Editore"s Note
Tilting at Windmills

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January 22, 2008
By: Kevin Drum

MORE INTEREST....Just a note on interest rates: yesterday evening the Fed reduced the overnight lending rate from 4.25% to 3.5%, a cut of nearly a fifth. However, those are nominal rates. Adjusted for inflation, the rate dropped from about 0.15% to -0.6%. You can't really express that as a percentage cut, but it's pretty significant. For the first time in a while real interest rates are negative — and as near as I can tell, markets around the world barely even paused to notice it. Yuck.

On the other hand, a friend relayed news last night that his relatives in the finance biz "are expecting about a 500+ point drop in the Dow tomorrow and say that anything under 300 should be considered a victory." At noon, the Dow is only down 150 points, so maybe the Fed will be able to declare a moral victory of sorts after all when the day is finally done.

Kevin Drum 12:17 PM Permalink | Trackbacks | Comments (47)

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Comments

When the Lysol clears the air isn't the big pile of shit on the floor still going to stink?

Posted by: steve duncan on January 22, 2008 at 12:25 PM | PERMALINK

The head of the St. Louis Fed was on TV this morning--he was the lone dissenter in the FOMC voting--saying that this was the wrong approach.

Posted by: jprichva on January 22, 2008 at 12:30 PM | PERMALINK

If the DOW doesn't lose too much today as a result of this latest interest cut,why not go all the way?

Think what our economy would look like if the fed rate went to...say 0.25%.

Then George could really trumpet about giving people back more of their own money. The high interest rates hurt us all.

Maybe there should be a cap on lending,say 3% for all loans.

I bet you the whole planet would benefit.

Too many people are saddled with debt. Primarily due to folks charging much too much interest.

I know I sound way off on a limb but I do maintain that we are seeing a global down turn fueled mainly by HIGH interest, on everything.

Posted by: Tom Nicholson on January 22, 2008 at 12:35 PM | PERMALINK

So where should I put my money?

Posted by: greg on January 22, 2008 at 12:36 PM | PERMALINK

I'm shocked that borrowing against the future to finance war profiteering while using gimmicks to keep the economy propped-up on a short-term basis has hurt the economy. Who could have foreseen this?

Posted by: Carl Nyberg on January 22, 2008 at 12:41 PM | PERMALINK

When you say "adjusted for inflation," it would make it easier if you would give the period it needed to be adjusted for. Is the .15 to .6% increase since the last rate change a month or two ago? Since 2000? Since granny was a little girl?

Posted by: anandine on January 22, 2008 at 12:42 PM | PERMALINK

although it's not that long since the glut-o-philes assured us that there was a capital surplus around the globe, the writedowns that we are seeing is clear evidence that, in fact, we have less capital than we think.

to me, this means a contraction is baked in: no matter how low interest rates are, if banks et al don't have the capital to lend....

Posted by: howard on January 22, 2008 at 12:46 PM | PERMALINK

Tom N.,
Sorry, I can't see how too many people are saddled with debt as a result of others charging too much interest.
Rather, I see that interest rates go up when people compete to borrow money that they shouldn't because they can't control their spending impulse.

This whole economic downturn has been caused by all kinds of people - those who have spent beyond their means and have gone into massive debt as a result, those who have encouraged these folks to buy those overpriced homes and cars and gewgaws, those who have lent the overspenders the money to let them get further into debt, those who have simply sat on the sidelines and watched the game (i.e. invested in finance companies on the stock market)and not said a peep, and last, but not least, those in federal, state and local goverment who have kept their mouths shut because their tax revenues were healthy.

I don't know about the rest of you, but I could see this coming from a long way back. But this lone voice screaming about over consumption and lack of lending sensibility couldn't seem to get much done.

Posted by: optical weenie on January 22, 2008 at 12:46 PM | PERMALINK

Asian markets dropped less than European ones did the day before, so it looks like things were already stabilizing somewhat. I'd bet that the Fed wouldn't have done this except for the MBS mess.

Let's also not forget that everybody still thinks US stocks are overvalued, although they've already dropped over 10% this year. I'm betting we'll see some further drops before things bottom out.

Interesting that we've now needed TWO emergency rate drops under Bush. You really can't trust Republicans with money...

