First Bloomberg, now Newsweek:
One of our favorite topics — inflation ex-inflation — has been slowly creeping into the mainstream. We have been hammering away on this for years; the surprise half point cut by the Fed is the most likely reason as to why the MSM seems to have discovered this meme.
Here’s the latest from Dan Gross’ Contrary Indicator column in Newsweek:
"Readings on core inflation have improved modestly this year," the Federal Open Market Committee said in justifying its 50-basis-point interest-rate cut last month, while conceding that "some inflation risks remain."
Catch that bit about "core inflation"? That’s Fedspeak for: inflation is under control, unless you look at the costs of things that are going up. The core rate excludes the prices of food and energy, which can be volatile from month to month. Factor them in, and inflation is about as moderate as Newt Gingrich. In the first eight months of 2007, the consumer price index—the main gauge of inflation—rose at a 3.7 percent annual rate. That’s more than 50 percent higher than the mild 2.3 percent core rate. The prices of energy and food are soaring, at 12.7 percent and 5.6 percent annual rates, respectively, and have been doing so for years. As a result, the CPI—including food and energy—has risen 12.6 percent since July 2003, for a compound rate of about 3 percent.
Signs of inflation are evident throughout the economy. When investors fear a rising inflationary tide, they latch onto the driftwood of gold. The day Bernanke cut rates, the price of the precious metal soared to heights not seen since 1980, when inflation ran at nearly 12 percent! I read about this in The Wall Street Journal (whose newsstand price rose 50 percent in July), which I picked up in the lobby of a New York hotel (where the average nightly rate soared 12.5 percent in the first seven months of 2007 from 2006, according to PKF Consulting) while sipping on a Starbucks Frappuccino (whose price has risen twice since last October)."
The whole article is wroth your time to read . . .
>
Source:
There’s No Inflation (If You Ignore Facts)
Dan Gross
Newsweek, Oct. 8, 2007
http://www.msnbc.msn.com/id/21047604
Under the guise of wanting to avoid a US recession which would wreak havoc on the average Joe, they cut rates with the buck already on its ear and in the face of a run in commodities, no less. It does not get any more brazen than that. But hang on a sec, that’s not the point at the moment. The point is the galling aspect of their feigning concern for the public. When you know that their every move is dedicated to keeping Wall St. happy.
Amaranth blew up in September of 2006. Prior to their demise, a 30-yr. old punk, using 8:1 leverage had manipulated the Natural Gas market higher in the wake of Katrina. By the ’05/’06 winter, Natural Gas had peaked at $14.73, a staggering level. Those eating with NG found themselves with eye-popping bills. (And others using alternative fuels were also zinged as a raging NG price can surely float all energy boats.) I am sure there were folks who went cold that winter, lacking the funds to keep the heat turned on.
The NG genius, Brian Hunter, was named the 29 spot on the Traders Monthly list of top traders in March of 2006. It was reported that Amaranth profited by about $800 mil on those NG trades with Hunter himself taking compensation of anywhere from $75 to $100 mil.
While the hoi polloi went into hock or went without, owing to the oppressively spiking retail cost of heat.
San Diego Employees Retirement Fund is one large pension that was invested in Amaranth. Apparently, that number was $175 mil in ’05. Since the fund dropped 50% in the first 9 months of 06, you gotta’ know that this pension fund took a big, bad hit. How’d you like to be 62 and ridin’ the back of the DPW truck for 30 years and then hear that, eh? How’d you like to get a $1,200 January gas bill? When you take home about $3k a month? Well, plenty of folks, did.
Did the regulators step into the Natural Gas market and put a stop to the manipulation that was causing an absolute hardship on John Q. Public?
Not on your life. But surely the FED was aware of the very real strain that US households were feeling! So why would the FED care now about poor John Q. and his re-sets when they didn’t care then that John Q. was cold? Because any intercession on John Q.’s behalf would have upset the grand slam that the energy traders were settin’
up. It’s that simple.
As a matter of fact, it wasn’t until July 25, 2007, that the CFTC charged Amaranth and head energy trader Brian Hunter with Attempted Manipulation of the Price of Natural Gas Futures including making false statements to the New York Mercantile Exchange. Ya’ think? I wonder if there’ll be any restitution to the old ladies out there who did without heat that year, eh?
