Fed’s Folly: Fooled by Flawed Futures?

SocGen told Bank of France. So the ECB knew and so did the Fed, in all probability. They went ahead anyway. What a bunch of sellouts. This is not the way monetary policy is supposed to be run. If they cut next week as well, it will confirm that we are a Zimbabwe style monetary policy regime.

I will freely expose my ignorance by asking these questions for possible response from those more knowledgeable than I:

If the stock market is a leading economic indicator, is it not responsible for the Fed to seriously consider its apparent “warning” signs?

Is speculation so rampant that the stock market is no longer (or never was) a valuable economic indicator?

I tend to agree with BR’s sentiment with regard to the disappointing moves by the Fed. It is certainly easier to gain “control” of things by letting them go their own way…

Thanks for any insight offered by comments…

I guess it all evened out then. The fraud took down the markets, the Fed leveled them off, then the monoline rescue chat brought the markets back to where they started! LOL. This is seriously hilarious.

i would like to add that FED should have led the markets correct upto 6-7% before announcing the rate cut.

it was quite possible bleeding may have stopped at 6-7%, which would have saved the 75 pt rate cut for future.

now the market expects another 75 pt next week, i guess right now it sounds like a good time to put straddle-option play. stocks will either go up 10% or go down 15%.

“i would take inflation any day compared to being without job and in depression.”

Let’s talk again when inflation is 15% and see how you feel. Inflation only rewards those who are in debt. If you are smart and you’ve save, a recession doesn’t hurt too much b/c you’ve got savings to hold you over. Inflation on the other hand, you can have a job and you can still end up living in a dumpster.

Inflation . . . the most insidious tax.

AND the market is still expecting at least 50 bps next week???? So does this mean, the Fed, feeling duped, will say “Mr. market screw you” and give 25 bps or perhaps even nil… we’ll see, but given what you wrote, there’s more than a decent chance.

As someone said above, America is the next Zimbabwe. Hyper-inlfation is coming within 5 years. Buy gold, while you still can. But be prepared for when the government begins seizing all gold, which it will have to do when the dollar hits zero. I am truly ashamed to be an American.

If we are realists (rather than members of the bull or bear dogmatic religions), then we need to accept that the Fed is a put on the investment community. It matters not what their job description is in the public arena — aren’t we all believers in the maxim “actions speak louder than words”?

One of the underlying presuppositions that seems to cause faulty expectations is that the US exhibits either a free market system or is aspiring to do so. As a student of history, I do not believe either are true. The wealthy will always protect one another, and they will manipulate the system to maintain the orderly structure that has benefited them in the past. With all do respect, anyone who does not believe such behavior will continue is a bit naive (or waiting for a messiah).

The power elite will never support a true free market system because in practice it means chaos or at least letting go of the yoke they so tightly grasp. “Free market” is nothing more than the catch phrase of the day. Anyone who knows economic reality knows that all markets are manipulated by laws and power (including money). Kudlow is a perfect example of why “free market” is nothing more than double speak for “fiscal and legislative aid for investor capitalists.”

Also note that although the Fed is bailing out speculators, they are ALSO providing a put for all the boomers who are currently or in the near future set to retire (or supplement income) on the worth of their two major assets: house AND EQUITIES. The value of equities play a very real role in consumer sentiment and per capita wealth. Thus, with all due respect, I think focusing on the Fed’s effect on speculators over simplifies the issue.

Bottom line as a realist: the Fed cut rates and will continue to cut rates with no concern for “moral hazard.” What do these objective facts mean for the market and the economy? The rest is philosophy and the religious faiths of capitalist existentialists …

Watching that video again today in light of the news out of SocGen, Liesman is even more of a joke. Criticizing you and Santelli for believing in a system of free markets? It’s almost darkly hilarious.

BR wrote: “Their panicky rate cute were not too insure the smooth functioning of the markets, but rather, to guarantee prices”

BR, why do you see these as so different?

Is there a significant difference between “insure the smooth functioning of the markets” and “guarantee prices” in the market?

Don’t worry shorts – the consumer is dead! Who can buy without money? The FED can cut all they want to, it isn’t going to help.

