The Coming Cut

I'm not fool enough to try to predict macroeconomic trends. I will say, though, that when the Fed chief hints at the prospect of a big rate cut on the heels of bad holiday retail sales, my first instinct is to think "panic!" rather than "looks like Ben Bernanke is responding appropriately to signs of economic trouble!" Both, however, seem like reasonably valid responses.

UPDATE: Krugman votes for doom, says interest rate cuts effect the economy mainly through their impact on the housing market, but it may not be possible to further prop-up the housing market at this point.

Comments

For those wondering, this is Yglesias's version of this http://www.washingtonmonthly.com/archives/individual/2007_11/012592.php

Although in this case I'll have to give the most points to Kevin for wit.

I'd hate to be on Wall Street today.

Posted by JFD | January 11, 2008 9:47 AM

As of 9:50, the Dow was off 140 pts.

It isn't particularly soothing to watch markets ping-pong like they've been doing recently. It makes me think that they people who handle my stocks and bonds don't have a clue what's going on.

Posted by Jeffrey Davis | January 11, 2008 9:52 AM

did you mean "vapid" instead of valid in your last sentence? Further cuts in fed rates will further impact the dollar and raise inflation. Bernanke needs to keep rates where they are. As an example, look at the price of oil in euro or gold terms -- relatively flat compared to oil priced in dollars. a nice solid rate hike will be inflationary and oil will price much higher -- the impact will be much worse for those who get their BTUs from oil and their food from supermarkets (production and transport expenses much higher).

Posted by mike c | January 11, 2008 9:54 AM

my bad ... meant "nice solid rate decrease" instead of hike.

Posted by mike c | January 11, 2008 9:56 AM

It makes me think that they people who handle my stocks and bonds don't have a clue what's going on.

OT, but I figured that out back in 1999 when, I believe, Pets.com was briefly (soon after its IPO) the highest-valued company in the world.

Posted by James Gary | January 11, 2008 10:04 AM

Well duh. A rate cut can't possibly help housing. It isn't like interest rate are high now are they?

Posted by freddiemac | January 11, 2008 10:13 AM

It's the economy stupid.

I would advise anyone who wants to know how the American people will vote come November to remember that pocketbook issues always come first.

While some people may want to roll the dice with Obama, I doubt that you'll find many hard working people facing economic uncertainty willing to do the same.

Posted by ken | January 11, 2008 10:21 AM

Krugman votes for doom

That's the best news we could possibly have about the economy. Krugman is, after all, about as bad a predictor of the economy as one could be. Remember when he predicted deflation? Didn't happen. Howabout when he predicted stagflation? Didn't happen either. Howabout when he predicted recession repeatedly over the last several years? Hasn't happened either. What would really scare me is if Krugman ever predicted smooth sailing for the economy.

Posted by Al | January 11, 2008 10:33 AM

What I'd like to hear from the experts about is the announcement that the trade deficit increased in November, against considerable declines in the value of the dollar. That bespeaks a shape of the balance of payments curve that foretells a considerable transfer of wealth from the United States to overseas if the phenomenon proves to be medium-term. Unless Bernanke has an alternative coherent explanation, I think the loose money policy can only be read as a short-term panic move.

Posted by Marshall | January 11, 2008 10:50 AM

Al, Golman Sachs is predicting a recession for 2008, as is Pimco and others. Krugman is not alone.

Unfortunately with so many credible voices warning of recession it can easily become a self fulfulling prophecy as business exectutives decide to sit on the sidelines before investing in expansion or in hiring additional workers.

The Federal Reserve is trying to restore confidence in the system. Unfortunately the Fed cannot do this alone and the Bush administration has exactly zero respect and credibility so therefore cannot be of any help.

Posted by ken | January 11, 2008 10:54 AM

"effect" the economy, eh?

Posted by Ryan Luce | January 11, 2008 10:55 AM

Ken, I realize the GS, among others, is predicting that. What I'm saying is that, if there's anything that gives me hope right now, it is Krugman's track record of being consistently wrong.

Of course, even a stopped clock, a blind pig, etc., etc.

Posted by Al | January 11, 2008 10:58 AM

There's actually some truth to Al's snark. Krugman is a brilliant guy, but he perpetually underestimates how long American investors can maintain an orgy of debt, accounting surreality, and financial Ponzi schemes. We've hit a number of icebergs, but the Fed keeps bailing and the band keeps playing.