When Gasoline first hit $3 bucks a gallon, did the regulators step in there, throw the specs out, RESTRICT OUR PRECIOUS COMMODITIES MARKETS TO “COMMERCIALS ONLY”? Not on your life. They know darn well what’s goin’ on, that a good $20 or $30 per bbl is courtesy of hot money, but do they step in and give John Q. some relief? Not on your life. Because, again, this would interrupt a very dynamic flow of funds from speculators. How many mutual funds jumped into this fray too, eh? You wanna’ spoil another trading party? We can’t have that, can we?
But surely the FED knew what $3.00 Gasoline would do to the least well-heeled among us, right? Do you think they have mulled what $4.00 Gasoline is gonna’ do? Perhaps. But that still would not have stopped them, no sir.
On the contrary, the FED knows that the shrewdest of the credit card issuers will be right there to save the day, to extend more credit to John Q. That he is going down the rathole, burdened with debt, is not an issue. Just think of the late fees and penalties that the lenders will extract from his hide!
As for the subprime debacle, did the regulators step in and derail the abusive/criminal activity? Did they make any moves to nip it in the bud? Not on your life. It was the Bear, Stearns misfire that pulled the rug out from under the crooks. Do the powers-that-be now feign ignorance? We don’t have to go there, do we? The bile it evokes is just too potent.
It is perverse to exclude items because they are volatile. A simple moving average, would remove the volatility.
How about that F. slip? wroth for worth!
I’m interested in opinions (slightly off subject)
“This week, the Chinese announced they are going to let one of their larger mutual funds invest outside of China. Local Chinese investors will be able to start to diversify and businesses will start to be able to take their capital and employ it abroad. This is just the start of the process. I expect that in just a few years Chinese will be able to buy a wide range of funds and investments”
How do you think this will affect our markets?
My thought – a whole new level of market averages?
The above is from John Mauldin’s weekly newsletter
i’m puzzled by the significance of this problem btwn stated rates of inflation and actual inflation; does it matter? are not the asian central banks, large mutual funds, pension plans and other large purchasers of american debt aware of this disjunct? if they are, then why is the yield on the 10-year still so low?
frankly, i just do not see why the rise in price of the “daily diary of the american dream”, a cup of premium coffee and a high-end hotel room should lead to a decrease in price of ten-year US gov’t bond.
Funniest thing I have seen this weekend is Bill Poole [or is it Poodle] of the FED to say that the markets shouldn’t build in more rate cuts. Um Bill, didn’t you say the same type of bullshit before cutting the Discount rate twice and a half point on the FFR?
And Bill, how come the effective right now is 5.23% when the stated is 4.75%? How come the 10 yr. and 30 yr. bonds as well as the traditional 30 yr. mortgage are up in the face of all your loosening? Could it be Billy Boy that our trading partners aren’t buying our fancy asswipe paper anymore?
Bill Poole and the entire FED are more full of crap than a Christmas Turkey. Save your breath Bill because the world is on to your lying ways.
SPECTRE of Deflation,
“Funniest thing I have seen this weekend is Bill Poole [or is it Poodle] of the FED to say that the markets shouldn’t build in more rate cuts. Um Bill, didn’t you say the same type of bullshit before cutting the Discount rate twice and a half point on the FFR?”
That’s the first thing I thought when I heard his most recent ‘warning’ to investors. In reality, I took it to be a confirmation that the fix was in and that an October cut is a virtual lock. (btw, I like your new moniker for him.)
Of course, if you recall, ‘Bill the Poodle’ was conveniently ‘absent’ when that 50 bps discount rate cut was done back in August.
Plausible deniability?
In order to understand the significance of CPI and its use, it is necessary to understand the core beliefs of the Federal Reserve members, especially the chairman.
The underlying fear, whether real or imagined, is the prevention of another depression. This is to be avoided at all costs. Price stability is a sideshow that cannot be well-controlled, nor can economic growth be well-controlled. The Fed is aware of this and thus is more concerned with economic chaos, and the greatest risk in their minds is deflation.
The core CPI is used to ensure there is a buffer of inflation to combat deflationary pressures. This is the crux of the Fed’s actions this year with a tight monetary policy – core inflation has been high enough to ensure this deflation buffer. As core CPI falls, the monetization party will start – to ensure this buffer stays in place.