The fault is chronic overspending by congress…we need a balanced budget amendment….20 years ago..

C’mon Barry — here’s your logic: “The Fed’s move is bad bad bad! Look at this SoGen trader!”

Really, you need to think better.

One rogue trader. Now if there’s are hundred rogue traders…

Look, the Fed made its move in accordance with its mission — STABILITY. We were headed to a credit market meltdown. We can’t have that, despite the desire of the shorts to make huge killings quick.

Let’s wring out the excesses methodically, calmly.

Justin says: “this is USA not zimbabwe”

What arrogance. How many times through history have we heard “It will never happen here”. Read some history about 1920’s Germany. Tyranny and poverty are America’s future.

This rogue trading thing seems to be happening everywhere that the banks are leveraged to the hilt in “questionable securities products”.

Coincidence??? Mais Non

just like the plane at ‘throw last week that didn’t respond to a call for more power…..funny you know that sort of thing happens when there is NO FUEL LEFT….

Sounds like Ferrari’s PR’s when a car drops out of a race:

“we had hydraulic failure”…..
The kind when the entire engine blows up and can’t power the system any longer….funny that.

Ciao
MS

Now that the Fed has (once again) shown the true focus of its concern, another intervention is on the way.

I don’t know much about finance but I know a good deal about politics, and I’m very confident there will be a federal bailout of insurers in this election year. The people who would suffer in the immediate aftermath of a insurer meltdown have far too much influence in the form of campaign contributions to not get their way, and you can be damned sure that the Bush administration in particular will not let the monolines collapse. The fallout resulting from letting AMBAC and MBIA go under would be the final stake in the heart of any GOP hopes for retaining the presidency and any meaningful power in Congress.

However, there will be significant cooperation with Congressional Democrats on a bailout as well. There’s too much campaign contribution money at stake here, and no politician of any party will want to be seen as contributing to a spectacular financial collapse. Don’t be surprised if Hillary comes out forcefully in favor of a bailout in the next week or so. After all, Manhattan is part of her constituency.

An ancedote: I’ve been surfing some forums, and the amount of people refi’ing or getting ready to refi is pretty darn high. Rates are quite low. Obviously wont help those upside-down, but looks like a nice chunk of people may be saved…short term, at least.

Wouldn’t it be very funny and very surreal indeed if uncle Ben were to raise rates at the next meeting? HA!

Just entertain yourself for a few moments with the thought of what the usual suspects in the financial media(including our host and his truth telling ilk) would do with that one. HA! HA! HA!!

Enjoy the laugh because it is one of the few true joys you’ll ever get at the expense of the cabal

the fed cut had more to do with foreign markets than our own. bernanke et al cut to salve the global frenzy which would have surely sucked our markets into the abyss – and if markets over-correct we get a depression here instead of recession. as is now clear (and well-discussed here and elsewhere), decoupling is a myth and we are stuck with the role of arbiter of global economies.

I think FED was largely responsible for the current mess but coming credit collapse at the
order of trillions forced their hands and their action was a zugzwang.

We are living in the middle of an experiment. To date, we have proven that a civilization can function well with a certain amount of leverage. People have been crying Armageddon since credit cards were introduced to the masses. What we learned is that credit cards work fine. Dual income families work fine in our economy (although horribly in our society).

What troubles me is using a house as an ATM. This is obviously problematic. However, the US cultural passion to consume and create businesses will keep the system going. We will have a recession, but then we will have another growth period. Predicting otherwise is like saying the French will stop making love or the Italians will stop loving food.

Doom and gloomers refer to the Great Depression like it was yesterday. FYI, most people grew their own food back then and technology was at a level considered nonexistent by someone in college today. Anything is possible (hence the ever growing citations of Black Swan by those who are first realizing this metaphysical fact), but ignoring all the resources we have created since 1930 is exactly that: ignorant.

And, this is not Zimbabwe. Take a trip there and you will notice that Zimbabwe might as well be on another planet. That’s why they call it the Third World. Anyone who makes those comparisons is ignorant of the MAJOR differences between our two countries, cultures, and economies.

