Martin Feldstein on the Housing/Credit/Economic Mess

Regular readers know that I am not a fan of the WSJ Op Ed page. In addition to their playing fast and loose with facts, I find their rhetorical tactics intellectually dishonest. I also suspect that excessive usage of the drug exctasy has left most of their editorial staff crispy remnants of their former selves, subject to frequent delusional flashbacks, delirium tremens and incontinence.

But I must put those intellectual reservations aside and direct you to Martin Feldstein‘s utterly dead on piece in today’s Journal. In a straight-forward, no nonsense manner, Feldstein perfectly sums up how we got to where we are today:

"Three separate but related forces are now threatening
economic activity: a credit market crisis, a decline in house prices
and home building, and a reduction in consumer spending. These
developments compound the general weakening of the economy earlier in
the year, marked by slowing employment growth and declining real
spendable incomes.

The current credit market crisis was started by
widespread defaults on subprime mortgages. Borrowers with poor credit
histories and uncertain incomes had bought homes with adjustable-rate
mortgages characterized by high loan-to-value ratios and very low
initial "teaser" interest rates. The mortgage brokers who originated
those risky loans sold them quickly to sophisticated buyers who bundled
them into large pools and then sold participation in those pools to
other investors, typically in the form of tranches with different
estimated degrees of risk. Many of the buyers then used these to
enhance yields in structured bonds or even money market funds.

Many subprime borrowers eventually had difficulty
making their monthly payments, especially when teaser rates rose to
market levels. The resulting defaults exceeded what investors in the
mortgage pools had expected.

Credit risk in financial markets had been underpriced
for years, with low credit spreads on risky bonds and inexpensive
credit insurance derivatives provided by investors seeking to raise
their portfolio returns. With such underpricing of risk, hedge funds
and private equity firms substantially increased their leverage.

The subprime
mortgage defaults have triggered a widespread flight from risky assets,
with a substantial widening of all credit spreads, and a general
freezing of credit markets. Official credit ratings came under
suspicion. Investors and lenders became concerned that they did not
know how to value complex risky assets.

In some recent weeks credit became unavailable. Loans
to support private equity deals could not be syndicated, forcing the
banks to hold those loans on their own books. Banks are also being
forced to honor credit guarantees to previously off-balance-sheet
conduits and other back-up credit lines, further reducing the banks’
capital available to support credit of all types." 

Feldstein notes what many TBP readers will recognize as big themes: The significance of housing to the prior "boom," the ongoing risk of inflation, the dangers a slowing economy presents, and of course, moral hazard.

We have seen and heard a lot of anti-free market, who-was-Schumpeter-anyway?, begging for a Fed bailout. Unlike that group of socialist whiners, Feldstein makes the most eloquent and persuasive case I have yet to come across . . .


Liquidity Now!
WSJ, September 12, 2007; Page A19

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What's been said:

Discussions found on the web:
  1. Barry Ritholtz commented on Sep 12

    Note my own usage of distasteful rhetorical trickery.

    That was ironic parody on my part!

  2. Mr. Beach commented on Sep 12

    Feldstein makes three unforgivable mistakes in his piece.

    1. He fails to implicate, condemn, or even criticize the Fed’s fearful lowering of the Fed Funds rate to 1% and holding it for so long.

    2. He fails to even consider the asymmetrical response of ignoring bubbles on the way up and somehow discovering them and “curing” them with liquidity on the way down.

    3. And most egregious, he says: “Today’s 5.25% federal funds rate is relatively tight in comparison to the historic average of a 2% real rate.” This statement would elicit a sharp red pen rebuke in any Macro 101 course. By attempting to contrast a nominal 5.25% rate with a real 2% rate, he is being either a)intellectually dishonest or b)dumb.

    BTW, the title of his piece is “Liquidity Now!”.

  3. Barry Ritholtz commented on Sep 12

    Fair criticisms —

    What impressed me was his frank recognition of our favorite issues

  4. wally commented on Sep 12

    The bone I’d pick is: he does not mention the house price bubble. He talks about falling house prices as a problem… but they are falling because overpricing is a more fundamental problem. In that regard, Mr. Beach, who posted previously, is right: the Fed holding the rate too low is the bedrock issue from which all else sprang.

  5. MT57 commented on Sep 12

    I don’t know, Barry. The piece has a bunch of big-picture generalizations and no data. I didn’t find it persuasive for that reason. He could be right,I don’t know, but just not persuasive.

  6. David Pearson commented on Sep 12


    Mr. Beach (above comment) is the one that has it right on. If this man had been tapped by Bush, the Fed would be cutting 100bps next week. Is that really the cure, or is it the disease?

    We get daily servings of platitudes from our monetary authorities and their posse. Mervyn King at BoE has his faults, but contrast this statement with Feldstein’s dribble:

    “The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,” King said today in written testimony to the U.K. Parliament’s Treasury Committee. “That encourages excessive risk- taking, and sows the seeds of a future financial crisis.”