Bernanke believes it was a debt-deflation spiral that caused the Great Depression, and thus by keeping tabs on the core CPI and keeping it well above zero, the greater risk of deflation is kept at arm’s length.
The problem with this concept is the same blind spot had by Irving Fisher, in that the bubblyflation (my term is haluciflation) that is caused by excessive debt buildup is ignored. Liquidity cannot be forced on those unwilling to either lend or borrow, and thus haluciflation is outside the scope of the Fed to control or even monitor well.
We are seeing these effects now. The hard commodities are skyrocketing – but there is only one commodity shown to be in short supply (I believe it to be sulphuric acid but could be wrong, here). So if there is no demand/supply imbalance, no money stock increase, no core CPI rise, what is fueling the rise in commodity prices other than speculative excess debt?
The same blind spot occured during the 1927-1929 period, when consumer price index was flat but debt soared – the Fed, following Fisher’s ideas, assumed all was well because inflation was tame.
Bernanke believes the failure of the Fed at that time was a failure to infuse to create liquidity – but liquidity does not always go where you want it to go when you want it to go there, you can’t force consumption on those that want to save, and you cannot control the appetite for risk and risk aversion.
It’s not how to patch together after the accident the guy who decided to run the red light, but the initial decision to “go for it” that created his problem.
And if the speed is high enough and the collision violent enough, not even the core CPI side airbags will cushion the blow enough to prevent serious injury.
Yes!The FEDs biggest worry is that the currency they sponsor might become too valuable. You just can’t help people.
I think we need to redefine inflation from “too much money chasing too few goods” to “too much credit chasing too high a return”
This market is way out of control, and we will ALL pay the price for it in the end.
“And Bill, how come the effective right now is 5.23% when the stated is 4.75%? How come the 10 yr. and 30 yr. bonds as well as the traditional 30 yr. mortgage are up in the face of all your loosening? Could it be Billy Boy that our trading partners aren’t buying our fancy asswipe paper anymore?”
are you trying to play loose and fast with the “facts” or just taking us for a bunch of suckers???? the eff. fed funds rate is 4.93% as can be seen here: http://www.ny.frb.org/markets/omo/dmm/fedfundsdata.cfm
whats your agenda and who the f are you exactly? your posts provide no insight, no suggestions on how to make a buck, just inordinate amounts of whining, conspiracy theory, etc-
Inflation? You want inflation?
How about date inflation?
Here it is 9/30/07 and we are reading an article from 10/8/07.
So many fictions.
So little truth.
Q4 arriveth!
Cheers
FWIW– For what it’s wroth!
It IS starting to get to the “mainstream” business sections of the local newspaper.
Here is San Diego (where nothing negative actually ever happens) the issue of the CPI gathering and it’s ineffectiveness in stating real inflation is the front section of the Business section of the local republican “feel good” rag that passes as a newspaper.
Real Inflation=more entitlement increases
Therefore…….LOL
BTW that Lewis Kid needs a good ass kicking on the track……maybe I’ll give him one next year as he won’t have the benefit of my prior employers handbook on how to run OUR car……
Ciao
MS
Seattle and Snohomish County apartment dwellers will really have to dust off their memories to recall anything like they’ve gone through this past year: Rents in those two areas have climbed 12.2 percent annually …
http://archives.seattletimes.nwsource.com/cgi-bin/texis.cgi/web/vortex/display?slug=rents30&date=20070929&query=rent+increase
There Is NoInflation
No evidence of inflation in the American economy, unless you look at the cost of the commodities which people must actually buy. Or the continuing decline of the dollar against world currencies. Or the predictable spike in the (dollar-denominated) …
Regarding the Chinese having $200b to “invest” in outside markets and what that means for the US market…..
Hank and Ben have repo’ed more than that amount in the last three weeks alone……you can say it’s just a like for like exchange (I know you perma-bulls will) however since the Fed/Treasurey has NO say in where that extra “liquidity” goes it can be used by the brokers to push up WHATEVER THEY DEEM IT FOR.
