Editore"s Note
Tilting at Windmills

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February 14, 2008
By: Kevin Drum

WHAT THE FED HEAD SAID....Fed chairman Ben Bernanke testified before Congress today and Brad DeLong provides a pithy summary:

Further cuts in the federal funds rate are on the way. Ben Bernanke is talking about how we are in a slow-moving financial crisis of DeLong Type II: one in which large financial institutions are insolvent — "pressure on bank balance sheets" — and in which lower short-term interest rates and a steeper yield curve are a way of providing institutions with the life jackets they need to paddle to shore.

Well, that sure doesn't sound very optimistic, does it?

Kevin Drum 5:46 PM Permalink | Trackbacks | Comments (30)

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Comments

In all my time here, it is truly stunning that, in 30 minutes of this thread, there hasn't been a single post. FAIL, Kevin, FAIL on this topic.

Posted by: Boorring on February 14, 2008 at 6:36 PM | PERMALINK

Great! T-bill rates will continue to plummet and CDs will follow. Pensioners will suffer as inflation heats up. Good luck to Hillary/Barak.

Posted by: Where's Sally? on February 14, 2008 at 6:48 PM | PERMALINK

http://www.clevelandfed.org/research/Policy/fedfunds/index.cfm

This shows how the futures market thinks about the next Fed meeting.

Right now it seems that the Fed will drop rates by at least 50 basis points.

The big problem is that it is virtually impossible to drop interest rates below zero.

Pretty scary

Posted by: neil wilson on February 14, 2008 at 7:25 PM | PERMALINK

I'm confused. I was under the impression that the "insolvent" part meant "insolvent". What lowering rates does in such a case (if it works) is to make the nonperforming (but higher face interest) assets more attractive to some hypothetical suckers, who will then buy them and move them off the banks' balance sheet at a price that doesn't result in too big a loss to the banks.

That's not so much paddling to shore as dumping someone else in the water and using their floating corpse to hold you up.

Posted by: paul on February 14, 2008 at 8:04 PM | PERMALINK

If inflation heats up, nothing the Fed does will keep long-term rates from rising dramatically.

Posted by: freelunch on February 14, 2008 at 8:30 PM | PERMALINK

Pushing on a string. Didn't help in the summer. Won't help now.
ZIRP (zero interest rate policy) here we come.

Posted by: Walker on February 14, 2008 at 8:31 PM | PERMALINK

Hell, that's as optimistic as Brad gets in the face of situations like this.

Posted by: Uncle Jeffy on February 14, 2008 at 8:35 PM | PERMALINK

I wish Bush's fed appointee would stop talking down the economy and aiding the terrorists.

Posted by: Speed on February 14, 2008 at 8:36 PM | PERMALINK

Wow, Boorring, you have nothing better to do today, huh?

Posted by: Monty on February 14, 2008 at 8:38 PM | PERMALINK

It's too bad Bush wasn't reading all those Paul Krugman columns all alongs, or then he would have known how to avert fiscal disaster.

See what happens when you hang out with the wrong crowd?

Posted by: Swan on February 14, 2008 at 8:57 PM | PERMALINK

Monty, the honest truth: Nope :). It was a great day at work.

Posted by: Boorring on February 14, 2008 at 9:45 PM | PERMALINK

For once, I agree with DeLong. The cut in rates raises bank capital almost instantly and lowers the probability of bank insolvencies. It is quite similar to the strategy followed by Japan since 1989.

Posted by: Yancey Ward on February 14, 2008 at 10:03 PM | PERMALINK

Sally and others are not paying attention. Treasury, or long-term rates have been rising all month just because the Fed are having to loose interbank rates to near zero.

Yep the possibilty of stagflation is quite real, or a herky-jerky fiscal policy as the Fed remain behind the curve, as they have been so far.

See what happened to Japan when they were debt-laden, credit-crunched, property values falling. And they went to zero interest rates!

That doesn't mean the little saver and the majority of us won't get kicked around and bruised as usual by the big guys.

Posted by: notthere on February 14, 2008 at 10:08 PM | PERMALINK

What appears to be missing in all this analysis is that the US government can only function by constantly selling off tons of Treasuries, at a whole range on maturities. Lowering interest rates makes those Treasuries a whole lot less appealing as an investment vehicle.
This is not just a theoretical possibility --- there are already plenty of indications of buyers giving a pass on the most recent rounds of Treasury sales. It will be interesting to see how this plays out over the next six months.

Gee --- who would ever have thought that getting yourself massively in debt would constraint your future policy options? It's almost as difficult as foreseeing that getting your army locked up in a second, purely optional war, would make it pretty damn likely that you'd lose the first war your army was engaged in.

Posted by: Maynard Handley on February 14, 2008 at 10:26 PM | PERMALINK

Per fed release H3--required reserves for depository institutions about $42B. Non-borrowed reserves about -$18B.

That's right, negative.

In order to meet required reserve levels, these institutions have borrowed $60B via TAF auctions.

Where would they be now without those?

Sounds like a solvency crisis to me.