  7. Joe Klein’s conscience commented on Sep 12

    Does Feldstein realize what would happen to the dollar if they cut the Fed funds rate to 4.25 as quickly as he likes?

  8. CT commented on Sep 12

    Barry, you surprise me.

    As highly regarded as Mr. Feldstein is, he obviously fails to understand what is really at work here.

    His editorial and similar such claims will ultimately tarnish his reputation. He would do well to remember Irving Fischer.

    Housing “demand” was artificially stimulated based on unsustainable factors. As such, prices rose in kind, also to unsustainable levels.

    The primary factors were low interest rates and loans which never should have been made in the first place – and won’t be going forward, regardless of the rate of interest.

    Unfortunately, as house prices rose to these levels, many households not only levered themselves based on these unsustainable values, but also, as is human nature, conducted their personal financial affairs as if this new found wealth was permanent. That manifests itself in many other ways, not simply is home equity loans, but importantly in spending and behavior patterns.

    Housing has reached what I call “Maximum Differential”. That is the distance between wages and prices. At this point, either wages must rise substantially, or prices must substantially. Given the paradigm shift in labor pools to Asia, et al., wages have an effective ceiling absent protectionism.

    Lower interest rates are not going to alter that fundamental outcome. What Mr. Feldstein and many others are going learn, as Japan did, is that these problems are interest rate insensitive now. Therefore lowering interest rates, even assuming we can do so without any untenable ramifications with the dollar, will not have the desired effect, and rather will only prolong the problem. In fact, what lowering interests rates will actually do, is make the problem much worse over time.

    One important factor completely lost by you Barry, and all others in the discussion on interest rates, is what the long term destructive effect of artificially low interest rates will have on the pension system.

    The pension system will ultimately implode because of these extended periods of low interest rates. Higher real rates of interest are necessary for the pension system to work over time.

    The reason is simple. A certain amount of today’s wealth must be taken through interest to build a sufficient sum for future use. These low rates are not sufficient. I pity the President when that bomb begins to explode.

    The fact that this most crucial issue is completely ignored is a sad commentary on the system itself, and the so-called market “pundits.

    What is needed now is to allow the free market system, to do it’s natural work and supply and demand be allowed to rebalance, however painful, in a sustainable and viable economic manner. Despite the wishful thinking of many, money is never going to be dropped from helicopters. Anyone who truly understands the world knows this to be true: 99% work for 1% to have all the wealth. It has always been that way, and always will be that way.

    In the late 1800’s an acre of farmland sold in Britain for $ 100. By 1940, it was selling for $ 10. That is but one of many historic examples that prove beyond and argument that real estate values, can, have and will have substantial increases and DECREASES in value.

    For those looking for a bottom, they had better look at 50% + devaluations before they can expect to find one. What is truly amazing is the reliability of human behavior – how so many smart people can be blind to what, for them should be plain to see and understand. Especially a man of Mr. Feldstein’s caliber.

    Mackay explains this in his book “ Extraordinary Popular Delusions & the Madness of Crowds”, which should be required reading for all so-called “economists” and market “pundits”.

    Irving Fisher is a contemporary lesson that obviously has been forgotten – and certainly by Mr. Feldstein.

  9. DavidB commented on Sep 12

    Sounds like the same type of fading outrage that was prevalent during the dotcom explosion. Why is it these guys can always recognize with laser precision the problem after the horses have left the barn and yet are found to be cheerleaders all the way up the cliff and half way over?

    What is the motive for them when they realize the obvious? More regulation and restriction of the common man? Regime change?

    All I know is that I have become accustomed to and very tired of the MSM barking at the crooks after they have cleaned out the house and being perfect lap dogs and chomping on the free steak while the house is being ransacked

  10. JS commented on Sep 12

    I concur with Mr. Beach. The Fed is not taking blame where it should, and critics are not holding them accountable enough. The Fed held rates too low for too long. It ignored a dangerous asset bubble. The Fed not only ignored the bubble, they fanned the flames. Recall that just less than two years ago at the height of the real estate bubble Bernanke was claiming that meteoric home price appreciation was supported by fundamentals. And let’s not forget the infamous Greenspan out there recommending ARMs when borrowing rates on fixed loans were incredibly low. He could have been out there investigating risks in lending practices and so-called “financial innovation”, but instead he’s cheerleading for Wall Street. Then of course the Fed trots out their moronic claim that one cannot spot asset bubbles yet somehow they can spot asset prices supported by fundamentals?! If you can’t spot a bubble, then you can’t recognize its absence either. Why on earth should the Fed be around if it cannot even perform simple economic tasks? Why would we possibly want a group that can’t even figure out if housing prices had strayed from norms based on numerous metrics, that were available to anyone who didn’t have their head way up their ***, to be in charge of the stability of our currency? Would anyone seriously hire one of these people to work for you in your own business after such a demonstration of incompetence and ignorance? I know I wouldn’t.