For those who think that it’s just “business as normal” go back to the Fed site (I’m sure you can find it) and see how it’s gone totally apeshit since early august……Hanky Poo has been busy as well as he’s “auctioned” off all that “execess tax receipts” for the last two weeks straight….think they were worried about the Q end?????
Worrying about $200b from the Chinese is not really all that big of a deal when you put into context what are gov’t is/has been doing with you’re neighbors boat loan……that is more scary to me as that’s what third world countries do…..but as we continue to hear “it’s contained at the bottom”
Ciao
mr clean+corky=jeff macke,
I think what DEFLATION is getting at is that the rate cut which many claimed would help homeowners, will actually hurt those seeking to purchase a new home or refinance their ARM into a fixed mortgage. This is evidenced by the fact that since Ben slashed the fed rates, 10-year yields are actually up which in turn has caused 30-year mortgage rates to climb:
http://tinyurl.com/mrsr5
As for “suggestions on how to make a buck”:
BUY GOLD AND COMMODITIES.
Score sheet for the first 3 Q’s of 2007:
S&P 500: +7.89%
DJIA: +11.57%
NASDAQ: +12.08%
Gold: +17.56%
“Inflation? What inflation?!”
For anyone left who actually believes the Fed has any real inflation concerns may want to read this from a Bernanke speech on deflation:
Quote: “Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero.”
The full speech is worth reading to get a grasp on this Fed’s thinking: http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm
Basically, what we have is an Irving Fisher clone sitting the the chair of the Fed – hopefully, he will have more foresight that the real Fisher who claimed that “equities had reached a permanent high plateau” around August of 1929.
The above references support the claims that I and many others here have made that inflation is a necessary ingredient of a debt-driven economy and thus the main job of the Fed is to manage required inflation in order to avoid the disaster of deflation.
Eclectic: Had you read the above speech, you wouldn’t have had to whip up that tasty crow sauce of yours – because I am certain you understood the magnitude of the crisis that was and is still there.
http://news.goldseek.com/GoldSeek/1190991990.php
Antal E. Fekete discribes a situation in which defalation and inflation occur concurrently, due to the expansion of credit occuring during an inabilty of the FED to expand the real Monetary Base which is the FRN’s due to reg’s as was insisted on by Estragon in a previous thread. How is this possable an is it in fact accurate.
He claims ~725B of FRN’s in circulation with another ~225 in waiting due to the lack of collateral backing.
Any thoughts??
Deflation + Inflation = Japan
Winston,
Please humor me and give me a good paragraph on your definition of “debt-deflation spiral.”
—
Storm, per you:
“Antal E. Fekete discribes a situation in which def[l]alation and inflation occur concurrently…” end quote.
…Late 1970s, Stormsky, due to the application of faulty Keynesian monetary policy, as the Carter administration chased cost-push inflation higher in support of failing domestic industries.
It took the insights of Paul Volcker to understand this enigma and put a stop to it. The jury is out on Dr. Benber N. Anke.
Eclectic,
I’m listening to the second part of Puplava’s News Hour, w/ Axel Merk, John Rubino, Peter Schiff & James Turk, they go on, and on, and on, and on….. about how much the FED is printing, then Fekete say’s in his piece nope they aren’t printing, does anyone really even have a clue as to what is going on or is everyone just speculating because usually when the FED cuts we get inflation. After rolling the dung ball by last week with Estragon and getting more schooling on what the FED can and can not do, I’m inclined to think that the Main Stream Investment Gurus are missing something that Fekete is on to which would have profound effects going forward. I don’t know if you read his piece but what he describes is a situation in which enough FRN’s can not legally be printed to support the demand induced by the credit expansion, leading to the hoarding of dollars and possably even fee’s for those who wish to convert other investments to cash.
Eclectic:
For all the good things and good thoughts you provide to this assembly, I am honored to comply to almost any request you might make – if you are humored, so much the better.
My understanding is this, taking part directly from Bernake’s “Deflation” speech.
“Japan in recent years has certainly faced the problem of ‘debt-deflation’–the deflation-induced, ever-increasing real value of debts.”
I extrapolate this debt-deflation to be a debt-deflation spiral as exhibited by higher real costs of debt due to deflation creating higher loan defaults which in turn causes tightening of lending which in turn leads to further deflation which in turn leads to further defaults….and so on.
