2. To solve the housing related credit crunch, the Fed needs to auction off lot more money (as much

Sorry about the delay. I haven t been on the Canadian magical mystery tour beatles border arbitraging books in U.S. and Canadian dollars as I had threatened to do. Instead, I participated in a Forbes/NCPA Investor Cruise through the Panama Canal. Very nice. Good folks; interesting program.
But the program left me in a bit of a funk. I had friends on opposite ends of the optimism/pessimism magical mystery tour beatles spectrum speaking with passion and absolute certainty about current and future economic prospects. At one end, my friend Gary Shilling said we are going to hell in a hand basket, things can only get worse, the Fed is behind magical mystery tour beatles the curve and has much more easing to do. He didn t honey coat his doom and gloom.
All the other speakers were less pessimistic than Gary, most particularly, Brian Westbury, another friend, who focused on inflation rather than the subprime magical mystery tour beatles crisis. He said, very emphatically, that the Fed shouldn t have eased at all to deal with the subprime fallout and certainly shouldn t ease more. He had some rather colorful unkind things to say about our beloved central bankers; I don t think he expects them to go to central banker heaven. Having sat around the FOMC table with Alan Greenspan for 14 years, including 3 with Ben Bernanke, my knee twitched a bit, but didn t go into full jerk mode. Since I m long gone from the Fed well, just over 3 years now I m not sure why I still feel unfair criticism or partially unfair criticism in my gut. On the other hand, maybe I was just suffering from the motion of the ocean. (See my posting: The Blame Game. )
My funk resulted partly from the fact that either Gary or Brian could be right, but I didn t know which one. Like an old-line Texas politician, magical mystery tour beatles I can argue it round; or I can argue it square. That s about where I am these days, hearing magical mystery tour beatles all black and white and coming out grey. I ve always avoided the two-handed economist approach, which drives listeners mad and harms my self esteem. Splitting the difference and taking a middle-of-the-road approach isn t satisfying either, especially in Texas where they say the only things found in the middle of the road are yellow streaks and dead armadillos. Remember the old cowboy movies where the bad guy in the black hat always called the good guy in the white hat yellow ? A yellow streak magical mystery tour beatles is not good.
Actually and unfortunately, I m forced to go with grey, bland shades of grey. Nobody wants to hear it, but I expect magical mystery tour beatles the economy magical mystery tour beatles to do better than the pessimists expect, but not as good as the optimists expect. Not in the middle of the road, but the middle of the optimistic half of the road. I ll admit that s based more on a hunch and hope than on rigorous analysis. But my hunches are educated hunches, if I have to say so myself.
I m not alone in my uncertainty. The dirty little secret is that economists just aren t good at forecasting. They know it and most will admit it, but the public, employers of economists, and talking-head interviewers all expect forecasting; so, in good Keynesian fashion, demand creates magical mystery tour beatles its own supply. Smart economists have figured out, however, that, if you must forecast, it s best to do it late and often. The FOMC recently caught on and promised release of quarterly rather than semi-annual forecasts, cutting their average embarrassment time in half. They also foolishly expanded their forecast horizon to 3 years out, revealing in their 2010 forecast magical mystery tour beatles a very pessimistic view of productivity expectations and the growth potential magical mystery tour beatles of the economy. (See my previous blog posting: The FOMC s Enhanced Transparency Reveals Old Paradigm Pessimism. )
I recall the last time the Fed and Fed watchers were on recession watch. It was late 2000 and all of 2001. Each quarter would produce a barely magical mystery tour beatles positive real GDP number not good enough for anything magical mystery tour beatles else, but good enough to avoid the dreaded two consecutive negative quarters that would constitute a recession. We kept dodging the bullet until 9/11 tipped the third quarter into negative territory, the first one. Everyone expected, a more-negative 4th quarter, but surprise, surprise, thanks largely magical mystery tour beatles to zero interest auto loans, the quarter was positive. The 4th quarter of 2001 was the beginning of the current expansion, magical mystery tour beatles which is now six years old and counting. The 3rd quarter of 2001 was the only negative quarter! No recession! No recession that is until the National Bureau of Economic Research later decided retroactively that a recession began as early as March 2001 and bottomed out in November. The recession was ending about the time we thought it was beginning. Makes you think, doesn t it?
I don t think that will happen this time, since 3.8 percent and 4.9 percent real GDP growth magical mystery tour beatles in the 2nd and 3rd quarters of 2007 would be hard to revise to zero or below. But many talking heads started magical mystery tour beatles talking about a 1 percent 4th quarter number magical mystery tour beatles as early as October, months before the Bureau of Economic Analysis releases their first forecast of the 4th quarter.