When Greenspan cut rates to the bone people said we would hyper inflate like Germany after WWI. Then people said we were doomed after 9/11. That never happened. Our society has been fine excluding all the normal negativity that exists in reality. When I drive through poorer sections of town I see people with cell phones who are eating food they bought at a restaurant. Doesn’t seem like we are headed to hell yet …

Just a “small” correction but the position they unwound wasn’t $7.1B in size – that’s how much they lost. The notional dollar amount must be at least several times that.

The Fed panicked simply because the futures that SOC GEN was selling down tanked the market. When you unwind that sort of position you will get moves like that. That no one at the ECB bothered to make this public is a travesty of communication that allowed the Fed to act as if they were “saving the market”…..

Go look it up…..it’s easily available and illustrates that our Fed has no clue on what is going on in this market much less across the street.

So the world market tanks because SOC. GEN couldn’t come clean and then invented this story with one trader….oh and BTW we’re needing to liquidate this position so if you see some strange shit going on in the market….it’s just us.

nice work on the communication

Ciao
MS

If the Fed had overcut, commodity prices would have risen on the news and the dollar would have fallen. But commodities fell and the dollar stayed more or less at the same level (at least relative to the Euro). Which means that the recession has killed off inflation. The Fed is not acting irresponsibly by cutting rates at this point. They are trying to prevent deflation.

The Fed knows how to fight inflation. If inflation starts to be a problem, the Fed can fix it. However, deflation cannot be fixed by the tools available to the Fed. They have to fight the possibility of deflation, because by the time you can actually measure deflation it is too late. That is why the comfort zone for inflation is 2-3% instead of 0-1%. You want to have a consistent, measurable level of inflation so that you can ensure that the economy does not enter a deflationary cycle.

“But at least the US authorities are facing up to the predicament that they created in the first place by fixing the price of credit artificially low for year after year, and failing to regulate banks, derivatives, and structured credit with a minimum of common sense.” **this would be the cause**

“The threat of a melt-down in the $2.4 trillion market for US municipal bonds had suddenly moved from possible to imminent. No monetary authority could ignore such risks.” **this would be the effect**

“If they lose their AAA ratings, all the bonds that they have insured will lose their ratings pari passu. This would force a large number of pension funds and institutions under strict investment rules to sell their bonds, setting off a cascade of sales with no obvious buyers in sight.” **this would be the outcome**

“But the time for tough-love is when the economy is humming along a little too fast, not when it is in the midst of a grave crisis. Calvinist monetary discipline at this point would wreak havoc, and possibly endanger the political stability of several countries (in Europe, if not in the US).” **this would be an excuse to postpone the punishment**

“The best we can hope to do is right the ship slowly, and turn a blind eye to moral hazard for now. But as Fed governor Frederic Mishkin put it recently, we cannot chastise whole societies to keep the moralists content. That will be the moment for society to settle its scores with the credit clowns. Not now.” **did it ever occur to you that the “credit clowns” who are insatiably greedy escape punishment time after time, by manipulating the FED into covering over the mess that they have created in the “best interests of the public”?**

Please, it’s always tomorrow. As the old adage goes, “tomorrow is promised to no man”.

The thing that everyone is missing is that all this is happening with interest rates at historical lows. We can’t keep interest rates at nothing forever for a number of reasons, including that nobody is ever going to have any savings, inflation is going to get out of control, the US dollar is falling and the US is running a deficit.
We are in a credit crisis. Its only a matter of time before interest rates reflect that.
If you want to see a stock market correction, wait until interest rates hit 8 or 10%.

Reading SG’s reaction/explanation of the loss is classic corporate Orwellian doublespeak….

Monsieur was ever so smart, using his “intimate and perverse” knowledge to hide everything….

I call shenanigans…your internal controls failed, you’re idiots.

“If the Fed had overcut, commodity prices would have risen on the news and the dollar would have fallen.”

I just checked and oil is up $1.70, gold is up $26 and silver is up .40. The dollar is down .62 and might close at its lowest rate this year. The dollar is waiting for an ECB rate cut. If it does not come, look out below!