Posted by: bleh on January 22, 2008 at 12:48 PM | PERMALINK

Wow, so I should just jump back in and buy, buy, buy after the DJIA only drops 300 points?

Posted by: a sucker on January 22, 2008 at 12:49 PM | PERMALINK

I will know we are in for a change when the credit card companies start competing on the basis of interest rates. I know they all have those zero percent introductory rates, BFD, I am talking about the real rates they charge over time. When that happens we might start to find our way out of this mess. Of course, its going to take Americans actually going back to work to make things before times really get good again. We have used up most of our mortgage equity living high and wide.

See what happens when we ship all the jobs to India?

Posted by: corpus juris on January 22, 2008 at 12:53 PM | PERMALINK

Optical Weenie –

Hard to blame people for borrowing money they shouldn’t have, when the banks, credit card companies, mortgage companies were all offering sucker loans, with low initial rates and downstream exploding rates and penalties hidden in the extra-fine print. Even Alan Greenspan was telling people to borrow more money. When the wizards on Wall Street and in Washington D.C. were foolishly pushing bad loans, it’s kind of unfair to exclusively blame the ordinary schmuck who took them up on it.

Posted by: fafner1 on January 22, 2008 at 12:57 PM | PERMALINK

Of COURSE the rate cut had no effect, INITIALLY. There were probably a billion sell orders already sitting in various computers, all ready to be executed the minute the market opened. The rate cut was announced 45 minutes before the market opened, and no power on earth could stop the sell orders from being executed.

By 12 noon, the actual shape of the situation is clear. The market has dropped. The drop is modest.

Mr. Bernanke's intervention is certainly to be considered a tremendous success.

Posted by: POed Lib on January 22, 2008 at 12:59 PM | PERMALINK

Oh, this is HUGELY the wrong approach. The European Central Bank is much more worried about inflation, and we're no longer the only economy big enough to throw muscle around. If the ECB doesn't make a major cut of its own, the dollar will tank right down into the shitpile.

And, the Dow DID drop nearly 500 big ones before bouncing at least part of the way back. So, given that pre-bell trades were tanking, etc., consider the "rebound" to be more just profit taking starting early. Not sure there's much of a moral victory here.

Posted by: SocraticGadfly on January 22, 2008 at 1:02 PM | PERMALINK

Ask the Magic 8 Ball
http://m8ball.nicksoft.info/index.php?answer=193425
Ask the Magic 8 Ball

and

http://www.ibm.com/developerworks/webservices/library/ws-eight/
Ask the magic eight ball

Posted by: jerry on January 22, 2008 at 1:04 PM | PERMALINK

Well, at least we are spared the stomach-churning US stock market plunge we were expecting today. Of course the excrement pile is still their so we will have to continue to hold our noses.

By historical measures interest rates the last few years have been low. Except for the spendthrift US the world has had an excess of savers. Of course predatory subprime lending was completely out of control, both in terms of the usurious rates applied to the entrapped population, and in the degree of risk assumed on the part of the lenders.

Posted by: bigTom on January 22, 2008 at 1:08 PM | PERMALINK

The magic 8-ball? Well, now I know what's really going on. Ben just scored a couple of kilos of prime flake just when it looked like everybody was dry.

Posted by: Doc at the Radar Station on January 22, 2008 at 1:10 PM | PERMALINK
Too many people are saddled with debt. Primarily due to folks charging much too much interest.

Actually, too many people are saddled with debt because too few have any fucking clue of how to manage their family's finances. We don't have compulsory financial education at any level of our educational system, and there seems little push to do so.

Granted, many banks (which, in reality, are in control of the credit card industry) lured folks in with those low rates without telling them about things like universal default, but we'd be in much, MUCH better shape as a nation if we took financial literacy as seriously as we take just basic literacy.

I write financial education article for a living and have heard stories from people who had no clue about the simplest of things -- at least 8 out of 10 didn't know the difference between APR and interest. It's tragic.

This isn't to say that many individuals did not just overspend in very, very stupid ways. But if you have a nation of clueless folks, what else do we expect?