  11. Howard Veit commented on Sep 12

    I have a Ph.D in home invasions from San Quentin and a MA in Jewish studies from a madrassa in Syria, but I must comment on the term “Moral Hazard.” Now to me, Moral Hazard means “what do I do if my wife finds out?”; What do I tell the cops when they find that powder stuff in my trunk?; and things having to do with cheating on my taxes for ten years straight. Where was the “moral hazard” when we bailed out Chrysler and Lockheed? Where was it when we bailed Chicago’s Continental Illinois Bank, plus a dozen of S&Ls “because they were too big to allow to fail?” The answer is that when the economy is really threatened we just hold our noses and do the obvious. We cannot afford the million plus construction layoffs, the several millions in foreclosures, or the drying up of the credit markets. We have to let these homeowners off the hook. Period. Because if we don’t we are all going down with them. They are a collective “too big to fail” and we better wake up, hold our noses, and risk our morals, whatever the hell they are at this late date.

  12. Philippe commented on Sep 12

    The venerable Mr Feldstein omitted to mention

    The private USA non-financial debt domestic, skyrocketing from 60 Pct of US GDP (1950) to 177 Pct now!.

    The total USA credit market, moving exponentially from 130 Pct of US GDP to 330 PCT now!.
    The other debt pick was only of 255 Pct of GDP in 1928/1929.

    These figures are with no doubt known by the National Bureau of Economic Research since long.

  13. Murray R commented on Sep 12

    Mises was right. Damn!

  14. VJ commented on Sep 12

    (And DOWN the stretch they come !)

    Ohio Attorney General “Prepared To Sue” Ratings Agencies

    STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: There’s a lot of finger pointing these days at just what caused the meltdown in the mortgage market. Ohio Attorney General Marc Dann says the credit rating agencies deserve a fair share of the blame.

    VOICE OF MARC DANN, OHIO ATTORNEY GENERAL: If there was no market for fraudulent mortgages, mortgages where the appraisal of the house far exceeded its value or mortgages where the homeowner had no hope of ever repaying the loan, that it was their willingness to buy those loans that caused Ohioans to be defrauded out of their houses.

    DHUE: Along with state attorneys general, the Securities and Exchange Commission and state security regulators are asking questions. At issue, whether the agencies have a conflict of interest since they are paid by the companies whose deals they rate.

    In the meantime, regulators and prosecutors will be holding the agencies accountable. Ohio’s attorney general says he’s prepared to sue the ratings firms to recover damages for people in his state who lost their homes.


  15. me commented on Sep 12

    Credit of the big three rating agencies under fire

    By Arturo Cifuentes

    Published: September 12 2007 03:00 | Last updated: September 12 2007 03:00

    The credit crisis has raised the profile of the rating agencies and the possible role they played in creating the current mess.

    They have been criticised for the accuracy of their ratings and have been accused of facing conflicts of interest because they are paid by the issuers whose securities they rate.

    Unfortunately, it has become apparent that many investors and most pundits do not understand what ratings mean and how the agencies work.

    First, some necessary background. Ratings reflect credit risk, that is, the ability and willingness of a party to repay a debt. They imply nothing in terms of liquidity, potential for appreciation or volatility. Thus, an investment decision based only on ratings is misguided.

    Essentially, there are only three main rating agencies: Standard & Poor’s, Moody’s and Fitch. All three rate bonds using a nine-category scale which they label differently. S&P and Fitch go with: AAA, AA, A, BBB, BB, etc, while Moody’s chooses: Aaa, Aa, A, Baa, Ba, etc.

    Most people think that AAA/Aaa means foolproof, BBB/Baa denotes something riskier, and CCC/Caa spells trouble. Reality, however, is more complex. First, there are many ways to measure credit risk; and second, S&P and Moody’s do employ different approaches to measure it. Thus, they attribute different meanings to seemingly “equivalent” rating categories.

    Now, the confusing part: S&P rates are based on default probability. For example, a 10-year collateralised debt obligation bond with a BBB rating reflects a 7.1 per cent default probability. Moody’s goes by expected loss. Expected loss, to make things more challenging, is calculated as default probability multiplied by severity of loss.

    So, what can we conclude from these observations? Well, although ratings imply an objective standard (in terms of default probability or expected loss) that in itself is meaningless. The key thing is the set of assumptions behind the analysis. Some of these assumptions are sound, others less so. Hence, taking a rating at face value (unaware of the assumptions behind it) is unwise.

    The agencies differ not only on the definition of each rating category, but also on the computational methods used for their analyses. Therefore, there is no reason to expect a one-to-one correspondence between Moody’s and S&P ratings. In practice, however, the degree of agreement, category by category (AAA and Aaa, etc), is extraordinarily high. This degree of agreement seems strange.