“The Fed is not acting irresponsibly by cutting rates at this point. They are trying to prevent deflation.”

At the expense of inflation.

“The Fed knows how to fight inflation. If inflation starts to be a problem, the Fed can fix it.”

Really? Inflation in the US economy is elevated at multi-decade highs. US producer prices were up +6.3% last year, and US consumer prices up +4.1%, the highest in 17-years, compared with +2.5% for 2006. Gasoline costs were up 37%, and food prices were up 9.3% last year.

“They have to fight the possibility of deflation, because by the time you can actually measure deflation it is too late.”

The same could be said about inflation.

“That is why the comfort zone for inflation is 2-3% instead of 0-1%.”

If that’s their comfort zone and given the numbers above why are they cutting rates and in effect inflating the economy? Because they, like most of their American brethren do not know how to save.

Pat Gorup,

I not only agree, yet sympathize with your comments. Nevertheless, why punish the masses at the expense of the criminal few? Do you remember Washington/New York officials reply to the predictable bank collapses in the early 30’s? A chilling combination of smugness and morality resulting in a world depression. Let us never forget that. What would you have the Fed do? Perhaps let the markets crash, then cut might be an option. Take preventive actions – which they did. Don’t do anything at all and let the chips fall where they may? Bad idea. Your response, thanks.

“Tuesday’s panicked 75 basis cut will prove to be an historical embarrassment, a blot on the Fed for all its days.

And, having been rewarded for their past tantrums, the market will now be screaming for another 75 bps next week. As Rick Santelli appropriately observed, the Pavlonian training is now complete.”

Which is why the Fed may stand pat or only go 0.25% on Tuesday. Either way, equity markets will be disappointed.

T.

What would Greenspan do? NOT CUT 75 SEEMS TO BE THE ANSWER.

Tuesday’s rate cut has prompted some to wonder how Alan Greenspan would have acted, and some have pointed to an excerpt from the March 20, 2001 Federal Open Market Committee meeting as guidance.

Economic data was middling at the time, although it would be later determined that a recession began that month. But in the seven trading days prior to the meeting, the Dow had fallen 900 points, or 8%, boosting expectations the Fed would cut the funds rate 0.75 percentage points.

Mr. Greenspan told his colleagues that day: “It is important that the Federal Reserve not follow a flawed strategy. I fear that with a reduction of 75 basis points or even 100 basis points today, which as you know a number of people are suggesting, stock prices could still fall, leading too many observers to conclude that monetary policy is ineffective. This is a potentially dangerous view in my mind especially among the broad array of those who do not participate in the equity markets. If we do 50 basis points and stock prices fall further, as they well might today, it is the central bankers who may be perceived as intellectually inadequate, not policy itself. This is far less dangerous to the economy!”

He was right. The Fed cut by half a point and stocks promptly fell; the Dow sank 238 points that day and another 331 over the next two days. “Rate-Cut Disappointment Sparks a Late Selloff,” was a headline in The Wall Street Journal the day after the move. “”I have no use for Greenspan and his merry band of fools,” one caller told a mutual fund company as he shifted all his savings to a money market fund.

Stocks returned to their pre-March 20 level a few weeks later before succumbing that summer to a weakening economy, and finally the Sept. 11 terrorist attacks. The Fed cut steadily that year, including three 0.5-point intermeeting moves.

Wow,

conforming loan limits being raised for 1 year. From $417,000 to $625,500. This is interesting…

FENNER,

Change your panties, the ones you are wearing are soaked…

BR: Forget about the trader in France, that’s peanuts compared to what is going on.

The market is setting the 13 week T-Bill rate at 2.27% with Fed Funds at 3.50% going to 3.00% next week and still not low enough. This tells us how worried everyone is, not just a French bank or two, as the world is plunging into the highest rated paper in the world.

Also, remember since those derviatives are basically a zero-sum game lots of folks out there are $5B richer. The money just went from one coffer to another, some would say back to its rightful owners (I wish it was me!).

Come on guys, there’s way too much whining in these comments.

