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