Open Thread: Markets, Inflation, Growth, Recession

Yesterday, I said that the Fed had become Wall Street’s "Bitch".
It was toward the end of the post, and I assumed it would hardly get
noticied.  However, I guess it was pithy enough to have gotten picked
up by a few media outlets.

Today, I wanted to steer the discussion the other way: Ben
seems like a smart guy who does not want to be Wall Street’s play
thing. He doesn’t strike me as irresponsible, and he sure doesn’t want
to go by the nickname "Helicopter Ben."

Ghelicoptermed
So let’s consider the other side of the coin: What did the Fed Chair
and the FOMC see that spooked them into a half point reaction?

The Journal noted "The move came amid a sizable drop in home sales, construction and prices that could send mortgage defaults higher and damp consumer spending . . . Fed officials had been leaning toward a rate cut in recent weeks, but the case for the larger move may have been sealed by a report two weeks ago revealing that employment declined in August for the first time in four years. That showed the economy had slowed markedly even before the full force of the market turmoil had been felt."

So, did they finally realize that Housing is a giant mess? What was it
the NFP number, the Retail sales data, a combination of all three?

What say ye?

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Graphic courtesy of Jordan Roy-Byrne . . .

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What's been said:

Discussions found on the web:
  1. Steven Milos commented on Sep 19

    Barry,

    My vote is that the recent US data helped somewhat, but that the real clincher was the scenes of people lining up to withdraw cash from Northern Rock. The initial discount rate cut on August 17 came the day after people lined up to withdraw cash from Countrywide in California; I don’t think they wanted to risk a repeat of that on a worse scale. It seems as though this Fed is very sensitive to systemic risk and the level of confidence in the financial system, and properly so in my opinion.

  2. ferd mertz commented on Sep 19

    until yesterday, i thought that BB was living down his moniker. an action appropriate with breaking with greenspan, IMO, would have been a 25BP cut with some inflation rhetoric to temper the speculative activities that have led to this point. he has now lived up to my previous nickname, Weimar Ben. the dollar and treasury market may agree.

  3. erik commented on Sep 19

    it was kaiser sose…

    anyone else care to comment on the extreme harmonic symetry of this correction and rally. if you pull up a 60 minute chart of the spx for the past 3 months it is striking that each dip is mimicked perfectly with a rally and vice versa. both the duration and strength is pretty much exact on both sides. by my count we have had 5 legs of weakness and 5 legs of strength. it’s like an ink blot. the past two days mimick the capitulation low we experienced mid august. currently we are so far away from the 50 day ma that it has to snap back with as much force as it reflected, similar to the action on the 16th.

    the machines are all trading in the same key. scary.

  4. rob commented on Sep 19

    Imo you were right the first time, a lot of these types are that way, Greeny may be a closet pillow-biter for all we know, no shame in but there is always the possibility that they are in fact SELECTED based on that quality, Wall Street wants someone compliant at the helm, who knows could be a blackmail deal. One thing for sure, no way they ever pick a top for the job, too independent.

  5. jras commented on Sep 19

    Clearly he saw something. Was it the jobs numbers and the revisions to prior? Was it the off the record talks with the various banking and financial institutions? Does he have a quiet tally of hedge fund redemptions we don’t know about? Did the fixed income markets bend his ear.

    God knows what he saw. There are more than a few that think his tools available are not sufficient to “fix” the problem. I don’t know. Fixing is probably too strong. Postpone is more likely. It seems that in the short term the market is driven by psychological factors. His move has done much to shore that up. The real and fundamental problems are not as easy. But if you think of the market as a prize fight. It is safe to say his cut was the “bell” for the first round. Both sides needed to go to their corners and catch their breath. But we’ve got a ways to go.

  6. Winston Munn commented on Sep 19

    We are in the throes of a credit bubble – not a monetary bubble. The conditions today are similar to 1927-1929.

    Bernanke is simply putting his ideas to the ultimate test – some large banks must be in massive trouble with collapse or near collapse a real possibility.

  7. Sammy20 commented on Sep 19

    So much for the Bernake to Volcker comparisons, huh Barry….

    Kudlow is such an ass clown. All he keeps saying is that lowering the cost of money will increase asset prices…no shit, it is called inflation and most of the assets it is inflating are non productive. That guy is seriously a danger to anyone who listens to him!

    This rate cut is going to be extremely counter productive as 10 year treasuries are going to steadily rise making the housing picture even worse than it would be if left alone…but I guess Fed intervention is always necessary to make matters that much worse…all ass clowns.

    Buy all the gold, silver and oil you can cause at this rate you will never see these prices again!

  8. Laurent Gosse commented on Sep 19

    I just wanted to signal i took part of your idea of nicknaming Bernanke, except i chosed a softer terminology “the wall street’s pet”, see (in french) http://www.leblogfinance.com/2007/09/the-wall-street.html

    Of course i linked my article to your original post (actually it’s not the first time i link to the big picture!).