Welcome to reality. The privilege of the rich is to have the ability to buy influence. Why else would I want to be rich? Don’t all of you want to be rich? Oh! I see….. You want to be rich and fair…. That’s a NO-CAN-DO buddy!

What we have here today is not anyone’s fault, it is everyone’s fault. The prisoner’s dilemma collectively got hold of all of us. Consumers, Corporations and Government. We have been living beyond our means and it’s time to pay the piper.

This is one party where I’m not going to pick up the tab. That, I can assure you of and you can rate that assurance AAA.

Econolicious

I just checked and oil is up $1.70, gold is up $26 and silver is up .40. The dollar is down .62 and might close at its lowest rate this year.

Gold and silver are mostly worthless and irrelevant. Look at agricultural and energy commodities. Both have been falling for the past month and continued down after the Fed cut. Inflation is best forecast by the agricultural and energy futures (unless you just want to look at core inflation).

This week, the dollar has moved within its expected volatility envelope. It is up about 1% since the end of last week (when US markets were last open before the Fed cut), but is staying within the range it has traded in since mid-November. The dollar is not falling relative to the Euro, it is merely fluctuating in value. A falling dollar requires a range breakout.

Really? Inflation in the US economy is elevated at multi-decade highs. US producer prices were up +6.3% last year, and US consumer prices up +4.1%, the highest in 17-years, compared with +2.5% for 2006. Gasoline costs were up 37%, and food prices were up 9.3% last year.

Again, look at what the futures contracts did last year. You are looking at what inflation was, not what it is or what it will be. The futures contracts for most agricultural products just about doubled last year. And in the past month, they have dropped about 10%. Inflation has been killed, although it will take another 6 months before these price drops make it into the CPI. The agricultural commodities are still below what they were last Friday. Oil dropped most of this week and then recovered today, but is still below last weeks closing price. These are not the price patterns you would get if the Fed were pumping up inflation.

Y’all quit beating up on my beloved stock markets. They can’t help their manic-depressed behavior.

Think of them like a collateralized debt obligation–putting a bunch of BBB paper together does not make AAA, good as US treasury, paper, no matter how good the financial alchemist.

According to Spinoza–my favorite dead philosopher–hope and euphoria are just the flip side of panic and fear, all of which are inadequate emotions to which we humans remain enslaved so long as we reject God, or pure logic and rationality. Were he alive today (he lived in the 1600’s), I think he would have looked at this market for blips on a computer screen that in turn represent slivers of illusory income streams, and point out the folly of trying to impart any rationality to it whatsoever.

How could it possibly be rational when so many of its participants are in bondage to their emotions? Collectively, the stock market is the essence of irrationality, and it can’t help it. Leave it alone…

Nice robust system of checks and balances… Not!

Great system — “And he did it in a way that meant he removed all trace of what he was doing.”

New kind of terrorism? Economic terrorism. Stock market terrorism. — “losses were blamed for bringing the world’s financial markets to their knees this week by triggering the global collapse in stocks.”

Pending dismissal? Not arrested? — “Mr Kerviel has been suspended pending dismissal..”

Trial run? Because he could? Management culture? — “don’t know the person and his motives”

An accident is “bad luck”. This was not an accident. It was ineptitude or apathy. Poor security, failure to know your systems, maintain them, improve them, is bad leadership. — “This is just bad luck…

I agree with your Barry. There is not a millimeter of separation from the Federal Reserve Bank (supposedly a public institution worried about rising unemployment and rising inflation) and oligopoly private financial system. The U.S. private financial system (intertwined retail banks, brokerages, investment firms, and real estate funds) that it might as well become one central bank.

The next step is to nationalize these large private U.S. banks–which are now down to maybe six of any size–and be done with it.
If China’s sovereign fund ends up controlling Citibank for example, we already have a nationalized U.S. bank controlled by a foreign (and possibly hostile) government.

Why allow these hack bankers to squeeze the consumer, misinvest funds, take outrageous salaries and bonuses, and then, owing to the incompetence and greed, pass the ‘lemons’ onto the State for a bail out.

