1/27/08

You’ll have to excuse the bunny for a moment.

He’s had enough and is losing his cunicular cool.

This past week’s inter-meeting rate cut struck him as precipitous, political, and most of all, panicked. That it was motivated at least in part by the fact that other nations’ financial institutions are prone to the same human greedworm eating away at our own (Société Générale? Belgium’s Fortis, England’s Northern Rock, and the UAE’s Abu Dhabi Commercial Bank are all adding to that bitter bouillabaisse, just to name a few). The blatant pandering of the pols has spread to the Fed, and the bunny just can’t take it anymore.

To recap: it is not the Fed’s job to babysit Wall Street (nor to police it—that’s what Treasury’s for). The Fed’s mandate is twofold—first, to promote full employment, and second, to maintain a sound monetary policy to prevent the sort of hyperinflation and bank runs that lead to widespread misery, xenophobic massacres, and pseudo-intellectual pontification that’s the verbal equivalent of an M.C. Escher drawing. Incremental rate adjustments over measured periods (and none at all in election years) help keep the Ship of State on an even keel. Taking a halberd to interest rates, especially when other central banks around the world did not, can only appear as a declaration by the Fed of a state of emergency with which other governments (friendly or otherwise) do not seem to agree. (Never mind that rate cuts take 6-12 months to make their way through the national economy, a period only slightly less than the length of the last two recessions).

Why would Wall Street expect another 50-point cut this coming week, taking rates to 3% (or, the bunny shudders to think, even lower)? Again, the answer is twofold. First, it means that things are worse than the Fed admits to, and second, the Fed is letting Wall Street dictate its moves. This would be a political decision, and a hruffy, murthified one at that. It would be an outright invitation to inflation. Is this a dollar I see before me, getting ink on my clean white paws? Why no, the bunny declares hothfully, it is less than a dollar, and the dollar will continue to be crushed should rates continue to be scythed, not to mention a spike in already spiking import prices. Ur grubba naar, hraf fuffing shoom bletzkwell! Phlap wabble therwin potok! (When the Rabbit Rage is upon him, the bunny's first victim is verbiage.)

Politics and politicos, gentle reader, are bad for the bunny's brain, as you have seen, and even worse for economic policy. Let us hope that in the weeks ahead, cooler heads prevail over itchy trigger fingers.



Bits o’ Bunny Collateral Damage:
“Evolution of economy will tell whether Fed overreacted” by Krishna Guha, Financial Times, 1/26/08
“The start of the great unwinding”, editorial, Financial Times, 1/26/08
“Société Générale’s Sales May Have Incited Market Plunge” by Nelson D. Schwartz and Nicola Clark, New York Times, 1/26/08
“Stimulus Deal Spurred by Fears of Voter Backlash” by Michael M. Phillips, Sarah Lueck and Sudeep Reddy, Wall Street Journal, 1/26/08
“A Global Fed”, editorial, Wall Street Journal, 1/26/08
“Mideast banks to report subprime losses”, Reuters, 1/26/08

1/21/08

So who's worried?

After all, despite a $150 billion bad-loan sump, the global finance system hasn't collapsed, right?

And despite a year-over-year inflation spike of over 4% and global commodity prices indices at new highs, manufacturing hasn't collapsed, right?

And just because of dismal seasonal retail sales, a widening trade deficit and unprecedented and yet-uncharted credit card defaults, the consumer economy hasn't collapsed, right?

And just because incumbent and incontinent politicians alike are one-upping each other with emergency stimulus packages designed to put negligible amounts of tax-relief cash into the hands of voters least likely to save it thanks to lowering interest rates and prior to the elections that will shortly be followed by massive tax increases, the matrix of civilization (or at least its 24-hour news cycle) hasn't collasped, right?

The bunny would like you all to take a moment to relax and pass hraka. (He duly bobs his hirsute head to Richard Adams.)

On the last point especially would he like to focus his energies. That the US economy is in the midst of contraction is uncontested, and attested to by the frenzy with which the carping constipated corps of politicos, pundits and pen-wielding press pests is howling for more gruel and grist. Tax cuts. Lower interest rates. Bad loan bailouts. Cash on the barrelhead. With each news cycle, more mouths join the banshee choir.

The bunny has no patience for such nauseating drivel. Unlike many of his mammalian brethren, the bunny does not possess the ability to regurgitate hairballs after grooming, relying instead on the bounteous nature of timothy hay, which, like kasha, bulldozes the badness back and beyond. In bunnies, as in the great rivers of the world, the current goes one way.

The media maelstrom also obscures what is in fact an old tactic deployed on a new playing field: political use of money (or monetary policy) to curry favor at election time. He (or she) pushing payouts pre-primary is more likely to effect the short-sighted worried about mortgage or credit-card debt, as opposed to later (and potentially felonious) dangerously deferred tax debt, while he (or she) champing cheap money (i.e., immediate rate cuts), which are the darling of institutional investors such as hedge funds (which themselves are not above the occasional donation to a candidate's war chest) might also be (already) forgetting the fact that cheap money was what ignited the subprime storm to begin with. And 5% national unemployment is historically considered full employment (and compares favorably with economies of scale across the pond). And that, very quietly, the core blue chip companies of the S&P have been racking up earnings well beyond what's needed for ballast in these roiling 1Q '08 waters.

The bunny does not deny that there is some serious skinning going on. But this flensing should also be viewed as a cleansing. A 15% correction is still a correction; markets go down as well as up. This is part of the business cycle, the corrective mechanism by which, eventually, the ship of state of things rights itself with keel down and mast held high. What's different from 2000-2002? No foreign attacks? Well, actually, the bunny is wrinkling his nose at the increasing bankrolling of US financial nodes by foreign sovereign wealth funds (but hey, beggars can't be choosers). He has been grinding his teeth over this, and will in postings to come. Among other worries, he would like to know how you get the investment arm of an entire country to open its books; he knows of no lawyer-subhumans with this sort of suction, and very much doubts the political clot has such clout either.

The bunny watches.

The bunny waits.

The bunny is back.


Things that line the bunny's box of late:

"The Invasion of the Sovereign Wealth Funds"; "Asset-Backed Insecurity"; "A Delicate Condition"; "Economic and Financial Indicators", The Economist, 1/19-25/08

"'Til Next Paycheck, a Stimulus" by Michael Santoli, Barron's,1/21/08

"Adjustment or Affliction? Why the Dollar's Drop is Failing to Rebalance the World" by Chris Giles. Financial Times, 12/11/07

"No Quick Fix to Downturn: Some Fear Stimulus is Already Too Late" by Peter S. Goodman and Floyd Norris, New York Times, 1/13/08