First, to lead with some humor, I heard one of the most incredulous, ridiculous explanations for a rate cut from CNBC's on air un-economic reporter, Steve Liesman.
Rick Santelli correctly noted that we currently have a counterparty risk problem in financial markets, not a basic economic production problem, and that cutting rates would do little to keep a homeowner with negative equity paying his mortgage.
Liesman agreed, then further explained that what Santelli did not understand is that the marginal home buyer would buy those underwater homes with lower rates. That this effect would be enormous.
Santelli was gracious and didn't break up into a roaring laugh on camera. Liesman remained with his usual idiot's grin on his face before the camera moved elsewhere.
But, onto more substantive aspects of the current debate about Fed action.
We have a Federal Reserve Board precisely to keep monetary policy out of the hands of biased, self-serving politicians and businessmen. Both groups are known, historically, to manipulate monetary conditions, i.e., rates and money supply, to further their own short-term agendas.
At present, there seem to be three competing conditions for which the Fed must balance the effects of its actions.
The broad US economy is currently continuing its productive growth. Across the country, outside of a few former housing hot-spots and the financial center of New York City, the US remains in possession of a healthy economy. Businesses are growing, employment is growing, loans are being made.
This economy, if over-stimulated with too-easy money, will eventually overheat, and lead to inflation. Many forget the pain of the inflationary years of the 1970s and early 1980s. For all the accolades which Alan Greenspan has been given, he never had to exercise the 'tough love' of monetary restraint that Paul Volcker practiced.
We look to the Fed to remember these lessons, and do the right thing for the long term health and growth of the broad economy. Right now, that does not seem to involve further easing of interest rates.
Some will argue that we are poised for recession, because of the effects of the contraction of housing prices, the damage to the homebuilding industry, and the financial losses of investors on subprime mortgage-related instruments.
However, as I have pondered what is so essential about the current economic situation that would require Fed easing, I find myself noting that the Fed is most effective in its influence on flows, not stocks.
That is, on using money and its price to help soften or shorten periods of unemployment and decreasing demand throughout the economy. These are flow variables- incomes, spending, and business investment.
What we have now is the loss of capital in some very specific asset classes. Not income or job losses, per se, on a broad scale.
Thus, the second competing interest for the Fed's actions is the financial sector. Many are calling for another immediate 50 basis point rate cut today. They claim that this will help stabilize asset values in troubled sectors like CDOs and other mortgage-related instruments.
But, here, the problem is inter-bank counterparty risk perception. As Brian Wesbury wrote recently, on which I commented here, flooding markets with more money won't solve this problem.
Many pundits, some of whom have been appearing on CNBC this week, debate whether we've seen 'the last' of the mortgage-related asset writedowns at large banks.
We surely have not. Why? Because, if nobody can make a market in these assets, and they do not trade in orderly, continuous markets, then you can be sure that banks are hesitant to take an aggressive write off of the value of these assets, until forced to do so.
In the meantime, analysts are busily measuring average writedown percentages, and opining on who probably still has more to lose before they hit bottom on valuations.
Again, this proves my, and Wesbury's point. We are not experiencing a shortage of money. We are experiencing a shortage of honesty and candor about the true value of collateral at many financial service firms- commercial banks, mutual funds, hedge funds and investment banks.
A Fed rate cut will, at best, simply pump up some asset values, by dint of lower rates with which to calculate discounted present values. But this is book entry stuff.
Real values will be found by selling some of the assets.
I remain sceptical that the financial services sector is so stricken that Bernanke's Fed must sacrifice healthy, moderate-inflation growth of the broad economy in order to rescue it.
In effect, people like Liesman, Larry Kudlow, et. al., want Bernanke & Co. to bail out private sector equity owners of financial firms, at the expense of inflationary pain on the broader US citizenry over the next few years.
And what about the value of the dollar? The same on-airhead anchors at CNBC who, today, cluck and shake their collective heads about the state of large US banks and the mortgage situation were decrying the fall of the value of the dollar only last month!
Which do they want?
Because a 50 bp Fed rate cut today will tank the dollar's value even further.
What happened to cries to defend the dollar? Simply put, you can't have it both ways in this context.
So it's very crucial for the Fed to sanguinely assess the source of the greatest risk to our economy's continued low-inflation, productive growth. Will that be best served by bailing out bad financial market decisions on Wall Street and at large money center banks, while inducing more inflation through easier money and a cheaper dollar?
Honestly, I doubt it.
CNBC had former Fed Governor Lawrence Meyer on the air this morning. After billing him as the closest source available to the current Fed, Liesman and Kernen both tried to backpedal when Meyer didn't tell them what they wanted to hear.
He directly rebuked Liesman for contending that 'the communications mechanism of the Fed with the markets is broken,' retorting that, if anything, the mechanism has become too efficient and fast.
Kernen wanted to hear Meyer say the Fed would cut the interest rate by 50 bps today, but Meyer was confident it will be only 25bp. He cautioned that the real message would be the wording of the accompanying statement, which would give clues to the overall stance of the Fed in coming months with respect to inflation vs. sustained economic health.
When Meyer stuck to his informed, experienced views, Liesman tried to cast doubt on Meyer's comments.
Finally, we have various observers, including the usually clueless Liesman of CNBC, professing confusion over the Fed's actions and words of the past five months.
To this, I would simply remind all that Bernanke stated, upon assuming the mantle of Fed Chairman, that he would be data-driven. And data change. So the Fed has been weighing developments and fresh data as they move between deliberations and actions, month by month.
That the pace and directions of their various pronouncements would echo those of the data they see and interpret is hardly surprising.
At least to those of us who actually listen to the Fed, and use common sense.
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