As Walter Reuther the U.S. auto union leader once said, “the great American free enterprise system is neither free nor enterprising.”

Since the Fed says repeatedly that it is guided by information and that it regards oil longer term futures, S&P futures, treasuries prices, Fed Fund futures on a day to day or even a month to month basis as accurate information ( cf many Fed statements, speeches ) then they are going to be gamed by the traders ( just the word traders should cue them, but if not they should read up about how Enron traders gamed the newly deregulation electricity market in Cali ) or fall victim to accidental, “black swan” event, which is what the SG fiasco is.

The naive fools – and if they compound it by continuing on the part of further rates this coming Wed. – to demonstrate that they weren’t fooled – as they probably will, then we will all suffer even further.

Got Euro ? Or Swiss Franc, Aussie $, Swedish , Norwegian kroner or ag commodities or gold or silver ?

-K

Here’s a rough estimate on the size of “Evil” Kerviel’s positions:

You have to slosh around hundreds of millions of euros every day in mtm to keep this going

To further the above comment on what we are supposed to believe happened at SG.

THere is no firm in the WORLD that would not know it had that amount of exposure hanging out to dry each and every day.

No way in hell……This is yet another spun story to protect the lack of risk management in a system that prides itself on self-regulation.

Fuck me and the rest of us because if that is true then why don’t we just get Fannie and Freddie to bury all these bad losses (as someone taps my shoulder) in it’s own books.

Oh yea…they just did that…

God help us all……..who have more than 15-20 years left in our lives.

Ciao
MS

To Terrence Patton

Okay you asked, sorry for the delay.

“Nevertheless, why punish the masses at the expense of the criminal few?”
The masses also participated in one form of fashion or another through credit, stock and house appreciation didn’t they?

“A chilling combination of smugness and morality resulting in a world depression.”
Deflation is often associated with The Great Depression which of course was a terrible circumstance to have lived through. It should be noted that normal cycles of deflation don’t always correspond with periods of poor economic growth historically. I think that deflation is being misconstrued with temporarily falling prices (like in housing) when in fact the definition is a sustained fall in general prices (i.e. wages, consumable goods and services). When was the last time you experienced lower prices for food, oil changes or doctor’s visits?

“What would you have the Fed do?”
The Fed existed before the 1920’s which led up to The Great Depression. At the time there was widespread use of purchases of businesses and factories using credit and the use of home mortgages for credit purchases of automobiles, furniture and stocks. Does this sound familiar?

Given their historical record would you trust the FED to do the right thing because they have your best interests in mind and are competent? The credit, housing and stock markets will not crash, they’ll just deflate. Will it hurt? Absolutely. But if the government keeps intervening it will only make things worse for a longer time.

Hmmm… maybe I’m naive, but suspect the impact on stock price is something of a side effect. My sense is that Bernanke is trying very hard to avoid a meltdown now (and for the next month or three) for the purpose of giving banks and financials a better chance to work through their questionable assets and free up some liquidity. I just don’t quite buy this idea that it’s all about the market. It is at this moment, but only as a proxy for investor confidence. He has to keep the market on an even keel or else companies and people will lock up their cash even tighter, turning a possible recession into a depression. Financial instruments will get marked to a non-existent market, and ‘poof’ there goes another several hundred billion dollars of shareholder equity, and several institutions collapsing, when a more stable environment would allow many/most of the at-risk companies to squeak by. If every person and institution in the US were not hoarding cash right now, I suspect rates would be much higher. But heck, I gotta run, time to refinance my (fixed rate) mortgage!

Assuming the Fed cut to prop up stock prices, and assuming major indexes add another percent or two between here and fed meeting, should the Fed stay steady?

Fed can’t afford to do that because rate cuts of 50 to 75 bps are already built into expectations (fed fund futures?). Like it or not (and I don’t like it), fact is Fed won’t do anything to upset the stock market.

Reminds me of the sick patient who needs his steady dose of steroids just to show a pulse. Sad that the Fed has brought us to this.