    Finally, the crucial point: the rating agencies enjoy a power that goes beyond what regulators probably intended and, even worse, understand.

    Whether a bond gets an investment-grade rating or not is critical. In some cases this prevents certain investors from buying the bond; in others, it forces the holders of the bond to sell it.

    Therefore, what is frightening is not only that the agencies determine if the bond meets the BBB/Baa standard or not, but also the fact that they define that standard.

    Granted, these issues might sound arcane. But grasping them fully is an essential requirement for any enlightened conversation aimed at improving the current environment.

    At the very least, the following topics should be addressed:

    *The fixed income markets are global in nature; who should oversee the rating agencies – a US regulator or an international entity?

    *What should the regulator regulate? The right of an agency to exist? Or the methods of analysis employed?

    *Are the rating agencies truly independent from one another?

    *Under the current regime, is it safe to determine capital requirements based on ratings?

    *Should the regulator specify an objective and common standard to measure credit risk and let the agencies map their ratings onto this scale?

    Dealing with these issues is the only path to intelligent regulation. But one final point. The rating agencies do play a necessary role: replacing them by a government entity would be a tragedy.

    The writer is managing director of RW Pressprich & Co, New York, the fixed-income broker/dealer

    Copyright The Financial Times Limited 2007

  16. Commodity trader commented on Sep 12

    Mr Beach near the top is so right. I’d add that, to evaluate today’s real Fed Funds rate, we must not be delluded by “hedonic” CPI adjustments but should look at the prices of real basic things (such as oil, wheat and milk). Paying attention to so-called “core” inflation numbers is ridiculous.

  17. Don commented on Sep 12

    Of course a liberal bear is not going to like the WSJ Op-Ed. It’s the same reason that realistic bulls don’t like the NYT Op-Ed

  18. Stuart commented on Sep 12

    “Mises was right. Damn!”

    AND, you got that right!

  19. Pool Shark commented on Sep 12

    By fiddling with mere ‘rates’ and ‘liquidity,’ the fed is rearanging deck chairs on the Titanic.

    Meanwhile the dollar sinks into uncharted depths: 79.17 and sinking.

    And the band played on…

  20. Stuart commented on Sep 12

    I’m thinking door #1 of the 3 doors Feldstein references is one we need to get a bigger lock for.

    Russ Winter:

    The Tangled Web of Fictitious Capital

    Wednesday, September 12th, 2007 at 8:10 AM
    Lately in the comment section I’ve discussed the concept of capital. When markets hit a terminal phase of blow off speculation the concept of capital can get pretty crazy. In yesterday’s post for instance I cited the example of the 27 year man in China earning $650 a month who felt wealthy because his stock portfolio was worth $200,000 on paper. I suggested that capital of this nature can be here today, gone tomorrow. A portfolio of T-bills is one thing, but stocks on the Shanghai stock exchange quite another.

    Someone in the comment section (#69 yesterday) then claimed that he had noted that while in China over the last year or so that folks there were quite flush with cash, and thus China’s boom was sustainable. I would simply ask how can that be so? Is this “flush with cash” view circular and missing the causation.

    To address this issue, one has to recognize that a tremendous amount of fictitious capital (FC) has been created not just in China, but about everywhere else in the world. Call it the bull market in FC, or even “the bull market in bull”. FC is a Karl Marx term. Marx didn’t get much right about capitalism but his theory on FC aptly describes the terminal speculative stages of Bubble markets. Regardless of whether the source of this FC concept is Marxian, thinking people should be dusting this theory off if they wish to understand what’s transpiring.

    To put it in simple terms FC is false or bogus capital, the ability of capitalists to coin cans of worms via Bubbles which are then passed off on the unsuspecting. The asset backed CDOs that this blog discussed early on is a prime example. Create a couple trillion in FC, get shills and canards to rate it AAA, put together a marketing campaign, and unload it on foils and Sheeple. The foils then ASSume they are suddenly wealthy, at least on paper, and behave according, engaging in further borrowing against inflated housing as a prime example. When the foil borrows a new security is created (wildcat finance), which in effect becomes new FC, and so on. The end results of FC are bloated, overpriced securities that then becomes the basis for more FC propositions from observers like GaveKal who go on and on about “wealth”. I gave GaveKal a good tussle in this post.

    Readers should intuitively know where I’m going next. What happens when FC comes untangled and is exposed? How does the air get let out? First, recognize that capitalists have a vested interest (I call this the Volkssturm) in sustaining FC. They try to maintain this Leviathan for as long as possible via the kind of propaganda that is the topic of my blog. Then when trouble or concerns are raised they set up a system (I call this the Milky Way) that hides true prices. To that end derivatives can be utilized to just make up prices, easy to do when a handful of parties make the market. Other ways of hiding prices are tools such as the egregious FASB rule 157 conveniently set up as the real value of FC started heading down the toilet.