It'd be like never teaching anyone to read, convincing them they needed the newspaper every day, putting a story in the paper about how everyone needs to be at the City Hall on Saturday, and then acting shocked and penalizing everyone when no one shows up.

Or ... something. I think you all get the point. :-)

Okay -- I'll stop my "FINANCIAL EDUCATION NOW!" rant. It's just that it could really solve a lot of these issues at the consumer level.

Posted by: Mark D on January 22, 2008 at 1:12 PM | PERMALINK

Both the Dow and the S*P went below the lows of last March - from a technical standpoint, not good. It will get worse before it gets better.

Posted by: Ethel-to-Tilly on January 22, 2008 at 1:35 PM | PERMALINK

Debt to our current economic system is like crack to an addict.

The more you have, the higher you get... until the crash. The US economic system been on a binge for a looong time.

Posted by: Buford on January 22, 2008 at 1:42 PM | PERMALINK

Education is not going to solve bad loans.

We tend to blame the victim.

Enough. Start blaming the money-changers.

THEY are the problem.

Why should poor people be punished for the "sub-prime" mess?

It's greed that sucks.

Posted by: Tom Nicholson on January 22, 2008 at 1:42 PM | PERMALINK

Like a truck rolling down a steep mountain, each use of the brakes wears down and over-heats the brakes a little more.

Not too many opportunities left to stand on the brakes.

Posted by: Neal on January 22, 2008 at 1:43 PM | PERMALINK

"Actually, too many people are saddled with debt because too few have any fucking clue of how to manage their family's finances. "

Actually, the problem is that there are too many fucking morons around blaming the fucking victim, instead of the banks.

How about, fucking know-it-all moron, that the fees for ARMs were like 3 times as high as the fees for a conventional mortgage? Would knowing that stop you from saying fucking stupid-ass idiotic comments.

The banks and load originators were the ones at fault here. Yes, people signed contracts. But many if not all were duped by greedy, greedy, greedy loan arrangers.

Posted by: POed Lib on January 22, 2008 at 1:50 PM | PERMALINK
Education is not going to solve bad loans.

Um ... if people don't have any clue about financial issues, how are they to tell a "bad" loan from a "good" one?

If people knew enough to tell the difference, there'd be no (or at least fewer) bad loans because no one would ever take one.

And note that a subprime loan is not always bad -- if the person can pay the bill without sacrificing any other bills, and it helps their credit rating in the long run, they can be good.

Not always, mind you, but sometimes.

We tend to blame the victim.

Please do not think that's what I'm doing here.

What I'm doing is blaming an entire system -- financial, governmental, educational -- for the current mess. Again, though, IMHO if people had a stronger grasp on money issues, a lot of these problems would go away. Not immediately, but eventually, as people learn the true cost of borrowing and that the stock market should be looked at for the long-term, rather than a way to make a quick buck.

As a bonus, financial education is a political winner for either side. I can't think of anyone who would go against it.

Enough. Start blaming the money-changers.

THEY are the problem.

Actually, they are big part of the problem, but not anywhere near all of it.

IMHO, the way to fix part of this includes:

--A national APR cap (I say 24%)
--A limit on balloon payments for adjustable rate loans (I'd say 3%)
--Better disclosures on lending documents, with a simple, universal, easy-to-understand form for all transactions.
--Allowing primary residences to be claimed in bankruptcy
--Removing banks' ability to offer investment products, given their tendency for conflicts of interest.
--Compulsory financial education

All of these can all work in concert to get our nation of debtors back on track. It puts firm limits on the money-changers, helps those who are in a tough spot, and can set up financial success for future generations.

Why should poor people be punished for the "sub-prime" mess?

Actually, everyone is being punished in one way or the other -- the poor due to less access to affordable credit ... the middle class as their wages stagnate and 401(k) plans go south ... the upper class, even, as their dividends decrease (although I think we all have little, if any, pity for that last group).

This problem isn't going to discriminate a whole helluva lot.

It's greed that sucks.

I couldn't agree more.

Note: I have no vested interest in a financial education company or anything. After reading through this comment, it may seem that way. It's not. :-)

.

Posted by: Mark D on January 22, 2008 at 2:06 PM | PERMALINK

Hasn't strong U.S. consumer spending kept the U.S. and international economy propped-up?