  9. Paul Griffith commented on Sep 19

    74 YEARS of deficit spending explains everything — including the latest Fed cut.

  10. m3 commented on Sep 19

    look, the fed knew about this all along.

    the idea that they didn’t know about all these risks is mindf*ckingly naive.

    i’m sorry, but the idea that inflation is tame when wheat, oil, copper, and gold are all near or PAST all time highs is just f*cking dumb.

    they’ve known for awhile that manufacturing and housing are in a recession. they know that US consumer habits are not sustainable. they know that all the BS the investment banks have been doing is borderline fraudulent; in fact some of them DESERVE to go out of business for this crap.

    none of this is news.

    the only thing that has changed is that their broker-dealer cronies are starting to get affected, and THAT’S what they are concerned with.

    damn inflation
    damn the economy
    damn the dollar
    damn unemployment

    according to their own stats and forecasts, the economy is strong. why does a strong economy need a 50bp cut?

    bernanke has sold his soul.

    literally.

  11. Larry commented on Sep 19

    Fears of dollar collapse as Saudis take fright
    Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
    http://www.telegraph.co.uk/money/main.jhtml;jsessionid=FYKEBPIU4HTVJQFIQMFCFFOAVCBQYIV0?xml=/money/2007/09/19/bcnsaudi119.xml

    And so it begins. Mr Bernanke, there is no free lunch.

  12. Bobby commented on Sep 19

    All I know is that if I hear another talking head say the FED did the right thing because they needed to stabilize prices I am going to crack!

    Let me make sure I get this straight…housing prices drop a few percentage points…the market in mid-August drops a few percentage points…everyone cries the sky is falling and we need the FED to act to stabilize prices.

    Okay…so for the last few years when housing and the markets were going parabolic we DON’T need the FED to act to stabilize prices?!? That’s right…no need to worry about increases of anything…since the “exclude everything” CPI shows there is NO inflation. So…if I don’t want to buy a house, fuel up my car (and heat said house), and eat every now and then I don’t need to worry about the FED taking action to stabilize prices on the way UP.

    I have been eagerly awaiting the opportunity to short the hell out of this market as the crazy no interest, no payment, no job, no nothing loans take their toll on the greater economy. However, with yesterday’s FED action I am increasingly getting concerned that this BUBBLE is going to get re-inflated (did it ever deflate?!). I truly believe if the FED tries to avoid the hangover by continuing to drink we will not be talking about the chance of recession in the next few years…we will be talking depression!

  13. Dave commented on Sep 19

    I’m no economist, but is it really worth fighting a small recession with risking a much larger one while devaluing the dollar? Is a recession really all that bad?

    The way I see it, the Fed over did it by lowering interest rates the last time. Every mortgage associated business in America took advantage of the rates and convinced everyone that they needed to buy a home. There were plenty of people who were suckered into buying homes who had no business doing so. There were plenty more people who bought bigger homes than they could afford to make payments on. Then there were also people who took out additional mortgages on their existing homes in order to spend it on everything possible.

    I see this 50 rate point cut as an attempt to bail out all those people, including those that are in the mortgage / housing business.

    All the home builders *put a home every possible place they could* during the last 4-5 years. They attracted *every possible buyer they could*. They simply over did it on a huge level. Now they have plenty of homes that won’t sell and they can’t sustain keeping their entire work force employed. There’s no one left to buy!

    So here we have a fed who is trying to save all the jobs created in the last few years while they attempt to give people one last chance to buy!

    Meanwhile, they are absolutely killing the dollar. You’ve over done it. By “You” I’m referring to everyone that took part in this process: The Fed, the mortgage companies, the home builders, the consumers, etc.

    Is it really worth it? If anything I see this turning out much worse.

    So much for teaching people to be fiscally responsible. So much for teaching Americans not to be greedy. So much for having a spine Big Ben. So much for protecting the future interests of this country. After all, it is all about the here and now, right?!

  14. Bob A commented on Sep 19

    A Panic induced run on banks seems to be the thing that really spooks them.

    Before the discount window announcement we had the head of a major mortgage lender (IMH) withdrawing $500k from Countrywide bank in the news and one Money Market funds refusing withdrawals. Leading to every major money market fund sending prospectus to every holder. And TDAmeritrade (among others?) restructuring their money market sweep from The Reserve to an inhouse fund as of next month. Before yesterdays announcement we had Bank of England guaranteeing deposits of all UK banks after a run on one of them.

  15. Winston Munn commented on Sep 19

    Anyone who believe the FedSpeak concerning its cut is truly naive. The cut was about the $20 Trillion in USD ABCP market that is frozen.

    This is an attempt to subsidize risk, a premium, if you will, paid to provide short term loans for ABCP.

