Investment

» axolotl - THE FED IS NOT GOD

In response to THE FED IS NOT GOD posted by Normxxx:
I'm a taxpayer - the people on Wall Street are taxpayers - the people with all these 401ks and IRAs etc etc etc are taxpayers. My position is very clear - do not chance a recession - this credit problem is not resolved - it ain't over yet - this is not Jimmi Kotter's type of mess - the inflation dragon is not roaring - 2% growth probably going sub 2% now - a little cutting now will save a lot of cutting later when we are in a recesssion - you are a very confusing person, Normxxx - are you now or have you ever been a socialist? Remember, 1% on a 9 trillion dollar debt is $90 billion so lower rates here also help the Fed government - the one that you pay taxes to, Norm. I hope that Jimmi Rogers who is running to China either has to pay income taxes here or his citizenship needs to be revoked.

-- posted by axolotl

» success409 - THE FED IS NOT GOD

In response to THE FED IS NOT GOD posted by axolotl:

I am not sure I understand your comments but I do know this. A recession is restoring and helps clean up excesses and imbalances. Inflation is destructive to the economy, stock market, good business decisions, world trade, etc. There is no comparison between the two. This is mainly why the Fed has a bias to stop inflation. Price stability is essential to well being of our economy and can help to prevent recessions. The only thing worse than inflation would be deflation. The Fed can't be concerned enough about inflation. Without the macro economic reasons to cut interest rates it would be caving in to the finance power brokers on Wall Street and would send a strong signal to the world that the Fed can be bullied and may be weak on inflation when they are pressured. If the credit and liquidity crisis starts to shut down the markets and economic system, then the Fed will have no choice but to cut interest rates, but we aint there yet. Also, the Fed still has some more tools in its bag. Because of greed I am afraid the future does not look good. We could easily have inflation or a lot more regulation. Either could be bad.

-- posted by success409

» axolotl - THE FED IS NOT GOD

In response to THE FED IS NOT GOD posted by success409:

Again, I do not believe a recession is ever desirable unless inflation is huge and in danger of runaway. Some people may bang on their thumb with a hammer because it feels so good when they stop. The FED has a history of waiting until it is too late and cutting after recession is obvious. It is not personal - it is not about Bernanke - it is not about the FED - it is about the economy. The real job of the FED is to monitor economic statistics and set policy to keep the economy on track and inflation under control. Their jobs are computer like to a large extent. The clamor for a cut is not without reason. Bernanke being stubborn when a cut is needed is not being intelligent.

-- posted by axolotl

» success409 - THE FED IS NOT GOD

In response to THE FED IS NOT GOD posted by axolotl:

Greenspan in 2001 cut rates down to 1% because of a recession or potential recession. As a result we had a shallow recession, growth came back and the stock market took off at the end of 2002. Inflation didn't seem to raise its head because of strong productivity increases at least that is what Greenspan has said. However, risk was not properly priced and assets became overvalued. Greed came into play and accelerated the process. We now are starting to reprice risk to appropriate levels and develope proper risk premiums which mean assets have to come down in value. This is not going to be pretty. I think a good recession would have been much better. You can't have your cake and eat it to. IMO By cutting rates we can delay the inevitable but the final consequences may be worse. Also, I think the economy will start to be all out of wack by rewarding or bailing out those who made bad decisions at the expense of those who made good decisions and were more conservative and less greedy. You can't have free enterprise and capitalistic markets without economic cycles as far as I know. Failure is part of it. Hopefully the Fed will make the right decisions and will use the right timing if they have to cut rates.

-- posted by success409

» permabear - THE FED IS NOT GOD

In response to THE FED IS NOT GOD posted by success409:

This is not going to be pretty. I think a good recession would have been much better. You can't have your cake and eat it to. IMO By cutting rates we can delay the inevitable but the final consequences may be worse. Also, I think the economy will start to be all out of wack by rewarding or bailing out those who made bad decisions at the expense of those who made good decisions and were more conservative and less greedy. You can't have free enterprise and capitalistic markets without economic cycles as far as I know. Failure is part of it. Hopefully the Fed will make the right decisions and will use the right timing if they have to cut rates.