Posted by: Neal on February 14, 2008 at 10:32 PM | PERMALINK

Things are getting pretty scary in financial markets. Auction rate bonds are going begging in the marketplace. Read about it here. Liquidity is drying up.

I think this tax rebate scheme is just a way to keep the economy limping along until President Dipshit can ride off into the sunset and leave the stinking piles of shit he created for someone else to clean up!

Posted by: The Conservative Deflator on February 14, 2008 at 10:55 PM | PERMALINK

I find it ironic that since I started following financial news and the markets, that the real events of significance often to do hit the head lines.

Yes Bernarkle's comments are important, but even more important were the hearings regarding bond insurance that were attended by MBIA, ABK and Ackman. Because of the financial position of these companies, the muni bond market has frozen up (literally, no bid). Buffet has offered to step in to take the munis, and that means there is no longer much reason for the intentional rating obfuscation to continue.

Next week will be an interesting time, hope you all got your crash helmets on.

Posted by: lulu on February 14, 2008 at 11:38 PM | PERMALINK

Obama will inspire us to greater spending. Regardless of the bad news, America's economy is fundamentally rotten, but with free trade and hundreds of millions of new chamberpot immigrants, illegal aliens, and jackpot babies, we'll soon be able to compete with low wage nations like Haiti.

Posted by: Luther on February 14, 2008 at 11:42 PM | PERMALINK

lulu: didn't I hear that the muni insurers turned Buffet down? I think they thought his terms weren't generous enough -or some such. Still it seemed that Wall Street was celebrating the fact that he tried.

WASS (We Are So Screwed).

Posted by: bigTom on February 15, 2008 at 12:57 AM | PERMALINK

This scary crisis is like nothing I have ever seen in 40 years of investing. It is one more reason not to turn the Presidency over to a novice.

Posted by: bob h on February 15, 2008 at 8:16 AM | PERMALINK

"Après moi le deluge" - George W. Bush

BushCo is handing off to the next president a financial disaster that will rival the Great Depression. I hope the Dems know what they're getting into.

Posted by: Vicente Fox on February 15, 2008 at 9:29 AM | PERMALINK

This scary crisis is like nothing I have ever seen in 40 years of investing. It is one more reason not to turn the Presidency over to a novice.
Posted by: bob h on February 15, 2008

Calling for a 3rd Bush term? Heh.

McCain exclaims he knows nothing about economics!

Hillary's credit crunch bailout was $1B for lenders!

Obama ... has Obama said anything about it yet?

Posted by: MarkH on February 15, 2008 at 11:01 AM | PERMALINK

Well, that sure doesn't sound very optimistic, does it?

Sad to say but right now optimism is for suckers.

Posted by: Tripp on February 15, 2008 at 11:03 AM | PERMALINK

>"It is one more reason not to turn the Presidency over to a novice."

ROFL. It seems to me like the 'experts' aren't doing so hot... eh?

Posted by: Buford on February 15, 2008 at 11:06 AM | PERMALINK

This is far bigger, far more misunderstood, than anybody knows. This is a real crisis of historic proportions and still no one is paying full attention.

Posted by: Jenna's Bush on February 15, 2008 at 11:15 AM | PERMALINK

It is quite similar to the strategy followed by Japan since 1989.

My thoughts exactly. We're following in the steps of Japan. Oh joy.

Posted by: Disputo on February 15, 2008 at 11:36 AM | PERMALINK
....See what happened to Japan when they were debt-laden, credit-crunched, property values falling. And they went to zero interest rates!.... notthere at 10:08 PM
Actually, Japan is then and now a ....massive net creditor

..., subject to none of the constraints that lesser economies face - is operating far below its productive capacity, simply because its consumers and investors do not spend enough. That should not happen; in allowing it to happen, and to continue year after year, Japan's economic officials have subtracted value from their nation and the world as a whole on a truly heroic scale....

The US to the contrary is a net debtor. Lowering interest rates to zero is impossible because of the massive borrowing the US needs to support its national debt and its account current deficits.

Posted by: Mike on February 15, 2008 at 12:18 PM | PERMALINK

I find this all very disturbing. What does one invest in?

I have some CD's and some money market funds (which have plunged). How does one protect one's money?

Would it help to buy Euros somehow (and how is that?) Growth is in Asia, but this doesn't seem like a time to buy stocks.

ack!

Input would be appreciated.

Or would cash be good if maybe I could pick up a house later on?

Posted by: Clem on February 15, 2008 at 1:31 PM | PERMALINK

Clem,

Let me know if you get an answer. I think you are starting to see the trap we are in. My only advice is to be very careful about investing in China. A lot of the economic news from China cannot be trusted.

Posted by: Tripp on February 15, 2008 at 3:36 PM | PERMALINK

Tripp,

Will let you know!

So far have heard nothing back.

Maybe the people who say get gold have a point.

hmmm. Well, when you spend a lot of money you don't have, guess this is what happens... the floor falls out!

Posted by: Clem on February 16, 2008 at 11:46 AM | PERMALINK




 

 

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