Eclecticc: I think whay is being referred to is “pushing on a string.” Inflating the supply of money which is accessible but because of the deflationary mindset noone takes up the offer??
Anyway E., W.M., I’d be interested on your take on today’s link to Credit Crunch- New Financial Snack.”,I don’t see howFed action can get around what is laid out in that article on derivatives and upcoming resets.
Zell said,
“pushing on a string.” Inflating the supply of money which is accessible
I do not believe it is readily appearant that the FED is inflating the supply of anything with the exception of credit. The numbers and rules regarding the collateral backing of any new currency created simply do not seem to support this,
North
http://www.lewrockwell.com/north/north568.html
and now Fekete
http://news.goldseek.com/GoldSeek/1190991990.php
what the main stream observed as happening in the previous rate cutting inflation cycles does not appear to be feasable this go round unless there is some mechanism for actually expanding the FRN supply that no one has put forward. Even that piece about printing being demand driven seems somehow flawed??
With regard to trying to diseminate anything from those speachs, Bernanke, Poole, “Read my lips no new bail outs”
remind you of anything, even kinda rhymes.
Zell,
That is one of the best articles I have ever seen and would put that in a glass Mason jar and bury it in a time capsule for future Fed chair’s to read.
There seems to be some connection between the article you mention and the one Stormrunner has indicated.
To understand the disconnect, the first thing is to understand how the Fed creates additional money stock. This is done simply by the expedient of the Fed making purchases with “magic money”, money that it has been granted the right to create from nothing. Whether it is Federal Reserve Notes or electronic money transactions is irrelevant, as they are in essence the same.
The System Open Market Account is the best guage of money creation. When the Fed monetizes, this is where the purchased asset goes. It has been growing at about 3.25% this year, so not much real monetizing has been going on.
But even the Fed has some theoretical limitation on its money creation, which would be the amount of available assets it could purchase.
In theory, the Treasury, ordered by Congress, could issue bonds to pay off the entire national debt of $9 trillion, and the Fed could buy that entire amount with “magic money”. This would be the Weimer scenario of hyperinflation. So there is a theoretical ceiling on the Fed’s creation limit. But, of course, the practical limits are much, much lower.
However, the derivative and asset backed securities markets worldwide represents about $400 trillion, give or take.
For argument, let’s say U.S. firms hold 50% of that amount and it is leveraged only 2:1. That would still be $100 trillion in debt, and thus it would be impossible to monetize $100 trillion in debt with the present available assets, even in a Weimer scenario. Even a necessity to monetize 10% of that debt could create incredible pressure on available money.
At least, that’s my take on what the disconnect represents. I’m open to hear other viewpoints.
On a sidenote, all the hoopla about repos is misunderstood, as the daily repos have to be weighed against the expirations along with treasuries coming due to get an idea of total liquidity injection that day – and notice that the phrase is “liquidity injection”, not money stock creation. Liquidity simply means: ability to transact. And these liquidity injections are temporary, hence you see them listed on the Fed’s temporary open market operations.
The more worrisome item than repos is the extension of the discount window loans to 30-days with rollover provision and no limits. This, in essence, is a semi-permanent infusion if the borrowing bank so deems it.
“And Bill, how come the effective right now is 5.23% when the stated is 4.75%? How come the 10 yr. and 30 yr. bonds as well as the traditional 30 yr. mortgage are up in the face of all your loosening? Could it be Billy Boy that our trading partners aren’t buying our fancy asswipe paper anymore?”
are you trying to play loose and fast with the “facts” or just taking us for a bunch of suckers???? the eff. fed funds rate is 4.93% as can be seen here: http://www.ny.frb.org/markets/omo/dmm/fedfundsdata.cfm
whats your agenda and who the f are you exactly? your posts provide no insight, no suggestions on how to make a buck, just inordinate amounts of whining, conspiracy theory, etc-
Posted by: mr clean+corky=jeff macke | Sep 30, 2007 12:49:58 PM
Read this and catch a clue moron:
Libor Costs Soar as Banks Seek Funds Over Quarter-End (Update3)
By Gavin Finch
Sept. 28 (Bloomberg) — The cost of borrowing pounds, dollars, and euros overnight rose as banks sought funding over the quarter-end amid a credit squeeze, and as U.K. lender Northern Rock Plc borrowed more money from the Bank of England.