    It won’t work. Risk is going to demand much more of a premium.

    Northern Rock had almost zero subprime risk – Lehman Brothers is awash in subprime risk.

    When the mark-to-Enron-model, off-balance-sheet shenanigans finally fail, banks will have no way of providing the reserves necessary to accomodate the increased exposure these off-balance-sheet loans will create.

    Now it is the Fed who has hit the panic button – and I expect a lot more panic soon.

  16. Stuart commented on Sep 19

    What Ben realized is that we’re in the 3rd inning of mortgage resets. While watching this game unfold, he sat back with his hot-dog and imagined what the score will be by the time we’re in the 6th inning considering the best batters of the other team are coming to the plate starting the next inning, the 4th. He didn’t like the overwhelming feeling of despair and futility he felt so he glanced up at the latest data hoping to seek comfort from the current score, but alas, he saw we were already losing. Efforting to do something to appease the cries of management, he threw in a few more batters, triple A batters at that, not realizing they will do little to alter the game’s outcome since the team had been comprised of fictitious batters with their names appearing on a roster but are not to be found. Ben just saw there and watched a few besieged batters stepping up to the plate trying to counter fictitious capital derivative fast-balls hurling past them. Player 3 up, count strike 2.

  17. NoFate commented on Sep 19

    Ben had to know the impact 50bp would have on the dollar and commodities. I think he has 3 things in mind:

    1) The housing bubble is going to cause huge devastation. It has barely started to do it’s damage and could easily kick-off a recession (possibly the worst since the 30s). One look at the Case-Shiller Index shows the magnitude of the bubble and the potential devastation. I think the disruptions we have seen so far are the tip of the iceberg.

    2) Inflation lowers debt. We have a huge debt problem at the moment, both as a country and as consumers. If China or Japan start selling treasuries in a big way it will lower the value of the treasuries they still hold, so he has them by the short hairs.

    3) The lower dollar should increase exports, which might make up for some of the likely future drop in US consumption. It won’t be enough, but admittedly it carried GDP for Q2.

    I think considerations regarding the equity markets were secondary. He probably knew stocks would jump initially like a crack addict getting a fix. The scary part is that when stocks do drop now, it might even be faster and farther.

    I think a final consideration is the election next year. A recession in an election year is UGLY. At least if it happens now he probably won’t get blamed.

    I would expect more big cuts. The current drop did little with regard to mortgage rates or improving the credit crunch. He has to be careful not to spiral into stagflation or create a new bubble though…

  18. Ant commented on Sep 19

    What say ye?

    I say you had it right the first time.

    One would hope that Easy Al’s recent PR tour would put an end to the myth of the all-knowing Fed. The man clearly was, and is, a shill.

    Many of us had hoped that Bernanke was a different animal – clearly we were wrong.

    We’re coming off of the biggest credit bubble in history, the dollar and oil both just crossed 80 moving in the wrong directions, commodity charts look like a moonshot, the market is UP for the year, and the Fed’s response is to open the floodgates?

    Yes, it’s possible they know something we don’t, but until I see additional evidence, Occam’s razor applies. The simplest answer is that the Fed is Cramer’s bitch.

  19. Robert commented on Sep 19

    Bernanke did what was necessary to (attempt to) keep the economy afloat through the bursting of the housing bubble. Here are a couple of charts to consider: http://www.speculativebubble.com/images/homevalues1.gif and http://www.bubbleinfo.com/storage/ivy%20arm%20reset%20schedule.png. Obviously, the first one speaks for itself. Housing has come a looooooong way up, and it still has a looooooong way to go down. It probably won’t go all the way down due to the enormous amounts of money the FED has created in the last ten years (hello REAL inflation!), but it’s NOT just going to level off at the top, plateau and carry on as if nothing ever happened…

    The second chart shows monthly ARM resets for the next 4 years. From glancing at the chat, one would assume that this month, September, would be the month that ARM resets top out, and that the worst may be over. That assumption would be WRONG… Foreclosures do NOT immediately happen… They take time – About 4-6 months from the time of ARM reset to the time the house is reported as a foreclosure, when you include the 90 days of delinquency required to initiate the process and another 30-90 days for the process to complete. Guess what that little revelation means to those who would care to prognosticate on the future of the housing market! You guessed it – The data will continue to deteriorate for AT LEAST another 4-6 months before even leveling off! Weeee!

    I have been telling people about this for a few months now (thanks in no small part to Barry at TBP). I have argued with permabulls many times and used these little charts in each and every one – They tend to silence the critics… There’s not much you can say to them, other than: “Damn. Looks like it’s probably going to get worse.” The FED knows what’s coming, and they are attempting to proactively deal with it in the only way they can… Throwing money at the problem. And guess what – They’re not finished! The moral? Buy gold and silver stocks – Because they’re not finished either.

