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Tuesday, January 22, 2008

Paul Volker, Call Your Office

I'm having trouble getting real excited about today's 0.75 rate cut by the Federal Reserve. Jim Cramer, a guy whose advice, had I followed it, would have saved me a lot of money in the 2000-2001 market collapse, says the following today at TheStreet.com:
The reason you want to get ahead of the curve is that you don't want to come in and cut rates a week before a Fed meeting on a day when the futures are down huge.

You don't want to be seen as someone who responds to the futures.

Yet that's what just happened.

I hate being in the "too little, too late" camp. This cut will help some refinance. But if consumers had been able to finance earlier, we would not have these astonishing defaults.

The real issue here is -- will it save Countrywide (CFC - Cramer's Take - Stockpickr) or Washington Mutual (WM - Cramer's Take - Stockpickr). The answer is simple: They have a better chance surviving today than they did yesterday,

And in the end, that's good.

They should have gone a point instead of 0.75 -- that would have been the real deal, because that, at last, was more than expected. But it is difficult [for Bernanke] to have told The Wall Street Journal three weeks ago that inflation problems are perhaps the more important issue and then cut a full point (emphasis mine).

Again, though, three-quarters of a point beats nothing.

It appears to this untrained but wary eye that the Fed is attempting to compensate for mistakes in the federal government's fiscal policies, namely too easy money for bad mortgage credit risks and an unwillingness to provide this economy with the energy resources it requires to operate, with easy money. It also appears that the Fed is responding to the financial markets, which IMHO is outside of its purview. It is not unlikely that the stock market is repricing in anticipation of a return to pre-Bush tax rates on dividends, capital gains, and business income, which will occur with the increasingly likely expiration of the Bush tax cuts.

So, consider - with the expiration of the Bush tax cuts, production will slow. While this is happening, the Federal Reserve is goosing the money supply, even though doing so will increase inflationary pressures that Bernanke states are already present, as this extra money will be chasing fewer goods. It all smells like stagflation to me.

If nothing else, it doesn't appear that the Fed is as focused on sound money as it should be, and that strikes me as very problematic going forward. A consistent Fed is essential for economic growth and it appears that that consistency is lacking in current Fed policy.


Blogger Force50 said...

You are right Thrifty Scot. Jason Lewis has said much the same thing over the last few months.

But there is another cause to inflation which everyone seems to overlook. It is the automatic increases government employees receive regardless of how the economy is going. Think 3% at federal, state, county and local while productive workers in private industry must work ever harder -- and actually earn any increases -- while government workers coast. That's galling. Maybe there needs to be another kind of class warfare -- not rich vs. poor -- but productive vs. privileged (meaning government workers). Perhaps a special inflation tax on benefits to government workers transferred tax-free to workers in private industry ...

1/22/2008 12:55 PM  
Blogger Thrifty Scot said...

What is most unsettling to me is the Fed lurching back and forth in response to the crisis of the day.

They raised rates 16 time in 0.25% increments starting June 30, 2004 and ending June 29, 2006. 13 months later, they began lowering rates, starting with two 50 basis point "shock and awe" cuts in August and September 2008 and then two 25 BP cuts in October and December. Now we get the latest 75 BP cut, apparently in response to cratering equity markets.

The Fed guns the economic engine, then slams on the brakes, then decides it needs to gun it again. This is no way to treat a currency.

1/24/2008 11:06 AM  

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