Everybody is happy to get the benefits of U.S. consumers spending too much, but no one wants to take responsibility for the debts that made it possible.

Yeah, the consumers spent too much. But the banks loaned the money. And big business (and government) reaped the rewards of excess spending.

Posted by: Carl Nyberg on January 22, 2008 at 2:15 PM | PERMALINK
How about, fucking know-it-all moron, that the fees for ARMs were like 3 times as high as the fees for a conventional mortgage? Would knowing that stop you from saying fucking stupid-ass idiotic comments.

First of all, you obviously need a hug. Or at least decaf. Sheesh.

Secondly, how the holy fuck is me blaming an educational system that fails to give people the proper tools the same as me blaming those without the tools?

Thirdly, do you think that if we offered financial education courses in school that those loans would have become so prevelant? Most folks would have seen why an exploding-rate ARM was a joke and would have gone elsewhere. Thus, the banks would never find it worthy to offer such crap. Not so sure why that's so hard to understand.

Fourth, and last, my comment wasn't blaming the individuals -- it was blaming a system that created individuals who don't know the simplest of financial concepts. So until you can find any post of mine here or anywhere else saying "These people go what they deserved! They're morons and it's their fault!", spare me your outrage.

Posted by: Mark D on January 22, 2008 at 2:30 PM | PERMALINK

...but vs. the core rate of inflation, real rates are still positive.

Inflation: 4.1%.

Excluding food and energy: 2.4%.

3.5-2.4= +1.1 "Real" (vs core inflation)

3.5 - 4.1 = -0.6 "Real" (vs headline inflation)

For setting social security benefits, you want to use headline inflation. For setting fiscal or monetary policy, core inflation is the relevant measure. (Actually the Fed prefers the less timely core personal consumption deflator, but...)

Then again, I see that core inflation is at 2.4%, up from 2.1% recently...
http://www.bls.gov/news.release/cpi.nr0.htm

Posted by: Measure for Measure on January 22, 2008 at 2:35 PM | PERMALINK

Maybe this will help POed Lib understand my point:

Say a person goes to a zoo. While in front of the tiger cage, the person decides to pet the tiger. And, naturally, the tiger rips part of his arm off.

But let's also say that the person never knew that the tiger was a fan of raw flesh because the country he lives in never made that an educational priority.

In this case, the zoo is definitely partially responsible for not having adequate warnings around the cage stating that the tiger likes meat, and making the exhibit unsafe. But the system is also responsible for never teaching the person that tigers are, in fact, quite dangerous.

In this case, the remedies are to try and teach everyone that tigers are dangerous, and to make zoos label exhibits of dangerous animals and ensure they are up to safety standards.

That's my whole point here -- the individual had no clue, and it's the system that created that cluelessness. That's where my ire is directed at -- the system, not the individual.

It's also why what I proposed in my post at 2:06 pm handles the institution (the banks who charged insane rates and balloon payments) and the system (which doesn't seem to care that most people are financiall illiterate), while protecting the consumer (changes in bankruptcy laws, disclosure, etc.)

Of course, if the person knew the tiger was dangerous, then he deserves to be called Stubby. I think we can all agree on that point (or at least I hope we can ... )

Does that help at all?

Posted by: Mark D on January 22, 2008 at 2:47 PM | PERMALINK

Until the human population quits playing magic paper games these sort of roller coaster rides will continue. And no, I am not pitching a currency system tied to gold or any other supposed "real value" marker. Try basing monetary systems on the laws of biology, chemistry & physics, you know, the real world.

If you seriously want to pursue this thought you can begin by checking out Eugene & Howard. A look at the work of Nicholas might also be of assistance.

Not that I think anyone will do so before ranting on about some ignorant economist & their biased ignorant theory.

"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist" - John Maynard Keynes

Posted by: daCascadian on January 22, 2008 at 2:50 PM | PERMALINK

To hear some people talk, you'd think people only borrow money to fund consumption of luxury goods. Lots of people borrow to afford that $800 car repair, or to pay for that expensive reroofing or house-painting job, or to attend college, or to pay medical expenses. It's not all dining out and flat-panel televisions.

