "innovate" in your berry patch and came up with a lame crop. You are about to find out how much hungry bears don't like eating stone soup.

"Money is much too serious a matter to be left to the central bankers." --Milton Friedma

"The way you keep the macro conditions sound is by not fostering the conditions that create the unsoundness in the first place."

I agree.

I hate to come up with such a solution since I am capitalist in my core but instead of reducing rates they should have hiked them to make sure that only the fittest survive. At the same time they should have taxed those who over years made profits from this situation. A guy like angelo should be left with the ability to rent a modest apartment in the inner city and nothing more....

Banker, I changed few words in what you wrote and got this:

"Look at the media in the last few years and try a thought experiment. At what price would you NOT buy a house ? Who would dare advocate a strategy other than "Buy as much house you can afford after stretching out as much as possible" Sometimes it just isn't about price. In my mind that is the definition of a broken market.

Banker,

"How's that working for Chuck Prince, Stan O'Neal, Warren Spector, Zoe Cruz etc. Sheesh"

It works very well for them.

If being sacked after making millions is bad - how do you describe good ? maybe keep on working and working and not taking a vacation ?

These people don't just desrve to be sacked but those who caused this mess need to have their money taken away from them. If this was done only at that point I could say that it did not work well for them.

By stopping these foreclosures the feds are inhibiting future growth. If couple of million home owners are up to their eyeballs in depth and will continue to live that way for the rest of their life, discretionary spending by these people will be constrained.

If they are allowed to foreclose, they go rent for couple of years and then their 'fico' score is enhanced. This will allow them to start borrowing and spending like nothing happened.

A few observations about some comments/ideas expressed throughout the thread -

The whole discussion of "the market for these securities is broken" vs "no it's not - there are no bids or no one wants to sell at the prevailing bid price" is pretty moot.

The end result is the same. There isn't a mechanism in place offer price discovery. It does lend some weight to the argument for a central dealer on a regulated exchange - something that both the regulators and IB's have been trying to kill for sometime now.

If these securities were traded on an exchange, priced continuously by a market maker/specialist who had a firm quote obligation with visible bids and offers for the world to see and centrally cleared this discussion wouldn't be taking place - or the discussion would rather be about "Wow can you believe so and so had that big of a position in this stuff?"

Reg NMS for stocks is going to be long term bad for stocks - the whole concept of dark pools, less transparency, and fragmented liquidity is net bad for the markets -though its a win for IB's who can internalize order flow all day long...

Not too long ago there was a story about Merrill Lynch having an OTC hedge to protect their mortgage positions and the hedge didn't quite work out as planned because of a "disagreement with the counter-party".

That right there is why the market for CDO's and related securities is broken - no one believes their potential trading partners will be able to fulfill their obligations - a huge problem for OTC transactions.

End rant.

Mike in FL, 8:44pm

I suspect Poole is not talking about interventions to head off sector specific bubbles but, instead, is referring to target rate increases intended to cool an overheated economy - something the FOMC has elected to do many times in my lifetime.

It would be news indeed if he were signalling that the housing or dotcom bubbles were to be the last of their kind. But I'm fairly sure that's not the case here.