I'm no monetary policy expert, but Clive Crook's point that it seems a bit misguided for the Fed to respond so dramatically to stock market news certainly looks sound to me. After all, interest-rate decisions and forecasts about interest-rate decisions are one of the determinants of stock market prices. Insofar as people get the idea that the Fed will act directly to avoid stock market price declines, that seems like something that will feed back into stock purchasing decisions in a potentially destructive way.
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Bail Me Out!
23 Jan 2008 03:52 pm
Comments (23)
I'm no monetary policy expert
I find that very hard to believe.
The Fed is not bailing out the stock market. It is responding to a negative wealth effect. Falling stocks and falling house prices create a prolonged drag on consumption growth in the Fed's models. This will drive unemployment higher through 2008 and into 2009. Hence the rate cuts.
The Fed has bailed out the stockmarket in 1987, 1998, 2001, and in 2007-8. Investors do have the idea that the Fed will take action if the indices decline significantly. That is why the indices have grown so much in the last twenty years.
This will continue until the US government runs out of credit.
SCMT wins.
doesn't make it sound policy though -- the impact on the dollar/inflation will make any employment "good news" moot -- there is a reason why the middle class cannot improve their living standard -- inflation running at close to 12% for a standard middle class basket of goods is a great way to get a silent pay cut.
it seems a bit misguided for the Fed to respond so dramatically to stock market news certainly looks sound to me.
Meh. I think they probably did the right thing. Everything--from the international exchanges monday and tuesday, to the first ten minutes of trading after the rate cut--augured a big crash, and I think history suggests that stock market crashes can have an outsized effect on the economy. If the market were down 1,200 points this week, I doubt Clive or you would be rallying to Bernanke's defense.
I don't mean to imply that the rate cut solves the underlying problems, but it seems valuable in buying some more time to work on them.
being that matthew isn't a monetary policy expert, he might want to refrain from, you know, just plain guessing what the hell is going on.
which is that credit markets are still somewhat frozen as the reality that we have less capital than people thought sinks in (with the inevitable associated contraction), so you can imagine the fed being more than a little worried about that phenomenon.
while there was a whiff of panic about the action, panic might actually be an appropriate reaction in the short term: we have never been as leveraged an economy before, so past performance is, indeed, no guide to future results.
bernake has studied the liquidity trap extensively and has drawn the conclusion better to over-ease than allow us to follow the path of japan in the '90s: maybe he's right and maybe he's wrong, but i think it's a little premature to assume that he cut rates because stocks are down as such.
the real risk is what mike c points to: the fed may well have decided the hell with worrying about inflation when we've got a likely recession looming. as i've written here and elsewhere many times, the logical outgrowth of bush league economics was stagflation lite, and waddya know, here it comes....
Ed wins. Check out Bloomberg's two top headlines:
* New York Regulators, Banks Meet on Plan to Raise Capital for Bond Insurers
* U.S. Stocks Surge; Plan to Rescue Bond Insurers Boosts Financial Companies
i would say that ed doesn't win, anon: the fed didn't bail out the "stock market" in 1987 and the other dates - it bailed out the economy and the stock market followed.
that said, let's turn to the specific example anon raises: do you honestly think, anon, that we'd be better off if every bond insurer in the country went bankrupt? is that what you would like to see happen? because if every bond insurer (other than berkshire hathaway, of course, but they are new to the market) in the country goes belly-up, that will be good for the economy, and the lion and the lamb will lay down together?
Howard,
Could you clarify your comment about Japan? Japan was pretty much the definition of "over easing" in the 90's. Check the rates. The Japanese banks continued to carry their own "big shitpile" (thanks Atrios) because of the cheap money available. It did not work out so well, it still isn't.
The whole Atlantic Blog team is offering their expert advice on the Fed's move.
Who knows if Bernanke made the right move. But he's in a much better position, with more information and expertise, to make a decision then the Atlantic Bloggers (in saying this, I realize they all went to Harvard, which gives students supernatural powers).
doug, the consensus (and i'm no expert here, i'm merely reporting what i've read) is that japan waited far too long to ease as their real estate bubble popped and reached the "pushing on a string" point where no one wanted to borrow and that the way to avoid that problem is to ease aggressively early.
in the small world department, i was just reading paul krugman's blog on this very point here:
http://krugman.blogs.nytimes.com/2008/01/22/preemptive-easing/
the money quote is from bernake: "A 2004 paper co-authored by Bernanke argued that the ZLB could and should be avoided by 'maintaining a sufficient inflation buffer and easing preemptively as necessary.'"
As i say, maybe he's right, maybe he's wrong, but it's clearly what he's thinking and this is a "known condition" about bernake in the first place.
doug, you got me thinking a little (even though i should be getting ready to go catch a plane!) and so i went back (haven't read it in years) to krugman's work on the liquidity trap and japan, which, while a little technical, you might want to take a look at for general edification:
http://web.mit.edu/krugman/www/japtrap.html (the original article)
http://web.mit.edu/krugman/www/liquid.html (some follow-up notes)
be aware that this is krugman talking about what do you do if and when a liquidity trap happens; as the bernanke quote i noted above says (and as krugman says) the better thing is not to get there in the first place....