  20. Ant commented on Sep 19

    By the way – did anybody see the CNBC commercial today saying more or less the same thing?

    Something along the lines of: “When Cramer talks, the Fed listens.” They cut together meltdown-Cramer “They know NOTHING!” with Cramer-on-his-meds “They Listened!”

    I was on the phone while this was on, so didn’t give it my full attention, but that was the basic gist of it. Very nice…

  21. bsneath commented on Sep 19

    Barry, Please help me sort out an apparent inconsistency. You have gone to great lengths to demonstrate why the housing bubble will result in a recession. The mortgage resets have just begun and the worst is undoubtedly ahead of us. It takes 6 to 9 months for a rate cut to affect the real economy. Job growth has virtually stopped. Unless decisive action is taken now, the economy could be in a severe recession in the near future. So… WTF is this “Wall Street’s Bitch” talk all about? With a recession looming, if a 50bp cut is not the right call, then what is?

  22. Dean commented on Sep 19

    Berry – Ben is smart!

    However, just because he’s is smart, that does not mean he’s right. Irresponsible could be right, the Fed should be careful not to cut rates too aggressively because the risk of a new War!

    “Observe his inclination in yourself.” Shakespeare

  23. bsneath commented on Sep 19

    I came on too strong in previous post. I apologize.

  24. Stuart commented on Sep 19

    It’s not just Ben. Lehman’s earnings and the subsequent market reaction prove that most investors do NOT desire transparency. They want to be lied to because they believe it boosts stock prices. Tens of billions in crap on their books and they say its fairly valued.
    Lehman kept the same accounting BS going but few cared to dig deeper to expose it.

  25. Greg0658 commented on Sep 19

    what a greeeaaat stamp

    1st class postage after $100 oil?

    : )

  26. Spectator commented on Sep 19

    There’s no contradiction to say a recession looms, and say the Fed should not cut. That’s because too many of these cuts got us here in the first place.

    Unless addicts are deprived, they do not recover. Over-leveraged speculators are no different.

  27. Ant commented on Sep 19

    bsneath,

    IANAE (and I’m definitely no Barry) but my amateur answer to your question is there is no inconsistency because it is not the Fed’s mandate to try and obliterate the natural business cycle.

    Rather, the Fed’s mandate is to maintain price stability and promote full employment. Long term, both of those goals would be better served by sane fiscal policy and re-instilling a little discipline in the markets. However this would also require ignoring Wall Street’s temper tantrums when it looks like their bonuses are in jeopardy – which apparently means it ain’t gonna happen.

  28. touche commented on Sep 19

    “With a recession looming, if a 50bp cut is not the right call, then what is?”

    “2) Inflation lowers debt. We have a huge debt problem at the moment, both as a country and as consumers.”

    It is the right call because of 2). In the end, they have to salvage the economy and to do that they have to nuke the debt. So investors, stop whining and try to find a safe haven.

  29. RunningBear commented on Sep 19

    Ant,

    This is the reason why I believe cutting the rates into this recession is a mistake. This credit inflation and bubble eventually has to be let out. What we have been doing is whenever pain looks like it is about to happen we slash rates and throw more money at the problem. What this continues to do is make the beast larger and larger. There will come a day when this will fail to work and our economy will implode. Would you rather start the process now of letting the air out or when Social Security, Medicare, Medicaid, and the baby boomers start crashing the party. If we don’t start taking our pain now it will only get worse down the road.

    my2cents

  30. Winston Munn commented on Sep 19

    The Top Ten Reasons The Fed Cut

    10. At 5.25%, Paulson’s China trips were getting to be too expensive.
    9. Aid mistook Northern Rock for Rolling Rock and three kegs were delivered pre-meeting.
    8. Two words: Jim Cramer
    7. Cheap dollar makes Times Square hookers a better bargain for foreigners.
    6. New policy removes the middlemen and allows homeowners facing resets to be turned down for loans directly at the Fed discount window instead of their banks.
    5. The Government Printing Office accidentally produced an upside down chart of the dollar.
    4. Wars are a bitch to pay for at 5.25%.
    3. It was cheaper than the rebate program
    2. Buy one home, get one free had already been done by Greenspan
    1. Ewwww. Recessions are SO nineties!

  31. Steven Milos commented on Sep 19

    Best post of the night goes to Winston Munn, great stuff!

  32. wunsacon commented on Sep 19

    My opinion on the FED is “ambivalence”. You know, there’s no way Americans can keep out-earning people around the globe by a factor of 2x, 5x, 10x, for at least three reasons. We all have to take a pay cut in real wages, in order to remain competitive. We could take the cut in nominal terms or not. If the mechanism matters, it probably matters more for political reasons.