Posted by: demisod on January 22, 2008 at 3:02 PM | PERMALINK

It's never good when the Fed is the most panicky one in the room.

Posted by: Mike on January 22, 2008 at 3:05 PM | PERMALINK

demisod >"...It's not all dining out and flat-panel televisions."

Yes but reality isn`t as much fun to rant about as made up straw men & takes a lot more time to understand than does listening to babbling media mouths & swilling overpriced coffee drinks.

[And would the mod(s) please release my previous post (an attempt at economic education) being held hostage due to the multiple links ? Thank You]

"There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things." - Niccoló Machiavelli

Posted by: daCascadian on January 22, 2008 at 3:13 PM | PERMALINK

Folks, you're not getting it.

The upcoming depression was not caused by the housing bubble... it is a clumination of years of running an economy based on unsustainable debt.

The housing bubble was just the 'last fix' for a sick economy... and now there's nowhere left to go for that next hit of economic crack (debt).

Stocks were in a bubble. Pop.
Housing was in a bubble. Pop.
Gold is still in a bubble... but it will crash too. Pop.

Today's rate cut is simply more of the same: printing money without any value behind it... only this time the world sees the dollar for what it is... a piece of paper.

For the USA, the 'high' is over and the withdrawl symptoms are going to be downright wicked.

Out of the collapse may come a nation a bit wiser about living beyond their means. The survivors may learn to value true productivity versus an economy based on smoke and mirrors.

History teaches us that this sort of economic wisdom lasts about a generation. Depressions generally occur when the people who remembered the last depression pass on. That is just about... now.

Posted by: Buford on January 22, 2008 at 3:21 PM | PERMALINK

Mark D. The real answer is don't let tigers loan money. You must be from San Francisco. Most zoos put tigers in cages.

Posted by: corpus juris on January 22, 2008 at 3:37 PM | PERMALINK

So, Tom: Could you lend me a couple of thousand at 3%?

Posted by: Brock on January 22, 2008 at 3:40 PM | PERMALINK

The real question is this. If you are "offering" to borrow money, you typically have to attract lenders. By lowering the interest you will pay out, don't you make your pool of lenders smaller?

Specifically, we're in hock to the Chinese for a ton of cash already, and borrowing like a drunken gambler. Isn't cutting the interest rates likely to lead to difficulties in borrowing further money.

Posted by: royalblue_tom on January 22, 2008 at 3:52 PM | PERMALINK

Yes, it's a victory for the Fed, but it's a Phyrric victory. The economy will continue to head south, taking the market with it. The scope of the problem is too large for short-term monetary (Fed) or fiscal (Bush and Congress) remedies.

They can let it proceed rapidly to a bottom from where recovery can begin, or they can make it a slow and painful descent by continuing to cut fed funds, injecting feeds into the market, tinkering with the discount rate and passing stimulus packages.

Guess which one will happen?

Posted by: DevilDog on January 22, 2008 at 4:28 PM | PERMALINK

borrowing like a drunken gambler.

Why does everybody have to bring GW Bush into this!?

Posted by: Tripp on January 22, 2008 at 4:38 PM | PERMALINK

Tripp >"Why does everybody have to bring GW Bush into this!?"

Because he`s the most visible drunken gambler with tons of other people`s money & he`s on a seven year long spree ?

"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." - H. L. Mencken

Posted by: daCascadian on January 22, 2008 at 4:58 PM | PERMALINK

Mark D, imagine that the zookeepers aren't neutral parties, but rather have a vested interest in getting people's arms chewed off. We might propose a large education program to teach people about the dangers of tigers and large-toothed cats, but the zookeepers are going to go off and find progressively more and more exotic animals that they can feature in the "petting" section.

Posted by: Tyro on January 22, 2008 at 5:02 PM | PERMALINK
Mark D. The real answer is don't let tigers loan money. You must be from San Francisco. Most zoos put tigers in cages.

corpus juris

Yeah, maybe a shark tank would be a better analogy.

:-)

And no, not from San Fran, and haven't even paid attention to that story -- just heard some coworkers discussing it and, for whatever reason, I went with it as a way to explain what I was getting at.