Brad Feld (a VC) made the point that this is crack-head-like behavior. And these cuts are absolutely factored into stock prices.
http://www.feld.com/blog/archives/2008/01/can_i_have_some.html
Didn't Milton Friedman have a line about the Fed needing to avoid acting like "a fool in the shower", fumbling around with the hot and cold knobs, trying to get the temperature right?
Bernanke may be fulfilling Friedman's vision right now.
Japan's main problem was that the gov't let the banks keep the dodgy debts off the books for too long, plus the whole mess was nothing more than a real estate bubble--so everything froze up and nobody sold to anyone else for fear that everyone would know exactly how bad things were. It wasn't until the late 1990s that we started getting commercial real estate activity in Tokyo again.
The fed fears that without massive intervention a stock crash will turn into a replay of 1929. They probably don't think anything can turn that around now, but they are hoping for a miracle.
Sounds crazy to some I know. But we've seen a decade where 9/10 new jobs came from housing or finance. Those bubbles have burst. There is now nothing left to prop up our economy, and from the individual level to the national, we are financially over-extended. The suburban sprawl explosion has been the greatest misallocation of wealth and resources in the history of the world. Energy prices will continue to climb due to Peak Oil. I am not optimistic.
The Fed is managing expectations, or trying to. It's a con game.
Fed funds had been gravitating towards 3.5% on their own the last month. For those of you who don't know the Fed Funds is set by the market. The Feds 'cut' yesterday is a cut in their target for that rate. (Several years ago the Fed semi abandoned using the Discount Rate as it's main policy tool. They set the Discount rate, and still do, but that isn't so important now. Now they TARGET the FF rate)
In order to achieve that target they use the traditional open market operation tools of adding or withdrawing money from the banking system by selling or buying Treasuries. For December when they are usually easy, ie. doing a lot of adding to the system with purchases, they had to actually drain. In order to keep the FF rate near their target. This was an insane policy in light of the severe stress in the markets.
Ben was the opposite of Helicopter Ben. He was trying to act responsibly by thinking about things like inflation, the dollar and bubbles in stocks. That was all well and good but 'the markets' won't stand for that anymore. They want ease, and more ease and then more again. So the big boys went on a buying strike in the new year, not without good reason but enough so that a crash was becoming a possibility. Ben relented and stabilized things a bit on Tuesday. Evidently that wasn't enough so the JP Morgans of today, probably with Treasury oversight, stepped in at noon today and started buying hand over fist, mostly in the futures markets. Sure it's manipulation but hell, now everyone is richer right?
Ben is a cipher. The Chairman has been superseded. Outlived his usefulness since there will never be another Greenspan. A man who did everything possible to inflate the assets of the rich and bring down the incomes of the middle.
The whole Atlantic Blog team is offering their expert advice on the Fed's move.Who knows if Bernanke made the right move. But he's in a much better position, with more information and expertise, to make a decision then the Atlantic Bloggers
It's not whether the bloggers' decisions are more interesting and well-informed than Bernanke's. It's whether they're more interesting and well-informed than those writing on the editorial pages of newspapers and magazines. In the latter sense, the Atlantic Blog Team's opinions are well-taken.
And here I thought moral hazard was only for poor people.
"The whole Atlantic Blog team is offering their expert advice on the Fed's move.
Who knows if Bernanke made the right move. But he's in a much better position, with more information and expertise, to make a decision then the Atlantic Bloggers.
"
This comment would be reasonable IF there were an agreed upon point we were trying to reach, and the issue were a technical one of how to get to the point from here.
This is NOT the case. Is the goal here
• to prevent unemployment as much as possible?
• to prevent inflation as much as possible?
• to keep the stock market as high as possible?
• to ensure that certain financial institutions do well?
• to actually stoke inflation and thus inflate away the US' debt with the rest of the world?
To simply assume Bernanke made "the right move" without a clue as to what Bernanke is actually going for is insane. It is absolutely the role of _The Atlantic_ to ask loudly and frequently exactly what it is that the Fed is trying to achieve.
do you honestly think, anon, that we'd be better off if every bond insurer in the country went bankrupt?
Of course not. But I do believe in government regulation and intervention in markets and society.
What I'm more than a little sick of is richie-rich finance guys who want their gains privatized, their losses socialized, and everybody else can go screw themselves. The same guys who argue that there's GOT to be a bailout are the ones who also argue that universal healthcare or decent public education or rent supports are going to ruin the country because any time you raise taxes to pay for those, you're destroying the country.
I mean, time to be honest here. We're asking government to fix the self-correcting, magical "free" market that has yet AGAIN crashed into a wall.
They're not opposed to socialism--they're opposed to socialism that helps other people. The sooner that folks realize this, the less power they'll have over our discourse, okay?
Comments closed February 06, 2008.
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Heads in the Sand
Most of the current credit mess can be laid at guilty parties in the US.
My guess is that after Monday's disastrous trading day overseas, some fellows in Tokyo, Hong Kong, Shanghai, Beijing, Frankfurt, and Berlin called up Bernanke to remind him that we're to blame for this, and that it's their money that we've been spending.
Needless to say, rate cut follows pretty quickly.
Posted by Greg | January 23, 2008 4:10 PM