    First, there was a time when everyone else’s factories were rubble and ours weren’t. We became “producers to the world” and — since the stuff was bought on credit — “creditors to the world” and thereafter earned a piece of their action. Often, we reinvested the proceeds abroad. During the “Cold War”, Americans and Soviets made the Third World their “hot battleground”. When there were wars and coups, the best place for foreigners to stash their cash was in the US (well, certainly not communist China or Russia!), which drove down our national cost of capital. That helped keep it cheap to do business in the US. In sum, WWII and the Cold War helped vault us to “first place” for a while.

    Second, one of our competitive advantages, capitalism itself, wasn’t as widespread. Yes, we can still call China a one-party system. But, its economy is much less centrally planned. At this point, it is a *capitalist* one-party system. So, in the past 20 years, the spread of capitalism to the Soviet Union and China increased the overall number of capitalists in the world by 25%.

    Third, before the internet, American knowledge workers had an advantage, because the amount and quality of “available knowledge” was proportional to the distance from places where that information was stored or generated, such as US schools (for student knowledge consumption) and corporate HQ (for worker knowledge consumption).

    So, some very important competitive advantages are gone. Without them, I don’t see how Americans can avoid a significant pay cut in real terms, relative to foreign workers.

    Now, we can debate the mechanism. Should we all take a 50% pay cut in nominal dollars? (If the FED didn’t cut, maybe that’d be the mechanism for the real cut in wages.) Or should we debase the currency, so that our nominal wages stay the same? (Since the FED cut, maybe this’ll be the mechanism for the real cut.) It doesn’t matter “how” in real terms. But, it’s probably safer for politicians to deal (a) with voters persuaded by the MSM to vent their anger at Russia for charging $150 for oil rather than (b) with mobs of unemployed.

    Sorry about the long post.

  33. sk commented on Sep 19

    You got it right the first time !
    Going by the numbers THEY believe – unemployment was STILL 4.6%; GDP was still 3 %, core inflation was still 2% – the TOP end of their range – Standing PAT until unemployment rose over 5% and/or inflation started coming towards 1.5% and/or GDP dropped toward 1 1/2 % would have been indicated by the NAIRU equation stuff that I last looked at PIMCO’s website and that the FED says they pay attention to.

    The only thing that’s changed is the banks are losing money and expect to lose a lot more as they are forced to deleverage and bring the off-balance sheet onsheet, reducing their ability to lend more.

    Its a dirty rotten shame – I’ve been expecting it – and half-planned for it, given his rep – keeping plans in abeyance while I gave them the benefit of the doubt. No longer – and I doubt that I’m the only one.

    -K

  34. Robert commented on Sep 19

    Wow, wunsacon – Very insightful. Thanks for laying that out.

  35. Graffiti Grammarian commented on Sep 20

    Really enjoy the lively commentary here.

    I have little to add, as I am watching to see what happens in my own market, which is CMBS.

    But to Stuart, who wrote the elaborate baseball metaphor: you don’t honestly believe that “efforting” is a word in the English language, do you? Tell me you don’t, or tell me that it was some kind of weird typo — it will help me get to sleep tonight.

  36. Bluzer commented on Sep 20

    Wonderful wise wunsacon! Take the day off. On second thoughts – considering the imminent lowering of living standards – make it half a day.

    Mucho Gracias.

  37. Bluzer commented on Sep 20

    ‘Efforting’ is a word – right out of the presidential lexicon. Please don’t misunderestimate Stuart.

  38. Steven Soh commented on Sep 20

    Barry,

    I guess the cut in 50 basis points tells us that the American Economy is really in a mess and the subprime mortgage defaults could likely spill over into other sectors of the economy so that a rate cut of 0.5% is a must so as to inject liquidity into the banking system to soothe the housing slump. I guess we have to watch out that oil is over $80 a barrel and Gold has climbed over $700 an ounce which tells us that inflation is looming and given the cut in interest rate, inflation could become more rampant and the Dollar would sink further so that although the stock markets worldwide rally but does that mean the economy is great? We’d better watch out when the housing scum gets worse…..

  39. Spectator commented on Sep 20

    Agree with wunsacon that it makes no real difference for working stiffs with no savings. For retirees and others with savings, currency debasement is clearly the greater evil. Their money is being gifted to Wall Street.

    But as you point out, currency debasement will be chosen, since most of the public and politicians have no clue what happened. And no one in charge needs to take any blame.

  40. Michael M commented on Sep 20

    Play on Fed day and go away:

    Fed Day/ S&P 500 on Fed day/ S&P 500 day before Fed day
    31 Jan +9 +8
    21 Mar +24 +9
    9 May +5 -2
    28 Jun -1 +14
    7 Aug +10 +34
    18 Sep +43 -8
    Total +90 +45

    No cuts, changing language, cutting, Goldilocks, credit crunch, Pooleing a fast on… doesn’t matter, not sure if Ben is predominately Wall Street’s bitch, misguided, victim, loyal Bushie or all of the above, but the street sure loves the sound of the black hawk. So far.