Success,

You may not like my agreeing you with, but I couldn't agree with the statement above any more. This is a point I've been making on these boards for a while. The Fed, along with the Bush administration (tax cuts, spending increases) goosed the economy in 2002 on, with artificial stimulation, which pretty much softened or even eliminated the weakness of the last recession. Moreover what Greenspan in particular did was create one bubble (housing, private equity) to ease the pain of the previous bubble (tech, NASDAQ). He even encouraged adjustable rate mortgages and alternative financing of home purchases in 2004. Both Greenspan and the Bush administration were completely asleep at the wheel as the excesses of the credit bubble, especially in housing became manifested. How anyone with any degree of financial sophistication could not see how interest-only, option ARM, no doc loans were going to be anything but trouble is beyond me. Bears such as myself were yelling and screaming about it on these boards the whole way through.

The end result of pretty much eliminating the downside of the business cycle in the past 25 years is going to be a massive downside for the coming recession/worse. This is one of the biggest reasons that I am so pessimistic. This was capitalism run amuk.

-- posted by permabear

» success409 - THE FED IS NOT GOD

In response to THE FED IS NOT GOD posted by permabear:

When you start talking about the last 25 years I am less aware of what all has been done by the Fed to mimimize the economic cycles. It could be that the Fed has been better at not overtightening or not undertightening which could also explain a least part of the reason we have had shallow and few recessions. One area where I think we probably disagree is the impact of the current situation. Again I am more optimistic (I could be wrong) then you about the correction process to get us out of our current situation. It may be painful but it probably won be catastrophic. The correction process could also be gradual rather than sudden. However, I am no expert in these matters. I am hoping the Fed and the rest of the Government knows what it is doing to a certain extent. I am hoping we can make better decisions in the future. I am also hoping the Government can make progress in gettings its act together on debt. It is not too late but time is running out. I hope I am more right than you. I like your posts, thought process and analysis and contributions.

-- posted by success409

» Normxxx - Talks Dove, Acts Hawk

Bernanke: Talks the Dove, Acts the Hawk [¹]

By iTulip.com | 23 August 2007

On the Goldman Sachs client call last week, we heard ex-Fed governor Larry Meyer intone that the Fed intended to stop the credit bubble collapse using the discount window in new and creative ways, providing liquidity selectively without lowering the Fed funds rate and flushing the whole system with money, Greenspan-style.

We have long wondered how the Bernanke Fed planned to fight an asset price deflation. As expressed in No Deflation. Disinflation followed by lots of inflation, we heard the Fed saying it planned to fight asset price deflation using every trick in the book, and then a few that aren't in the book.

Now we appear to have our answer, or at least a good part of it. What the Bernanke Fed has for the past few weeks been trying to do is prevent a runaway asset price deflation, keep the banking system whole, and at the same time not create a moral hazard by bailing out speculators who should be allowed to fail, all without producing excess liquidity that will lead to another set of asset bubbles.

Here's the Fed's program.

Federal Reserve Bank of New York Staff Reports


Rediscounting under Aggregate Risk with Moral Hazard-- Staff Report no. 296-- August 2007.

James T. E. Chapman and Antoine Martin

This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System.

Any errors or omissions are the responsibility of the authors.

What it says is that there will be no Fed Funds rate cut in response to the credit bubble collapse. The easy money Greenspan Fed put is gone. Welcome to the Open Market Operations Fed or OMOF. It's motto: Liquidity Without Asset Price Inflation.

Mechanically, here's how it works. The Fed will only do business directly with banks that maintained good loan practices and are the most credit-worthy. Lenders of various flavors such as investment banks and hedge funds that took on a lot of bad loans can only deal with the banks that deal directly with the Fed. They do not have access to the new and improved discount window on their own. However, the credit-worthy banks can use the weak creditors' assets as collateral to borrow from the Fed.

[ Normxxx Here:   Remember, there is a REPO agreement in place whereby the bank is legally obligated to redeem the seccurities, worthless or not, after 30 days. They are absolved from this obligation only if they declare bankruptcy. ]

For example, a distressed hedge fund can't access the Fed directly but can take the mortgage-backed securities they hold and bring them to a credit-worthy bank that does have access to the Fed. That bank uses the paper as collateral for a one month loan. That's why Bank of America, Wachovia , Citigroup, and JP Morgan all hit up the discount window at the same time yesterday, to let hedge funds and others know where to go to put up their asset backed securities and CDOs and other paper as collateral for loans. The banks borrow from the Fed, and the hedge funds borrow from the banks. Hedge funds and others can still fail, but in an orderly way versus a simultaneous dumping of assets into a frozen market. The Fed can turn the discount window knob as need to control the rate of failure, averting the dreaded "break in the chain of payments."