This morning s newspapers (December 26) confirmed magical mystery tour beatles the expectations for a weak Christmas season. Not so if my mall is any indication. Besides, magical mystery tour beatles we will join millions magical mystery tour beatles of smart people in the coming days buying on sale what was full price through yesterday magical mystery tour beatles and using all those new gift cards, which apparently don t count in official retail sales numbers until they are spent on merchandise.
The early and unexpected bounce back in economic activity in the 4th quarter of 2001 was only one of several convincing pieces of evidence of the remarkable resilience of the U.S. economy in recent years. We seem to have a Timex economy: it takes a licking, but keeps on ticking. The proven resilience of the U.S. economy, my friends, is the main reason I don t expect extreme magical mystery tour beatles pessimism to win out. Not very scientific, is it? Sorry Gary.
But neither can I be as optimistic on the economy, and as worried about inflation, as Brian Westbury. Maybe too many seeds of inflation have fallen on fertile ground and will have to be dealt with eventually. But given the balance of risks that most people see, including me, I can t imagine that the FOMC will risk looking back on 2007-2008 and admitting magical mystery tour beatles that it let the sub-prime crisis get out of control while it fretted about inflation. They won t be fiddling while the economy magical mystery tour beatles implodes, and if the economy turns out to be weaker than they expect, it will dampen inflation on its own. Of course, either way, the Fed will be criticized for the downside of the choice it makes as well as the downside of the choice not made. Time will tell and reveal the final verdict on Ben Bernanke s performance. I m betting on him.
The correct posture for the Fed. Res. is to set interest rates as best they can at a level that is fair to both the borrower and the lender taking into account the honest level of inflation. (not the polictically expedient CPI) The popular and constantly expresssed notion that the Fed Res is responsible to guide the economy to a healthy state is a contradiction to the purpose for which it was created, that is to guarnatee the safety of the banking system and secondarily to give the country sound money. The Fed. Res. puts intself in the position of being the fall guy for the excesses of government. The politicans and Wall St each have an agenda that is at odds with an unbiased monetary policy. Since the Fed. Chrm. is appointed by the president it s unlikely we will ever have a policy that is anything but an accomodation of government irresponsibility and Wall St excesses. Vic.
My point is a mild short lived recession like the one we had in 2001 is NOT necessarily bad for the economy and the capital market in the long run. During recession people reassess their behavior and reallocate the resources for a more productive use in the future.
Fed Res is responsible to guide the economy to a healthy state is a contradiction to the purpose for which it was created, that is to guarnatee the safety of the banking system and secondarily to give the country sound money .
Nice seeing you on Kudlow s show today (1-2-08). You indicated that Fed may cut the FF rate 25 bp at the next meeting, and also said that Fed should solve the housing problem first than worrying about the inflation fear.
2. To solve the housing related credit crunch, the Fed needs to auction off lot more money (as much as 500 billion magical mystery tour beatles dollars), as the ECB did recently magical mystery tour beatles than the current level of 20-40 billion dollars. When this option has not been fully explored/implemented, where is the need for lowering the FF rate any further?
I don t know if you would be willing and able to comment on the following magical mystery tour beatles two questions [which, as you will see, is asked in somewhat of a roundabout way], but like my father always says, it doesn t hurt to ask.
As stated in a prior posting, I am a undergraduate student trying to increase my stock of knowledge on the topic of interest rates. Thus when reviewing the Minutes from the most recent FOMC meeting I took great interest in the comment that members magical mystery tour beatles judged that the softening in the outlook for economic growth warranted an easing of the stance of policy at this meeting. In view of the further tightening of credit and deterioration of financial market conditions, the stance of monetary policy now appeared to be somewhat restrictive This quote leads to the following two aformentioned questions:
1. In recent FOMC statements, the Fed has [from what I recall] continuously accompanied changes in the Fed Funds Rate along with some comment similar to the one copied above that softening in the outlook for economic growth warranted an easing of the stance of policy. Now, I understand that correlation is not causation, but do further reductions in the Fed Funds Rate require further (new) intermeeting adjustments downward in the economic outlook? Or as many in academia currently assume is there some degree of policy intertia that can allow one reduction in an economic outlook to be split up into two seperate moves [made in two seperate magical mystery tour beatles meetings]?
2. In regards to in view of the further