    And a side comment regarding the ongoing discussion elsewhere about 1-month and 6-month performance after the Fed starts cutting: note that the Fed didn’t start cutting this week, but effectively started the campaign when they opened the discount window with the S&P 500 around 1380/1410, so we are already up around 10% from the real start of the campaign, which is huge compared to other postwar campaigns. So if history is a guide we probably will have no more short-term upside from further cuts.

  41. Sebastian commented on Sep 20

    This is an exciting moment in US-monetary history.

    Recession will come, no matter what. The decrease of the interest FED rate won’t have any effects within the next 4 to 6 month on the economy.

    Stocks are rising in the short run, but not for long….unless the economy is suffering.
    the stock market i s also getting in a turmoil.
    It will be very hard to get the right quotes and the increases of the past will be done for a while…

    This whole decission of stearing against the credit crunch will lead to a tremendous decrease in the US currency for sure.
    It will be good for the exports and bad for the more expensive imports… but the problem is that America is the number one consuming country in the world. It needs more goods than it produces.
    So prices will go up in the US and inflation will increase.
    … what will follow after that…?

    If the Saudis will stick to their road map and they might even think further…
    … switch their general strategy …
    e.g. that the OPEC (oil producing) countries will switch the oil factored in US Dollar to e.g. Euros.

    because why shouldn’t the OPEC, if the currency is no longer stable and getting weaker every month…
    the downward cycle and pressure on the US currency will be tremendous…
    ..
    Is this is just the beginning of a downward cycle, riding on the US currency?

    If, on top of it, the Chinese government decides to reduce their monetary currency reserves…. which they should for a fair currency swap .. the pressure will increase on top of it

    –> Good by US Dollar

    Sebastian
    Germany

  42. mlnberger commented on Sep 20

    Excellent comments — one more: this is an election year. No way politicians / Fed let things slip now. Next administration will pay. and pay. and pay.

  43. Eclectic commented on Sep 20

    First – this has been the best continuous string of high quality comments that I think I can ever remember on TBP.
    ———-
    wunsacon,

    Super comments!

    Spectator adequately summarized part of what you said in this fashion:

    “Agree with wunsacon that it makes no real difference for working stiffs with no savings.” end quote.

    That phrase “working stiffs with no savings” would have been a bit like “love the smell of napalm in the morning” for John Maynard Keynes.

    I think in his heart of hearts, he’d have enjoyed sniffing the rare air alluded to by Spectator’s summary of your remarks, at least a little.

    While Keynes never advocated the destruction of wealth, he wasn’t afraid of being a little wishful that wealth would have to come to attention, salute and go to work like the rest of humanity. That is, he didn’t like the idea that it was self-sustaining.

    He would’ve enjoyed the notion that the whole world might eventually be composed of regular working stiffs… a world moving toward something like a Star Trek world of workers with communicators and phasers but no wallets. I’m not a Trekkie, but I don‘t remember a single episode in which anything was ever bought or paid for… never saw a wallet… never saw money. I may be wrong… but, they didn’t need money.

    Relative to their earthbound viewers (a modern aircraft carrier is a beehive of commerce), they’d ascended economically to a world where human productivity had more closely approached infinity, a world where goods and services had virtually no cost… and thus money was not needed any more.

    Keynes envisaged a world in which capital would be constantly on the move… in a sort of gigantic mathematical gerbil cage, constantly turning out economic productivity for the benefit of the masses, reducing costs and obviating the exchange of money.

    He thought of wealth as being something temporarily useful, something you rented rather than owned and didn’t need after you were no more.

    If you can blend the meanings of two words into one, he was thinking of something like: egalitarian capitalism. Not socialism really… and definitely not communism. He was too much a scientist to believe that altruism could ever supplant capitalism’s profit motive for achieving economic objectives.

  44. dblwyo commented on Sep 20

    wunsacon – as others noted nice points. Let me take them as a start and riff a little.
    1. China & India (& Russia for that matter) are all adopting some market-oriented economies but a) their real immediate advantage for the next two decades is shifting a huge pool of under-employed labor from the 11th C technology to a modern one which b) is hitting a wall in the coastal cities driving up costs and labor but moving more into a middle class (which is very good in the long-run) but c) requires continued major improvements in the legal and political systems otherwise corruption and civil disorder will slow or halt the machine.
    2. If this works out well we’re re-balancing the world where there’ll be a much bigger pie even if our slice is smaller; this is all to the good and no surprise. With all the rubble we had a unique advantage post WW2. Why would people think it would be permanent – on the other hand we’re still going to be the major player for another fifty years and a major player if we work at for a longer time.
    3. So will we work at it – the re-balancing works out well on the whole but if we don’t find decent jobs thru the creation of new industries there’s going to be a lot of hurting folk during this re-balancing. Those jobs require two things – innovation and education. Gee, those probably aren’t separate either, are they ?