    Once the FC facade starts breaking down then many of the market participants suddenly realize a whole lot of people are playing these games. Naturally an FC system engenders and encourages plenty of psychopathic snakes in suits to get in the game as well, which really makes for a particularly nasty witches’ brew. There is a realization that the “collateral” backing the FC that they hold may not just be suspect, but may be out right worthless or subjected to fraud. They themselves have been involved in the tricks of the FC trade,and so naturally and correctly assume others are doing it as well. To quote Groucho Marx, a little light bulb goes off in snake in suit’s head that says, “Please accept my resignation. I don’t want to belong to any club that will accept me as a member.” We’ve had the Minsky Moment, but the Groucho Marx moment is especially brutal because it starts the process of destroying the tangled web of fictitious capital.

    I think it is also important to recognize that there may be a transitional phase of sorts. The reason is that despite the suspicions about FC there is still a lot of falsely priced capital “on the books”. In other words, picture a big Pig Man institution who still claims to have a large cans of worms portfolio holding “worth” $1 billion under various mark to market, mark to model, and mark to make believe accounting. The Pig Man can still shuffle capital around the chess board, especially as long as he has access to Ponzi finance. And as long as confidence in money markets and bank deposits are sustained, so will financing, even if it’s at a diminished capacity. However, this starts to look like what’s described in this story, walking wounded or conceivably walking dead.

    As FC gets increasingly stressed there is a tendency for capital, including that about to be destroyed, to run around like a chicken with its head cut off. So the $1 billion portfolio gets shifted and moved around. Since credit and synthetic futures are easily incorporated and take on a life of their own, the institution really doesn’t even need to sell their falsely priced marked to make believe securities to conduct this darting behavior. They used to be able to buy credit insurance, but because that’s suspect, they can instead purchase Treasury note futures or even gold to front run the so called “inevitable rate cuts” and loose money I’ve been railing about. However, my theory holds that this synthetic activity is really just shifting FC around.

    The concept participants need to understand, to tie this all together, is that as FC is destroyed, so will the ability to conduct this kind of rearranging of the deck chairs on the Titanic. The will show up as trading drying up especially on futures exchanges, so watch that like a hawk. Unless the holders can find a very large buyer for trillions of this FC to sustain prices, then they will collapse under their own weight. And opening up the discount window for $1.3 billion of new borrowing simply will not sustain FC. Further, cutting interest rates will only prolong the shifting and synthetic activities, as participants desperately unload dying Ponzi units at FC prices, and try to get into the still more lively hard asset Bubbles. Regardless, dead man walking securities will simply fade, and possibly crash. And when they do, you should be concerned about just about all forms of capital, assets, and wealth, as little will really be totally immune.

  21. Michael commented on Sep 12

    The Wall Street Journal editorial page provided surprising insight today. I never understood how a mortgagee could walk away (debt-free) from a foreclosed home that was underwater. Mr. Feldstein (Reagan’s Chairman of the Council of Economic Advisors) gave me the answer in his editorial “Liquidity Now!”. Home “mortgages are non-recourse loans”. The only moral hazard is credit score risk; the financial risk is limited to the down payment in a real estate purchase. Small down payments encourage wild speculation.

    Mr. Feldstein provides a detailed explain of why a Fed rate reduction will not help existing homeowners and that home price will fall an additional 20%. So far I am in sync with him. Then his conclusion makes no sense: lower the Fed Funds rate to 4.25% to save the economy. This is in complete contrast to Fed Chairman Bernanke who sees excess worldwide liquidity. Any good risk individual or business can get all the financing they need.

  22. Strasser commented on Sep 12

    Seems the Senate just approved a $100 M to prevent home foreclosures! and they’re asking lenders to match it. No more worries… bailout cometh and socialism prevails.

  23. Pool Shark commented on Sep 12

    It’s even worse than you think Michael,

    Not only can irresposible borrowers walk away from their ‘no-recourse’ mortgages, but they’re about to get a tax break from the consequences as well:

    From CNNMoney article:

    Foreclosed borrowers may get tax break
    For homeowners whose situations can’t be remedied with a refi, they may get a tax break if they end up facing foreclosure.

    Currently, if you foreclose on your home and the bank forgives a portion of your mortgage debt which isn’t recovered by the sale of your home, that forgiven debt is treated as taxable income to you. President Bush has asked lawmakers to provide a temporary exemption from that rule.

    Both Seiberg and Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, think it’s likely lawmakers to pass that exemption this fall and to make it retroactive so that homeowners who foreclosed in 2007 would be covered.

    Moral hazard indeed!

  24. donna commented on Sep 12

    The Fed did not “ignore” an asset bubble, it created one to keep the game going.