The London interbank offered rate that banks charge each other for overnight loans in pounds rose 20 basis points to 6 percent today, the highest in 10 days, British Bankers’ Association figures showed. The corresponding rate for dollars rose 21 basis points to 5.30 percent, and the euro rate climbed 6 basis points to 4.23 percent.
Interbank market rates have soared as concern that losses on securities linked to U.S. subprime mortgages will spread keeps lenders from providing money to all but the safest borrowers. The Financial Times newspaper said today Newcastle-based Northern Rock had been forced to return to the U.K. central bank for more money after a Sept. 14 bailout to stay in business.
“Coming up to quarter-end you would expect to see a small spike in Libor, but with the market so short on cash it’s particularly vulnerable at the moment,” said Oliver Mangan, chief bond economist in Dublin at AIB Capital Markets, a unit of Ireland’s second-biggest bank. “People are reluctant to lend cash while banks are scrambling to hoard as much of it as possible. This is keeping rates elevated.”
Libor for pounds, euros, and dollars has typically risen between 4 and 11 basis points over quarter-end for the last four quarters, the BBA data shows.
`Abnormally High’
The cost of borrowing pounds for three months was unchanged at 6.3 percent, after touching a nine-year high of 6.9 percent on Sept. 11. The cost of borrowing dollars was also little changed at 5.23 percent and the euro rate stayed at a six-year high of 4.79 percent.
The pound three-month rate exceeds the Bank of England’s key interest rate by 56 basis points while the equivalent dollar rate is 48 basis points over the Federal Reserve’s benchmark. The difference between the rate for euros and the European Central Bank’s refinancing rate is 79 basis points.
“Libor spreads to official rates continue to sit at abnormally high levels,” said Charles Diebel, head of European rate strategy at Nomura International Plc in London. “Spreads have scope to re-widen.”
Northern Rock has borrowed a further 5 billion pounds ($10 billion) since the bailout and it now owes the central bank almost 8 billion pounds, the FT said.
Northern Rock fell as much as 5.4 percent today, while the value of U.K. home-loan providers Bradford & Bingley Plc and Alliance & Leicester Plc, which also seek financing in money markets, declined.
Considering that food and energy prices can reverse rapidly (as, for example, energy just did, rising quickly after falling for 3 months), it would be irresponsible of the Fed to take them into account as part of its inflation target. To see this without the emotional distraction of today’s context, imagine that food and energy prices were falling rapidly. To get the overall inflation rate into its preferred range, the Fed would have to allow other prices to rise rapidly. Fine, except suppose suddenly a hurricane destroys a lot of energy capacity and the food and energy component starts to rise rapidly. Other prices are not going to stop rising just because food and energy prices start rising. By targeting the overall inflation rate, the Fed would have unintentionally created high inflation. The same argument applies in reverse when food and energy prices are rising to begin with, except that deflation is generally more painful than high inflation.
Spectre of Deflation wrote:
Read this and catch a clue moron:
Libor Costs Soar as Banks Seek Funds Over Quarter-End (Update3
By Gavin Finch
You are confusing LIBOR with the fed funds rate.
Stormrunner,
While it’s true that the fed has limitations (which could be suspended)on the amount of liquidity it can supply via open market operations, these operations aren’t the only way of getting money into public hands.
It could, for example, make low interest loans through the discount window and take pretty much anything for collateral. Even if it monetized every debt in the US, it could monetize still further by accepting foreign debt as collateral.
Incidentally, this wouldn’t be the proverbial dropping of money from a helicopter. That chore falls to congress through fiscal policy.
Spectre of Deflation wrote:
Read this and catch a clue moron:
Libor Costs Soar as Banks Seek Funds Over Quarter-End (Update3
By Gavin Finch
You are confusing LIBOR with the fed funds rate.
Posted by: agdsgsdjl | Oct 1, 2007 1:10:02 PM
My bad on that count. The FFR has a stated at 4.75, and on Friday effective was 4.93% which ain’t 5.23%. My main thrust is that the two discount rate cuts and the FFR cut are not in any shape, form or fashion helping homeowners. The banks and brokers love it though. I read so much that at times I get my figures wrong, but I reckin’ I’m not the only one who can make the occasional mistake. My apologies to all concerned.