  45. Eclectic commented on Sep 20

    Winston, bringing foward your last comments regarding Keynes, just for clarification and to contribute to this topic of discussion.

    I thought your comments were generally excellent.

    Keynes never had to address the notion of slowing an economy down. His whole existence (and dominance at the time) in macroeconomics came during an extended period of economic depression. He didn’t have to worry or theorize about overly expansive economies. That topic wasn’t on his watch shift.

    The problem with Keynesianism is that it eliminates its own withdrawal mechanism, because even the hard core Monetarists, who vehemently rejected Keynesianism but ultimately benefited from its application, can’t manage to observe their OWN disciplines, when they do have the most power of all, absolute proven and efficient power, to slow things down.

    Milton Friedman understood the slowing down part, and understood that controlling monetary inflation is in all cases the responsibility of the central bank. His protégé lived in his same academic world, but he’s just tossed the old professor overboard, as all Monetarists ultimately do when the spotlight gets hot. Hang what Greenspan said about Bush’s profligate spending… He didn’t have to accede to it.

    (note – I am generally apolitical when it comes to economic theory – Dems and Pubs are all the same to me.)

    The answer to your implied question is that Keynesian economic theory is the answer to the hoped-temporary economic dilemmas we often find ourselves in, where Classical Theory breaks down… That is, where MV = PQ doesn’t hold any more, because the volatile nature of human psychology causes it to lose its linearity. Keynes didn’t adequately explain this phenomonen, but I have. Read all my work posted on this blog.

    Keynesian theory has to be withdrawn and monetary policy reverted to Classical Theory when it becomes necessary to damp things down. That’s exactly when MV = PQ DOES hold p-e-r-f-e-c-t-l-y, but the fools won’t use it!

    Take that understanding into consideration when viewing an asymmetrical Fed, one that likes the adulation, praise and cocktail parties in good times, but only responds to financial problems after a crisis, and you’ll understand why we’re in the pickle we’re in now.

  46. SPECTRE of Deflation commented on Sep 20

    The Dollar busted into 78 through the night, Gold and Silver are up and the 10 and 30 are up in yield since the 50 basis point move on the FFR and Discount. Sounds like the cuts were well planned. END SARCASM! Bunch of assclowns who couldn’t find their way out of a paper bag.

    I din’t think anyone could top Greenspan for stupidity and lying, but Benny and the FEDS proved me wrong.

  47. Stuart commented on Sep 20

    The sad truth is, the decline in the greenback is inevitable. The US has been spending other peoples money to finance its lifestyle and masquerading as if it was wealthy. I could charge to the hilt my credit cards too and for a while, I also would be fooled into feeling like I was opulently wealthy. The difference, I realize I have to eventually pay those bills and return to live within my means. Debt is not equity. Debt is NOT wealth. Events over the past month in the financial markets are just making more salient that same realization for stakeholders in the US economy. Its currency is starting to reflecting that.

  48. wally commented on Sep 20

    You have an economy that is or soon will be in recession. There is a parasite on that economy: the moving, never-ending bubble speculations. If you feed the economy, you feed the parasite, too.
    So what do you do?
    The Feds real challenge is to find a way to end the speculative damage somehow, someway. They decided they did not want to do it right now by starving the economy, so they blinked.
    Whether you think the rate cut is a good or a bad thing depends on whether you have more sympathy for those who will suffer in the coming recession or more anger towards the speculation that put us here. Either way somebody gets hurt.

  49. Rusty commented on Sep 20

    I agree with someone else’s feelings – great commentary in this thread. However I have one complaint – can we please stop with the criticism of Bernanke? He’s but one vote on the committee. He’s a figurehead. He’s not a dictator. He’s getting the same treatment that a QB gets on a team with a bad defense – too much of the blame.

    Not that I care one way or the other about the guy, but when I read comments about his character or lack thereof, his motivations, etc. it starts to look like conspiracy talk, and I skip to the next post.

  50. bsneath commented on Sep 20

    IN A NUTSHELL:

    “Whether you think the rate cut is a good or a bad thing depends on whether you have more sympathy for those who will suffer in the coming recession or more anger towards the speculation that put us here. Either way somebody gets hurt.

    Posted by: wally | Sep 20, 2007 8:47:51 AM”

    Good observation Wally

  51. jkw commented on Sep 20

    The baseball analogy (we’re in the 3rd inning of mortgage resets) is missing the real problem. The mortgage resets aren’t what will cause the whole system to collapse. It’s more like we just got 3 strikeouts in a row from mortgage resets. Same pitch every time. And Ben just realized that those are the easy pitches. August was the first month where the asset backed bonds started to have no bid. When that continues for a while longer, mortgages will be less and less available. If the problem was merely the mortgages resetting, house prices would just come back in line with their long term trend. But when the credit bubble implodes, houses will drop back to the trend set during the great depression.