While its too early to call an all-clear on the debt deflation at the top of the debt pyramid, evidence is that this new system is working-- so far. Even the secondary market in CDOs is opening up, as we heard from a company that structures them that contacted us yesterday. While these events are not definitive, we will use the occasion to invite our respected friends Mish and Rick Ackerman, who were expecting an uncontrolled deflation at this point in the process, to come over to the dark side, the one that acknowledges that central banks have a big bag of tricks to fight asset price deflation. C'mon down, boys!

Of course, there are still plenty of signs that the debt default danger is far from over, even at the top where cures can be targeted and it is thus more readily managed. iTuliper Charles Mackay posted this note today from Justin Oliver at Canaccord Adams:

The unprecedented spread between US TBill and LIBOR rates is suggesting a heretofore unseen attack on the global financial system. There is clearly something going on that the large banks are privy to, that we are not as they are clearly not willing to lend to each other without a massive risk premium. It is inconceivable that equities can continue to trade relatively unaffected by a complete backing up of the credit markets.

For now the new OMOF approach appears to be working, but it is far too early to say whether this approach, while very clever, will ultimately allow $13 trillion in fictitious value in the housing market to dissipate [[disappear: normxxx]] without causing significant damage to either the credit markets or economy. There remain millions of homeowners underwater on their mortgages.

Today iTulip's recently appointed new ShadowFed Chairman discusses Bill Gross's appeal to the Bush administration to bail out said strapped homeowners.

Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

Today Bloomberg published the following report.

Pimco's Gross Urges Bush to Bail Out U.S. Homeowners


By Patricia Kuo

Aug. 23 (Bloomberg)-- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., urged the Bush administration, rather than the Federal Reserve, to bail out U.S. homeowners to avoid ``destructive housing deflation.'

Let's dig into this a little bit.

Pimco's Gross Urges Bush to Bail Out U.S. Homeowners

No, Bill. Bush doesn't have that kind of money.

Gross advised President George W. Bush to set up a ``Reconstruction Mortgage Corporation' and ``write some checks' to bail out homeowners

Oh ... I see. You want Bush to use MY money. How generous of you. more...

If Gross is asking, clearly at the street level a bailout is needed that the OMOF system will not address.

What are the implications of OMOF for the equity markets? Short term negative, and long term negative.

Short term, markets have priced in at least one rate cut. If it's needed, that's because the U.S. economy has fallen into recession; the drop in primary demand that is now pushing down oil prices has created self-reinforcing recessionary processes in the economy. Long term, markets have already priced in a Next Bubble, as if Greenspan were still in charge. Markets are still digesting the evidence that the new Fed chair who rode in on a helicopter full of money may yet turn out to be the first asset inflation fighter we've seen in over 20 years.

He talks dove and acts the hawk. What does this mean? We don't know yet. But, as usual, you heard it here first.

Normxxx    
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

-- posted by Normxxx

» Normxxx - The failure of central banking

The failure of central banking

By Stephen S. Roach

http://normxxxruminates.blogspot.com/200...

-- posted by Normxxx

» axolotl - The failure of central banking

In response to The failure of central banking posted by Normxxx:

Does Roach want Bernanke's job? I just listened to Dr. Faber - the Gloom Doom and Boom guy - he says the last 25 years of asset inflation is ending and the consumer inflation is going to return - he suggests gold. The trouble with reading all these economists and commentators is many sound plausible, but there is no way to tell who is correct. The US central bank has a pretty good record since 1982 when it broke the back of inflation, but maybe all the recessions avoided are still going to be paid for in the future with high consumer inflation again.

-- posted by axolotl

» Normxxx - The failure of central banking

In response to The failure of central banking posted by axolotl:

Faber is right; I suggest you do a little research on the '70s, for inflation, or the '30s for deflation.

-- posted by Normxxx