Something I found this AM which makes my case about who was helped. It was the reckless.
Investors to Fed: Thanks for nothing
The reckless are getting relief from Bernanke while the prudent are paying the price, argues Fortune’s Allan Sloan.
By Allan Sloan, Fortune senior-editor-at-large
September 28 2007: 2:27 PM EDT
(Fortune Magazine) — One of the core principles of the U.S. medical profession is the Hippocratic oath, the most famous part of which is “Do no harm.” It’s too bad that the governors of the Federal Reserve Board don’t have to take such a pledge when they assume office, because their recent interest rate cut has done a lot of harm to those of us who’ve managed our finances prudently.
Even though the Fed’s stated reason for cutting short-term interest rates by half a point was to help keep the economy from falling into recession, anyone who’s been paying attention knows that a major motivation – if not the major motivation – was to try to calm the turbulence that has been roiling the markets since August.
The stock market has never seen a rate cut it didn’t like. But Fed Chairman Ben Bernanke is penalizing the prudent.
The players in the biggest trouble, of course, were the ones who’d taken the biggest fliers in junk mortgages, ultra-risky leveraged buyouts, and other financial esoterica that proved to be malignant.
The stock market, which had been begging for a bailout and hasn’t ever seen an interest rate cut that it didn’t like, responded to the Fed’s half-pointer by running prices up. Ben Bernanke, the Street decided, is just what the doctor ordered.
Did the Fed go too far?
However, if you look at the financial markets’ overall reaction to the Fed move – not at just the stock market’s reaction – you realize that as a result of the cut, those of us who keep score in dollars and didn’t need to be bailed out are less wealthy than we were in terms of anything other than our home currency.
Why? Because the rate cut contributed heavily to the dollar’s recent sharp drop in the currency markets – parity with the Canadian dollar, for God’s sake! – and to the price spike in hard assets like gold, silver, copper, and oil. So our wealth, relative to these other things, has diminished.
And wait, there’s more. Even though the Fed has cut short-term rates, long-term rates, which it doesn’t control, have risen in reaction to the cut. So whatever economic benefits may flow from lower shortterm rates will be partly offset by the rise in long rates, which are at least as important to the economy as short rates.
Finally, consider this. Even though Bernanke’s cut may mean that some junk mortgages will reset at lower rates, the cost of large, high-quality fixed-rate mortgages, which are tied to long rates, will be higher than they’d otherwise be. (Yeah, penalize the people who are prudent – way to go!)
When I talk about prudent people being penalized, I don’t mean just the decline in their wealth in terms of anything other than the dollar. I’m also talking about the price paid by investors who wouldn’t play the subprime mortgage game and thus got lower returns than players who took bigger risks.
The folks who didn’t get carried away (and avoided huge losses) look smart today – but they looked prudish and foolish until the housing bubble finally popped.
Welcome to Bailout City!
Look, as I’ve said before – and will probably say again – the Fed’s job is to protect the financial system. It doesn’t dare let a giant financial institution fail, lest it drag down other big players and trigger cascading failures.
But if we taxpayers are going to bail out the likes of Countrywide Financial (Charts, Fortune 500), even indirectly, I’d like us to get a market return on our money. That would reward us for the risk we’re taking and seriously penalize companies that so overindulge that they need Dr. Ben’s Magical Money Elixir.
Let’s get the Treasury to negotiate deals like Bank of America’s (Charts, Fortune 500) with Countrywide in August, when the bank put up $2 billion and got a high current coupon and a below-market conversion option.
The Treasury could do what it did years ago with Chrysler and get stock-purchase warrants in return for guaranteeing loans to companies that we can’t afford to let fail. The idea would be to reward U.S. taxpayers and send a message to gunslingers without risking a worldwide financial collapse.
This different way of thinking won’t cure Wall Street of its “heads I win, tails I get bailed out” syndrome – but it will reduce the number of bailouts and mitigate the harm they now do to those of us who haven’t overreached. If Hippocrates were in the investment business, I’m sure he’d totally approve.
Barry: How do you respond to these blog posts? All three question whether your “inflation less inflation” theory.
AccruedInterest
Brad Delong
KNZN