    Bernanke is pushing on a string. The lack of credit can’t be fixed with liquidity. The fundamental problem is that the debt load has climbed too high and everyone is scared of being stuck with the bad debt. There is a very real risk of deflation now. The choice is between stagflation and deflationary depression. Ben took his last chance to choose stagflation. But it’s likely that Greenspan chose deflation 6 years ago and there’s no going back now.

  52. Greg0658 commented on Sep 20

    wally the FED answer is in Congress

    shut down trading instruments

    those individuals will have to get new jobs making a widget or cooking at their new startup restaurant buying stuff along the way

    real work = real growth

    wunsacon has the sticky problem nailed – US wages in the global world

    I’ll add education in a very technically molded world with that sticky problem of teachers wages

    wunsacon and eclectic please send your resumes to the Obama headquarters for WH Cabinet posts – I’ll be prompting him to begin listing the team brains

  53. KP commented on Sep 20

    There is no such thing as managing the money supply. For every person born in this country XXXX US dollars should be printed. That’s as far as it ever needs to go. The US dollar has been trying to act like a World Dollar…and it clearly is not. A World Dollar is the ultimate answer. But it doesn’t appear to be quite close at hand just yet. Exchange rates are the direct result of individual currencies existing.

    You can’t regulate away “economic pain” AKA inefficient capital allocation….NOR SHOULD YOU EVER TRY!!!

    It really doesn’t have to be this difficult…but I guess the elites have to continue their endless manipulation of the serfs.

  54. Jordan commented on Sep 20

    Barry, I sent you an email. I dont know where Gartman got that cartoon from but it is my property. Hopefully I can get appropriate credit for it. Thanks.

  55. jkw commented on Sep 20

    You can’t have a world dollar without a world government. Currency fluctations are what stabilize trade between different regions. If you have two regions with the same currency and different regulations, there will be large imbalances in trade that can’t be corrected. For an example of this, look at what has happened with China pegging their currency to the dollar.

    If you want a world currency, you first have to set up a world government. Then you have to allow people to move as freely as capitol does. That means basically abolishing the concept of country-specific citizenship. Anything else will cause a race to the bottom and lower standards of living for everybody.

    That is why it was such a long time from the first beginnings of the EU to the introduction of the Euro.

  56. P Williamson commented on Sep 22

    Barry,
    The Fed is to be congratulated a bit here. Intervening here will require less intervention than it will later. However, the decision was probably made less on data than on anecdote and ‘gut feeling’, which is probably not a good way to operatate a federal researve. The trick now is for the Fed and congress to enact legislation to make credit risk more transparent, to improve data flow and allow better monitoring of markets by the fed.

  57. CPR commented on Sep 23

    The Irony of a 50 bps cut…

    Is that mortgages are going to actually get more expensive. Mortgages are tied to the 10 yr. and not to the Fed Funds rate. As central banks around the world start to dump bonds (that Saudi news was a shot across the bow) then you can expect yields to rise. Mortgage rates were actually higher after the rate cut than before. I would expect them to rise in the next several months. Just as a huge number of ARM’s are due to reset.

    In short, people are going to find themselves facing higher mortgage resets than they would had the Fed done nothing.
    This was obvious to anyone with a basic understanding of how markets function.

    It goes to show that you don’t need numerous degrees, years of experience, and an Ivy League background to be a central banker. You just have to do what you are told by those who put you in the position.

    Bernake is a tool of Wall Street, plain and simple. Can you here the sound of the printing presses running full steam? Everyone here should buy yellow or black gold now.

  58. bob radano commented on Sep 27

    Dear Barry and fellow BP readers:

    The question is essential. What do we NOT know? I agree BB is a smart guy. What spooked him? While I enjoyed reading the many comments, particularly the top 10 reasons post, I’m still confused. I am writing this post days after the cuts as I’m still not sure. It should be noted that this site and others have correctly reported that, in addition to the rate cut, the Fed is now printing money as though it were a few days after 9/11…

    Really, what’s going on? Stocks are in rally mode, the ultimate 6 month call option, yet other markets are flashing warning signs.

    My personal feelings are geo political. We’re upset with Iran, Russia and China and oil producing states. De-valuing our currency sends a message to the world that they still need our markets in spite of our weak currency. It’s a dangerous game. Remember that oil and gold moved up sharply before the rate cut surprise. The current problem is global in nature. The US Fed seems to be sending the message that it will not tolerate exporting/developing economies ignoring longstanding US monetary rules. Maybe BB is really pressing his fellow central bankers into action.

    I’m prepared to be proven wrong. I have never considered myself to be the smartest guy in the room, but I’m smart enough to know something is going on.

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