Tuesday, April 22, 2008

Everything Is A Crisis


We are in crisis mode:

  • Housing and banking
  • Oil and gasoline
  • Climate and CO2
  • Terrorism and war
  • Food and the poor
... and on and on.

But if we step back and look at these crises, we might get a better idea of the underlying causes.
Housing and banking: the normal dynamics of buying, owning, and selling homes were affected by non-market actions. First, banks were bludgeoned by the federal government to accept shaky loans in areas they would normally "redline"... avoid or have very restrictive conditions. Then the federal government, by way of the Federal Reserve, lowered interest rates to practically nothing and encouraged all sorts of free-wheeling lending and reselling of mortgages to spur on the economy. Then the federal government, again through the Federal Reserve, quickly raised interest rates to the point that those risky borrowers could not repay the loans and caused a banking crisis. Finally, the federal government, once again through the Federal Reserve, rescued the banks, but left the housing market a shambles.

Oil and gasoline: as the world population has grown and the need for energy grows dramatically with the emergence of new economic powers such as China and India, the normal market response to the situation has been affected by the federal government's reluctance to permit exploration and drilling in areas of known reserves. Then the federal government investigates oil companies because the artificial shortages have driven up the price of oil worldwide and the profits of the oil companies regardless of where they are located. Then the federal government places the burden for correcting the shortages on the automobile companies by requiring them to create expensive, small alternative vehicles for the marketplace which creates economic hardships for both the companies and the consumers who own older vehicles and cannot afford newer, expensive ones.

Climate and CO2: a simplistic model of earth's climate based on the assumption that increases in CO2 will create a crisis of global warming was created by an employee of the federal government and promoted by a former employee of the federal government [to his vast enrichment]. Despite challenges by scientists worldwide, the federal government has taken the position that CO2 is, indeed, a threat to our climate and has been officially labeled a pollutant by the U.S. Supreme Court... the Judicial Branch of the federal government. Subsequently, the projected cost to constrain additional CO2 in the atmosphere has been set at tens of trillions of dollars, but the federal government is committed to actions such as the expansion of ethanol production which will not abate CO2 production and the reliance on non-nuclear, non-fossil fuel sources of electric power generation placing future economic growth at risk.

Terrorism and War: despite a direct attack on the U.S., many officials within the federal government contend that the threat by Islamic extremists is overstated and military actions in the middle east unwarranted. A large portion of Congress, the Legislative Branch of the federal government, has attempted to block funding, personnel, and necessary equipment to properly and successfully fight these forces. A candidate for the President of the United States, head of the federal government Executive Branch, continues to minimize the value of the military efforts and has stated his intention to end U.S. efforts to keep the fight with the terrorist organizations overseas.

Food and the poor: in conjunction with the federal government's requirement to expand the use of corn and sugar, basic foodstuffs, as a source of ethanol to offset the federal government's restriction on exploration and drilling for oil in areas with known reserves, the price of food has become prohibitively expensive for the poor in the U.S. and around the world as food supplies have been diverted to non-food purposes and other food costs have increased with the dramatic price increases in oil and gasoline.
I'm sorry. I just can't seem to find a common thread among all of these crises. We'll just have to contend with these issues as best we can, knowing there is nothing that we can do to improve the situation.
Maybe we can pressure the federal government to do something. There is obviously a secret conspiracy out there.

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CO2 Cap and Trade

There is always an easy solution to every human problem—neat, plausible, and wrong.
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."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates


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."
"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."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
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 "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)