  25. Norman commented on Sep 12

    So, Barry believes that the WSJ’s op-ed page is disingenuous? So, he probably believes that the NYT’s Krugman (an economist from Princeton who has been wrong for seven years), Dowd (a Molly Ivins wannabe), Rich (who cut his teeth on international events by watching Broadway plays), etc. are all seminal, honest thinkers?

    Barry, the NYT’s editorial section is nothing more than attack ads without pictures. Please comment and convince us that you aren’t this illogical.


    BR: I never gave a Rat’s ass for what the NYT Op-Ed had to say.

    But the WSJ is the paper of record for my industry, and what the scelerotic wingnuts at the Op-Ed have to say matters more to me.

    Its not just me — most of the staff I know at the Journal are utterly embarrassed at the intellectually undefendable tripe that frequently passes through the editorial pages.

    I read both the NYT and the WSJ. One for fun, and the other is for professional reasons.

  26. David commented on Sep 12


    Martin Feldstein is playing to the Stock Market audience. This sort of talk is what they want to hear. If the Fed does what he wants, it will cause the us to enter a period of stagflation, similar to the late 1970’s and early 1980’s. This errors will eventually force us to rethink the role of the Fed.

    Were are the responsible adults? Alcohol in punch bowl again.

    “There is a tide in the affairs of men. Which taken at the flood, leads on to fortune; Omitted, all the voyage of their life Is bound in shallows and in miseries”

  27. Winston Munn commented on Sep 12

    Murray R wrote: “Mises was right. Damn!”

    The Austrian School seems overall to have a better handle on what is happening.

  28. ari5000 commented on Sep 12

    Barry — jeez — CNBC is just completely and thoroughly a disinformation machine…

    These people come on for 3 minutes and I understand now it is critical that they keep saying “We’re running out of time”. Otherwise someone might say something truthful or explain why things are so screwed up.

    These guys jump on and say everything is fine, the U.S. equity markets are cheap…. but we need a lot of rate cuts too. Well, why? Why would you say one thing and want the other?

    All I have to say to the media bulls on CNBC is:

    You’re running out of time.

  29. fatmary commented on Sep 12

    i love marty feldman

  30. me commented on Sep 12

    “NYT’s Krugman (an economist from Princeton who has been wrong for seven years),”

    Was that a joke?

  31. techy2468 commented on Sep 12

    i had posted this question in the past, dont know if it got answered.

    i think that interest rate cut may help the economy and dollar wont tank.

    reason dollar wont tank:
    * emerging economies like india,china etc wont let their currencies appreciate anymore.
    * even europe does not want euro to appreciate against dollar since its hurting their exports.

    * only problem is oil producing countries, but they can hike the price of oil to cover USD depreciation.

    lowering rates will lead to inflation, but it may also lead to wage increase, which means debt deflation.

    sorry if i am repeating, and let me know if you answered in past.

  32. jag commented on Sep 12


    What’s Krugman (ie Enron’s favorite advisor) been right about?

  33. me commented on Sep 12


    What’s Krugman (ie Enron’s favorite advisor) been right about?

    Uh, healthcare, Iraq, tax cuts for the rich, offshoring jobs……….

  34. Brian commented on Sep 12

    A little off-topic: Has anyone seen a detailed long-term analysis of what happens globally – particularly in India and China – if the US credit crunch/housing debacle leads to a recession?

    Any idea what percent of Chinese economic growth is directly tied to the US Consumer? Thx.

  35. Estragon commented on Sep 12


    What you’re describing is a broad cycle of competitive devaluations. It makes everyone “rich” through money illusion, but unfortunately it doesn’t (in itself) create any more real goods or services. What it does do is distort relative prices and introduce potentially destabilizing imbalances and sub-optimal resource utilization. It almost always ends badly.

  36. Estragon commented on Sep 12

    Brian – “Any idea what percent of Chinese economic growth is directly tied to the US Consumer?”

    Almost impossible to calculate, and not terribly relevant even if you could.

    A US recession would, for example, mean the US buys less from Canada. Canada (still #1 destination for US exports) would likely buy less from the US, but also less from China. Likewise Mexico, Europe, etc. It’s all connected whether the trade is directly bilateral or not.

  37. M.Z. Forrest commented on Sep 12

    I think China is a harder call. They have 2 major industries: clothing and electronics(toys). It isn’t like people are going to switch to Armani during a recession. So I think their textiles will be fine. I think China could see a hit on the electronics side, but there again they are in a better position to capitalize on weakness in the electronic’s industry. To assume China will be devasted in a US recession is kind of like predicted poultry consumption will decrease in a recession. There are a lot of variables at play.

  38. Eclectic commented on Sep 12

    I don’t know why you’re so impressed with this op-ed. It’s only a repeat of his assessment he filed on Sep 1:

    He could’ve written it from assessments of the housing situation that many of us here on TBP have been making for months and months.