Krugman's right on the central point, though. All the arrows are pointing in the same direction.

Posted by LaFollette Progressive | January 11, 2008 11:01 AM

LaFollette, that's why it's always a bad idea to bet against the economy. Not because everything in the economy is so hunky-dory, but because the market can stay irrational longer than you can stay solvent.

This month in Harper's, an author went so far as to argue that the government would react to the housing bubble crash by trying to cause a bubble in another economic sector.

And yes, I think Krugman is great, but he is playing to the stereotype of economists who have "predicted 10 out of the last 5 recessions!"

Posted by Tyro | January 11, 2008 11:07 AM

Al, are you postulating that a 'Krugman effect' exists such that policy makers could work it into their models with the same degree of confidence as say the 'wealth effect'?

In a way that is pretty funny.

Posted by ken | January 11, 2008 11:20 AM

The obvious way for the federal government to prop up the housing market would be for it directly to purchase housing.

This would provoke predictable conservative outrage over "Big Government." However, if the Pentagon were to be the agency to purchase this housing, then conservative outrage about "Big Government" would magically dissipate. "If housing goes vacant,then the terrorist would have won."

I am not recommending this ( although my housing purchasing idea is nevertheless no worse than anything else that has been suggested ). I am merely pointing out that if we live in a society where a large number of jackasses exist who viewed their houses has an investment, then we are bound to have problems.

Posted by Duncan Kinder | January 11, 2008 11:28 AM

"what is different this time..." (THE most dangerous phrase in investing) is that there is no other market to bubble up (unless you consider china) waiting in the wings. The crashes in other bubble-oriented asset- backed securities (credit cards, autos, etc.) are already occurring (cf. american express news this week).

So what is different this time is that credit cards reach directly into the day-to-day consumer spending power that previous provided a robust prop to the economy.

My 8 year old daughter got at least one credit card offer per month last year; suddenly as a 9 year old, her credit must have soured (...or something...) -- no offers in the last few months!!

Posted by mike c | January 11, 2008 11:30 AM

"Every morning in Africa a gazelle awakens knowing it must today run faster than the fastest lion or it will be eaten. Every morning a lion awakens knowing it must outrun the slowest gazelle or it will starve. It matters not whether you are a gazelle or a lion, when the sun rises you had better be running." - African Proverb
--------------
Any guess as to what happens to gazelles who sit on their ass reading blogs , surfing the Internet, or watching TV?

As I noted earlier, I told you guys a YEAR ago that this was coming --see http://matthewyglesias.theatlantic.com/archives/2006/12/the_sweet_sweet_fed.php#comment-119132

Notice how Hillary told the audience in the New Hampshire debate that a recession is likely.
(IMO, we're already in one )

Hillary's knows what's coming -- Wild Bill told her. You do learn a few things while President.

Warren Zevon's advice to "bring lawyers, guns and money" is somewhat out of date. Guns are still good but the money's losing value and I think they may start shooting the lawyers at some point.

One might take a leaf from the patricians of ancient Rome --who knew to flee to countryside retreats when things turned to shit in the city.
Read the first chapter of Baccacio's "Decameron" for a vivid description of what happened to the social lorder in Florence during the Black Plague --and how a few people survived.

The basics are simple: One year's supply of food, 6-10 acres of land with a well, partial forest for firewood, fruit orchard and nut trees, prepared garden, a cow/goats and some chickens.
Mortgage fully paid off and $50,000 in gold coins to keep the tax collector at bay.

Plus guns. "Lots of Guns". Ammunition.

And for God's sake, don't get a solitary cabin in the woods somewhere. Wood smoke will lead predators to it and it becomes a secondary crime scene where you and your relatives/friends are tortured to reveal where your caches of food and money are buried. And God help you if you don't have such caches.

No -- buy on the edge of a small town --3000 to 5000 people -- in a farming area which can feed itself, can fortify itself, can muster a militia strong enough to fight off motorcycle gangs, and which has a hospital/doctors. Said town should be at least one gasoline tank drive away from any large cities (i.e, 400 miles distant.) Best to stay away from anyplace 600 miles downwind of the Minuteman missile silos in Montana, North Dakota, and Wyoming/Colorado.

Matthew's too much of a city boy, of course. So he should go down to Belle Haven Marina just south of Alexandria VA and learn how to sail.

That way he can pirate..er "commandeer" a sailboat and head for sunny Cuba when things turn to shit in Washington. The rivers are the only way out of Washington and New York.

