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Sunday, March 09, 2008

Drawing Economic Lines

SEARCH BLOG: ECONOMY

Fed expands lending to tackle liquidity crisis

By Krishna Guha in Washington

Published: March 7 2008 13:36 | Last updated: March 8 2008 00:18

A deepening sense of financial crisis yesterday spurred the US Federal Reserve into new emergency action to try to ease strains in the credit markets – and convinced investors that another major interest rate cut is on its way.

Plan for a Healthy America

“We now face an opportunity — and an obligation — to turn the page on the failed politics of yesterday's health care debates… My plan begins by covering every American. If you already have health insurance, the only thing that will change for you under this plan is the amount of money you will spend on premiums. That will be less. If you are one of the 45 million Americans who don't have health insurance, you will have it after this plan becomes law. No one will be turned away because of a preexisting condition or illness.”

— Barack Obama, Speech in Iowa City, IA, May 29, 2007


Yesterday, I wrote about China as an unethical trading partner. Regardless, the U.S. ignores these "minor problems" because there is so much "benefit" from trade with China... and other "low cost" sources.
  • Consumers get less expensive goods... "subsidized" by China
  • Importers get to purchase components or whole products for sale without using expensive American labor
  • The U.S. government has a customer for its debt
Yes, it appears to be a win-win-win. Then why do so many feel so uneasy about the arrangement?

Perhaps this is why.



PFFFT!

Ah, see, if the economy gets bad enough and the dollar gets weak enough, the U.S. manufacturers that have been significantly reduced in size and capacity will be positioned to export goods to foreign countries that still protect their own markets with hefty trade barriers. Huh?

Don't worry. In the end, our government will simply raise taxes on the top 1% of income earners and corporations so that it can provide the benefits you would have if you had a good job in the manufacturing sector that has been going away. And if you can't pay for your home anymore, the Federal Reserve will yo-yo interest rates once again to "fix" your problems.

So, who's to blame: Republicans or Democrats or corporate and finance manipulators or politicians or economic advisors?
Answer: yes.

There is no free lunch [even for Opus] and the Chinese are not "subsidizing" us.

But the one thing the government will not do... because, well, I just don't know.
What I do know is that this particular government inaction imposes a significant trade imbalance on this country, contributes to the decline of the dollar, hurts domestic manufacturers, and hits us all in the pocketbook.
The U.S. is still, by far, the largest economic machine in the world. The machine was built on and grew by being a producer nation. Now we are deluding ourselves into thinking that we can simply be a consumer nation... a service economy... and all will be well. The biggest consumer of all is the Federal government... but politicians of all stripes want us to believe that it is going to be the biggest provider... whatever we need... whatever we want... come one, come all.
It will swallow our problems for us... it will swallow us.
..

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Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
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Tracking Interest Rates

Tracking Interest Rates

FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)