    David above is correct… If the Fed cuts the FF rate, they will launch this economy into stagflation. Watch bonds if they do, because the bond market will confirm that.

    I suppose now that all of financial media, Wall Street and much of macro-academia has made a cut a fait accompli, the FOMC can just wear sneakers and jeans in for exercising a quick proxy for Feldstein.

  39. pacific_waters commented on Sep 12

    can u spare us the coulterish/dowdish comments?

    “I also suspect that excessive usage of the drug exctasy…”

  40. wnsrfr commented on Sep 12

    pacific_waters, this is a Blog not a subscription-based publication…BR says what he wants.

    Also, FWIW, Ecstacy burns-out the pleasure centers of your brain, which probably explains the tone of the WSJ editorials…

  41. techy2468 commented on Sep 12

    picture from india:

    * economic boom started due to higher wages in IT/ITES sectors (started in 1995ish, pause between 2001-2002, full speed after 2003).
    * this has lead to rampant construction of residential and commercial property…it is still blazing full speed
    * Shopping malls all over the place

    so far non Export dependent jobs has been created only in Finance and construction industry (brick, cement etc..)

    currently wages are rising in IT sector….which was causing huge inflation particularly in real estate.

    (a three bedroom apartment is around 6-8 times average household income on most Tier1 cities….and you though california is expensive, and the interest rate is around 12%)

    depreciating dollar also lead to inflation in imports, due to which they let the ruppe appreciate by around 10% in the first quarter.

    but again they are holding the exchange rate with USD between a narrow band.

    If USA was to go into recession….and USD gets further depreciated….
    they will have to let the rupee appreciate and kill the economy (since its driven solely by exports)
    or they will face rampant inflation and revolt by working class.
    (wage difference between a unskilled worker and a average IT guys is around 15 times)

  42. techy2468 commented on Sep 12

    Estragon… can you elaborate a bit in layman’s language, sorry i am not a finance/economics guy.

    they way i see it is:

    *cut interest rate
    *leads to fall of dollar
    *inflation of imports
    *Wages increase
    *but the biggest problem: DEBT stays the same, hence it becomes manageable.
    *also House prices become stable due to inflation, hence the credit market will not lose much
    *increase in exports
    *increase in local manufacturing

    BTW why wil FED not cut rates on sept 18th.
    i have a strong feeling they will cut atleast 25bps.

  43. Don commented on Sep 12

    Do you make a distinction between WSJ op ed pieces and editorials. Because the editorials on this subject seem fairly consistent with your own views — e.g. sub-prime lending was excessively loose, fed policy was excessively loose, fannie and freddie were excessively loose and all these fueled an unsustainable housing bubble (in an editorial several weeks ago they ran a graph showing home values versus income which was fairly compelling). More recent editorials say the bubble is now bursting as was inevitable and monetary policy can do little to address that, and instead fiscal measures and banking supervision / crisis management should be the primary tools to deal with the fallout. I am curious, where do you differ with the editorial board on the housing bubble / credit crunch? I am guessing you would prefer spending instead of tax cuts for the fiscal stimulus part, but any other differences I’m missing?

  44. bsneath commented on Sep 12

    Herbert Hoover would have loved some of the commentary on this blog (before the great depression started, that is).

    “What this Country needs today is fiscal discipline! Raise interest rates, reign in liquidity, blah, blah, blah.”

    Fortunately, the Federal Reserve has a very long institutional memory. Further, I do not think Bernanke wants to be remembered as the FRC who could have prevented the “great depression of 2008”, but didn’t.

    IMO, Mishkin is right on target in suggesting that in times of financial crisis, IRs need to be cut quickly and substantially to avert serious damage … and they just as rapidly need to be restored once the economy is back on track. This shortens the duration and intensity of an economic downturn. In the end, it results in fewer gyrations in the federal funds rate and a faster restoration of the rate to the norm.

    One of the greatest outcomes of monetary policy under the Greenspan Era has been the job creation and employment of millions of individuals who are now productive members of society rather than dependants of the state.

    The best job training program that we have ever had and all without wasteful, counterproductive government programs!!!

    Yes, we have excesses and we need to work through them. For the most part the greediest of the “evil-doers” have already been exposed and no cut in interest rates will bail them out.

    I do not think that we should so totally obsess over the “moral hazard” issue given the risks, in terms of the potential for millions of lost jobs, lost homes and long-term economic destruction if the economy falls hard.

  45. Blissex commented on Sep 12

    «By fiddling with mere ‘rates’ and ‘liquidity,’ the fed is rearanging deck chairs on the Titanic.»

    Barry, and many other commentators, you are not sufficiently distinguishing between the two. But the distinction between “rates” and “liquidity” is very, very important indeed, and conflating the two is a trick some parties wish to use to advance their scams.