The roads will be gridlocked. Some might advise grabbing a motorcycle and heading out on the bike trails/power line right of ways /railroads -- but then you are dead meat to the first asshole with a shotgun who hears you coming.

For more info, see the archives at http://www.survivalblog.com

Posted by Don Williams | January 11, 2008 11:34 AM

if we live in a society where a large number of jackasses exist who viewed their houses has an investment, then we are bound to have problems.

As I see it, the problem is not that individuals viewed their houses as an investment, but that large numbers of individuals bought into a speculative bubble. It's reasonable to assume in many cases that real estate, bought prudently, can be a fairly safe investment. The core issues here to me seem to not be that a certain behavior occurred, but that such behavior was allowed to get out of hand.

(cf. american express news this week)

At the risk of being pedantic: "Cf." is an abbreviation for the Latin "confer," which means "compare," and is probably the opposite of what you intended (unless the news from American Express was that business is solid and booming.) "I.e." is most likely the correct Latinism here. See also: http://en.wikipedia.org/wiki/List_of_Latin_phrases

Posted by James Gary | January 11, 2008 11:48 AM

Al et al. apparently don't realize that Paul Krugman was the OPTIMIST at the recent American Economic Assocation 's panel. Because Krugman hopes that the US economy might get some stimulus from Exports due to the much cheaper dollar.

By contrast, here is what Nouriel Roubini at NYU's Stern School had to say:
----------
"This is the worst housing recession in US history and an economy-wide recession is now unavoidable

and it will be a severe recession rather than a mild recession;

and there is now a risk of a systemic financial crisis.

This is a crisis of insolvency, not just illiquidity; it is a problem of unmeasurable uncertainty (on the size of the losses and who is holding the toxic waste) rather than priceable risk;

and liquidity risk is now severe and not manageable as we have a shadow financial system where non-bank institutions (SIVs, conduits, money market funds, hedge funds, investment banks, etc.) borrow short/liquid and invest in long/illiquid assets;

so they are subject to a severe liquidity/rollover risk but they don’t have access to the lender of last resort support of the central bank in the case of a liquidity run."
---------
Ref: http://www.rgemonitor.com/blog/roubini/235798/

Posted by Don Williams | January 11, 2008 12:14 PM

Krugman first started writing about a housing bubble back in 2004, and the statistics show he was right that there was a housing bubble back then. He also wrote about how the dollar had to drop a great deal even before that. I don't blame him for being right in his analysis but wrong his predictions because TPTB decided to push the problems to the future over and over so that when the the unsustainables had to be faced it was 7 years of a housing runup to deal with rather than 4 years and a dollar that plummeted in a very short amount of time.

More briefly: We would have been better off if we had dealt with the housing bubble and overvalued dollar a few years ago, and Krugman was right on both counts. Al is blaming Krugman for wanting the country to be responsible.

Posted by blah2 | January 11, 2008 12:25 PM

James Gary: I intended "consult" not "compare", from http://en.wikipedia.org/wiki/Cf. :

cf. is an abbreviation for the Latin derived (but also modern English) word confer, meaning "compare" or "consult". It is mainly used in common and statute law contexts as well as in academic writing.

Thus "cf." is often used by authors in the text of their article or book to refer to other academic material which may provide auxiliary information or arguments to the understanding of theirs.

....

I appreciate the alternative definition but stand behind my words using cf in the "consult" definition -- friends don't let friends op cit!

Posted by mike c | January 11, 2008 1:05 PM

Krugman always votes for Doom though.

Sure he's eventually right but he's been pretty off on his timing.

Posted by MNPundit | January 11, 2008 1:55 PM

Every morning in Africa a gazelle awakens knowing it must today run faster than the fastest lion or it will be eaten.

The smart gazelles know that they only have to run faster than the slowest gazelle.

Posted by daveNYC | January 11, 2008 3:26 PM

Dave,

That assumes there is only 1 lion:-)

Once the first lion takes out the slowest Gazelle the next lion takes out the 2nd slowest Gazelle, and so on...

Posted by Eric K | January 11, 2008 3:46 PM

"Krugman always votes for Doom though. Sure he's eventually right but he's been pretty off on his timing."

So I take it you'll continue smoking until you definitely have cancer?

That's how that logic reads.

Posted by Richard Steven Hack | January 12, 2008 12:51 AM