If only they refused to bail out LTCM and banks that lent margin for LTCM’s fail proof schemes, the world’s speculators would have been forced to take their lumps and take a saner approach to RISK. Instead, Fed now gets to manage RISK while the REWARD is completely assigned to the reckless speculators.

techy,

In trying to re-educate people about the systematic problems we have in this country it is useful to define some terms.

Inflation, contrary to popular belief is an increase in the MONEY SUPPLY, not increase in prices (M3 . . .funny how they no longer produce M3). Rising prices are the RESULT of inflation, not inflation itself.

Don’t believe me . . . go look it up in a 1983 Webster’s dictionary. For some quirky reason (maybe so the masses can’t understand the problem), sometime in the late 80s, early 90s, dictionaries changed the term to say an increase in prices—absolutely false.

When the monetary supply is increased . . . either through fractional reserve banking, the FED injecting liquidity into the market, or through lowering interest rates (causing more banks to borrow) . . . it does not inject itself into the economic system symmetrically. It will flow to the path of least resistance (sorry as an electrical engineer, I like using circuits). What is the path of least resistance?? Well, it’s most likely going to be the current “boom” area.

Let’s give an example. If stocks are through natural growth going up at 10% YOY, and real estate, bonds, commodities are lagging at 2% natural growth, an injection of money will most likely go to the stock market. This of course in turn pushes stock prices higher and higher. Eventually, it blows off and the market crashes. This is precisely what happened from 01-05, but in housing. Housing already in a boom phase, got knocked into another gear by an injection of money supply through low interest rates. Why was anyone with a pulse getting a loan, not just b/c of loose standards, but b/c money was so insanely cheap, thus promoting price increases.

This is why the deflation argument is completely wrong. Let’s say you have an average true inflation, M3, at ~9% a year over the past 8 years. Over 8 years you’ve had an 99% increase in inflation. Let’s say then for the next 2 years we have M3 destruction at 10%. After 2 years of M3 destruction you will still be up 63% over 10 years, yielding about 5% inflation over 10 years.

Also contrary to popular belief, the effects of inflation (price increase) are asymmetrically. You can have inflation effects in stocks, real estate, and commodities.

Inflation effects in wages and commodities are the LAST thing to happen. Funny, no one complains when inflation effects go into stocks, or real estate. But boy do people get bend out of shape when inflation effects show up in commodities, and they get even more bent out of shape when it happens in wages (remember price/wage controls of the 70s). Inflation effects in housing took about 4 years . . . yet it will take prob. 10 years of wage increases to finally get back to the same ratio before 4 years of inflation effects in housing. Eventually the effects of inflated stocks/houses will have an impact on commodities/wages, but it takes time before that happens.

Yes we are now a debtor nation . . . how did we get to this point (50+ years ago we were the leading CREDITOR nation in the world). We are the leading debtor nation b/c over the past 50 years (especially the last 30) we have pursued a monetary policy which punishes savers and rewards debtors (inflation).

Yes inflation causes CURRENT debt to shrink . . . but it also causes people to take out MORE FUTURE DEBT. What incentive does a society have to stay out of debt when it will just be “inflated away”?

So we are trying to solve the problem of inflation (or the effects of it) by inflating. Completely circular!

We’ve had M3 growth at about 6% from ’03-05 and then growing up to 15% in ’07. Why haven’t we seen 6-15% rise in the CPI. It is not symmetrical. Some of that money gets shipped overseas to foreign banks, some to iraq, some to illegals and south american countries. You want to see inflation . . . look at the dollar down ~13% YOY.

So we have M3 GROWTH (not destruction) of 15% in ’07 and we lower interest rates, thus spurring more M3 growth???

As far as sharing the pain and as we all shared the prosperity . . . that’s utter nonsense. Not everyone benefited from higher stock prices, or higher real estate, and not everyone will suffer from higher commodity prices (tell that to futures traders, like me, and mining companies).

You’re right we’re not Zimbabwe . . . but we don’t have to be for this to get REAL UGLY (70s anyone). I won’t be surprised to see the game go on. The world still supports our system b/c it works for them right now.