    If there is a liquidity crunch, in otherwise sound finances, the Fed should indeed smooth the way and provide temporar liquidity.

    But what everybody wants is not liquidity: it is free money, that is in effect zero or preferably negative real interest rates, because financial companies can make enormous profits out of those (and they have been, thanks to ”easy Al”), and use those profits to pay themselves large bonuses while filling the holes in their balance sheets.

    Zero or negative real interest rates are what the ”markets” want, that is a colossal continuation of the expansion of the money supply, to go mainly to those that have direct access to the financial markets. At the expense of those earning fixed incomes, which nowadays means workers.

  46. VJ commented on Sep 12

    A survey of brokers by research firm Campbell Communications found that 57% of those attempting to refinance their adjustable-rate mortgages in August, to avoid looming higher monthly payments, were unable to obtain new loans.

    An estimated five million adjustable-rate mortgages are scheduled to reset at substantially higher rates over the next 18 months.

    OH, this is gonna to get UGLY.

  47. donna commented on Sep 12

    Actually, MDMA (ecstasy) is not that bad a drug, and was used pretty extensively by psychology researchers in the past. It is rather addictive, though, and its long-term effects on the brain are debatable, but more likely adverse effects are due either to impurities or mislabeled drugs that are not actually MDMA.

    Crystal meth however will eat your brain.

    I’m currently bouncing through a bunch of antidepressants since kicking myself off Effexor, so I’m doing lots of drug research. Still looking for the perfect noripenephrine reuptake inhibitor that won’t hit my blood pressure so hard.

    I want a new drug….

  48. Stuart commented on Sep 12

    “A survey of brokers by research firm Campbell Communications found that 57% of those attempting to refinance their adjustable-rate mortgages in August, to avoid looming higher monthly payments, were unable to obtain new loans.

    An estimated five million adjustable-rate mortgages are scheduled to reset at substantially higher rates over the next 18 months.

    OH, this is gonna to get UGLY.”

    I read a report a few weeks ago on another blog that Moody’s estimated 65% of ARM resets no longer qualify per the new credit standards. ALL resets, not just subprime or Alt-A…All of them..

  49. Winston Munn commented on Sep 12


    I suggest the “blue pill” and watch more Kudlow.

  50. Rick commented on Sep 13

    I pick answer “a,” he was on bubblevision when I woke up here on the left coast this morning and he talked about a rate cut as a done deal.
    Ofcourse noting he was at J.H.and “spoke” to Ben last weekend I suppose lends some credence to the comment even though the gal asking him that final question set-him up.

    Blue Pill? Naahh most these clowns are White Trash “N” generations removed that just came-up with another method to play an AMWAY style Pyramid Scheme (CDO, Sub-Prime debt, SIV’s,). Who flinches next?

    I have never shorted a stock or indice in my life, until today (i.e. SDS).

  51. me commented on Sep 13

    “One of the greatest outcomes of monetary policy under the Greenspan Era has been the job creation and employment of millions of individuals who are now productive members of society rather than dependants of the state.”

    Yes, true, in India, Brazil, Romania.

    Your argument falls apart with he participation rate continually falling. You don’t see a problem with 25 million jobs 1993-2000 and only 8 million for 200 to 2007?

  52. anon commented on Sep 13

    I read a report a few weeks ago on another blog that Moody’s estimated 65% of ARM resets no longer qualify per the new credit standards. ALL resets, not just subprime or Alt-A…All of them..

    This is why, if they choose to, the Fed will cut rates – i.e. to soften the blow. We saw market volatility like this in 2004 and the Fed was ratcheting-up rates, only to be followed by the bull run. The Fed will not cut for the markets.

  53. Lee commented on Sep 13

    “Uh, healthcare, Iraq, tax cuts for the rich, offshoring jobs…..”

    Uh, no.

  54. me commented on Sep 14

    Lee, sounds like you are still drinking the cool-aid and are missing the facts:

    “Tax Cut Message No Longer Resonates with Independent Voters

    Looks like the magic of the “tax-cuts fix everything” message is wearing off:

    GOP Forced to Pivot on Taxes, by Erin Billings, Roll Call: Senate Republicans are likely to engage in a more serious message makeover than they previously thought following a private strategy session … where they reviewed new polling data showing tax cuts are no longer priority No. 1 with key independent voters. The news, GOP Senators acknowledged…, served as an important wake-up call as the party undergoes its massive internal image overhaul. The theme of lower taxes has been a cornerstone of the Republican platform …

    The findings … showed Senators that Americans are far more focused on key domestic reforms like health care reform and the level of government spending rather than on previously enacted GOP tax reductions. … Republican Senate sources said the latest information … shows Republicans relied too easily on tax cuts as the answer to every domestic problem… [E]xplained one senior GOP Senate aide. “We’ve worn out the message.”…”

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