The weird thing is that if I moved the "fucking" in the post that set off POed Lib, it reads totally different. In hindsight, probably should have moved that since I really, honestly, don't blame a vast majority of folks who have gotten hosed in this whole mess (subprime, credit cards, etc.). Trust me ... I didn't know crap about money until about ten years ago, when life and my job(s) made it necessary, and I understand that people aren't idiots -- they just haven't been given the tools.

I also think I made it clear in my 2:30 post that banks need back in their cages (the one Reagan and the 90s GOP Congress left wide open), while still being given some room to roam. Just very controlled room and closely monitored roaming.

Mark D, imagine that the zookeepers aren't neutral parties, but rather have a vested interest in getting people's arms chewed off. We might propose a large education program to teach people about the dangers of tigers and large-toothed cats, but the zookeepers are going to go off and find progressively more and more exotic animals that they can feature in the "petting" section.

Tyro

Which is why we need someone to inspect the cages -- to ensure they're working adequately. That used to be the role of Congress, the SEC, FDIC, OCC, OTS, and the other alphabet soup agencies.

Then, as this excellent article points out, the GOP said, "Nah ... if a few people get bitten, the tigers will just learn to not bite so hard next time!"

I think we all know how that's turning out.

Again, my main point was never to blame those who took out a lot of this bad debt -- that's just what certain folks decided to read into what I wrote. My point was that if our system better educated people on financial issues, banks could never have gotten away with what they did -- no one would have fallen for it.

Yes, banks and other financial institutions will always try to hose people over, just like used car dealers, furniture stores, etc.

But if someone is armed with knowledge, it's a lot harder for that attempted hosing to happen.

Posted by: Mark D on January 22, 2008 at 5:33 PM | PERMALINK

Man that Tyro is one jaded person!

Posted by: optical weenie on January 22, 2008 at 6:38 PM | PERMALINK

Yes, over the last few decades we have gone from a creditor to a debtor nation. Its hard to believe but it was theorised that Americas dollar hegemony would be one of debt.
Debt becomes the vehicle

Soon, with the implicit threat of withdrawing its nuclear shield as its prime persuasion, successive US Administrations realized that rather than depending on its role as the world’s creditor as it had until 1971, the American Century could theoretically thrive as the world’s greatest debtor, so long as American finance and the dollar dominated world finance

Posted by: Ya Know.... on January 22, 2008 at 7:36 PM | PERMALINK

The link didnt show on my last post, lets try again

Debt becomes the new vehicle

Posted by: Ya Know.... on January 22, 2008 at 7:44 PM | PERMALINK

I have the perfect economic stimulus package in mind:

IMPEACH Bush and Cheney NOW!!!

Not only would this provide a major boost to the U.S. economy, but to economies worldwide. Confidence would soar. Birds would begin singing again. Rainbows would brighten up world markets.

Hey, we should at least give it a try. A package deal. An economic stimulus package deal. Impeach Bush and Cheney at the same time. I just know it would stimulate our economy and avert a deep recession.

Posted by: The Oracle on January 23, 2008 at 3:10 AM | PERMALINK
...but vs. the core rate of inflation, real rates are still positive.

"core" inflation is pretty meaningless, substantively.

For setting fiscal or monetary policy, core inflation is the relevant measure.

That's based on the idea that "core" inflation is a better predictor of long-term inflation trends, which is, of course, the assumption on which the measure was created and adopted. The problem, of course, is that the actually testing this assumption (as was done by the Federal Reserve Bank of New York) find that "core" inflation is not a better predictor of long-term inflation than just using the moving average of the CPI.

Posted by: cmdicely on January 23, 2008 at 11:59 AM | PERMALINK
The real question is this. If you are "offering" to borrow money, you typically have to attract lenders. By lowering the interest you will pay out, don't you make your pool of lenders smaller?

The rate lowered is the federal funds rate. Lowering that rate makes it less costly for banks to loan money (it reduces the cost of having their reserves drop below the legal limit), and therefore encourages lending in the economy. (That is, it encourages banks to be borrowers in the interbank system or from the Fed itself, and discourages them from retaining excess reserves to be lenders in that system.)

It is not the rate offered on, e.g., U.S. government securities.

Posted by: cmdicely on January 23, 2008 at 12:06 PM | PERMALINK




 

 

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