Whether it goes on now doesn’t really matter b/c it is doomed to fail. It is an inherent flaw in our monetary policy, and at some point it will fall.

Whether that’s today or 30 years from now is anyone’s guess, but fail it will unless we change the system.

p.s. I thank my lucky stars that we do not live in a democracy/mobocracy (not yet anyways,but getting closer all the time), it’s called a Republic (learn some US history)—rule by law, the Founder’s specifically didn’t want a democracy b/c it tramples on the rights of the minority.

In reality there are very few people who are blaming Greenspan for this when as you say, he deserves plenty of blame. Bernanke cannot possibly please everyone at this point.

Please sentence, don’t be bold.

bold is gone?

Being that this blog is called The Big Picture, I want to say that my view of the big picture is that the Fed caved into the pressure (which comes at no surprise) and they are simply kicking this disastrous can a little further on down the road. Eventually, the shit is going to hit the fan and Bernanke’s delaying it will not just make it worse but will also make it all the more inevitable.

DH wrote, and I agree completely with the following: “We are a fully industrialized society (C.f. 1930) and the world is still in transition to becoming fully industrialized as well. This alone supports a long term (i.e., longer than our lifespan) economic growth trend with MANY up and down cycles along the way.”

The REAL problem in what I see as the big picture is inflation and not depression because of the above said global economic growth, and while I think hyperinflation a la Zimbabwe is quite an exaggeration, I do believe inflation like we saw in the 1970’s is quite possible and indeed quite scary. The irresponsibility of Fed policy to bring rates down to below 3%, as the market fully expects next week, in the face of a collapsing dollar, soaring commodities and soaring budget deficits is breathtaking to me.

Big picture last 6 years in commodities:

Crude oil from $25 to $100/barrel.
Gold from $270 to $900

The Goldman Sachs Commodity Index has gone from 170 in Jan 2002 to 597 today, up some 350% in 6 years. More importantly though, inflation in the GSCI in the last year has rapidly accelerated !! In Jan 2007, the GSCI was 420 and moved in one year to as high as 625, with today’s close at 597. So, in just one year that’s 50% accleration.

The spectre of the late 70’s awaits us where inflation spirals to double digits, combined with a collapsing dollar, collapsing bond prices and collapsing equity prices. At the same time, we will have staggering national debt and politicians that lack the courage to make the painful policy changes in domestic and foreign policy to positively impact these disastrous national fundamentals.

Unfortunately, I really am starting to view this as more of a probability than a possibility. I won’t declare it yet an inevitablility, but I’m not all that far from that view.

And, that’s my big picture view. Call me the anti-Kudlow. But hey Larry, I’m not a pessimist; rather, I’m a realist.

We are already following in Britain’s footsteps (who followed those of the great Iberian, who followed the Romans, who followed the Greeks, who followed …). The Brits seem to be doing fine. I like Britain. I also like Spain and Portugal, Italy, and Greece. Seems like things have a way of working out OK …

Terrence:

The FED couldn’t cut in 1930 because the dollar was pegged to gold. Hey but they fixed that in 1971. Aren’t we better off now? lol

Winston, I have to agree with Shane as we see it the same way. I guess in the long run we’ll find out who was right. I actually hope its you because I’m a saver and my assets will have greater purchasing power in a recession. But because I think that inflation is the greater threat I only invest in the most liquid of assets (metals and currency). No stocks or bonds. Good night all.

Money Market Mutual Fund Assets
January 24, 2008

http://www.ici.org/home/mm_01_24_08.html#TopOfPage

etail: Assets of retail money market funds increased by $12.09 billion to $1.196 trillion. Taxable money market fund assets in the retail category increased by $13.06 billion to $906.85 billion, and tax-exempt fund assets decreased by $975 million to $289.49 billion.

Institutional: Assets of institutional money market funds increased by $52.33 billion to $2.055 trillion. Among institutional funds, taxable money market fund assets increased by $52.16 billion to $1.873 trillion, and tax-exempt fund assets increased by $177 million to $182.36 billion.

If BEN shoots his wad, he’ll only have blanks remaining and then really be up s**t creek without a paddle.