The Fed Finally Got It Right

Well, after months of misapprehension, miscommunication and monetary policy missteps, the Federal Reserve finally articulated a coherent position on how it plans to address the instability in our financial markets and the imminent recession that has both Wall Street and Main Street panicked over the prospect.

Wednesday, Ben Bernanke and company cut two key short-term interest rates a half-point apiece, only one week after cutting those same rates by three-quarters of a percentage point, amidst a global market meltdown.

The Fed's decisive action, which has taken short-term interest rates down 2½ percentage points in less than six months, coupled with a new and open-door policy with respect to further rate cuts, has finally had an impact on market psychology, witness yesterday's big stock market turn-around. With any luck the Fed's actions however late, may blunt the impact of the housing recession, the bear market in stocks and the increasingly broad-based malaise in the economy.

To be sure, we are not out of the woods yet. There are some potential large scale financial market problems hiding out there, like rabbits in a woodpile, and could jump out at us at any time and scare the bejeezus out of all of us.

Having said that, the contents of the Fed's statement, that accompanied yesterday's rate cuts, showed, for the first time since the credit crisis began last summer, that it stands ready to calm the financial markets and protect the economy with all the tools at its disposal.

No doubt the ride will be bumpy from here. One need only review recent economic statistics to understand the severity of our economic problems.

• The unemployment rate has moved up to 5% in the last several months, while 17 thousand jobs were lost in January (as reported this morning), the first job loss since August of 2003, while unemployment insurance claims hit the highest levels in years, as reported this morning. Both indicators are consistent with the onset of an economic downturn.
• Manufacturing indicators are showing signs of deterioration, an ominous portent of future economic activity.
• The dollar's unrelenting slide is indicative of an increasing loss of confidence in the U.S. financial system, as is the safe-haven buying of gold, which is at a record high, well above $900 an ounce.
• Residential real estate is suffering its worst recession, arguably since the "Great Depression." Home prices have fallen a whopping 8.4% nationally, the first time that home values have declined across the country since the 1930s.

In addition, home sales have plunged by record amounts for both new and existing homes while inventories of unsold homes have reached almost 10 months worth of supply. Housing starts have tumbled more than 50% from the peak of homebuilding activity, a decline that historically has encompassed an entire down-cycle in real estate. This decline happened in a much-compressed 12-month period!

• Big Investment and Commercial Banks will continue to write off bad debts, whether they are tied to residential real estate, exotic credit market derivatives or, soon, commercial real estate loans. The heavy losses will keep lenders from extending credit to individuals and business, dampening any economic rebound that may be in the offing.
• Municipal Bond Bombshell: While most of us thought, over the last couple decades, that insured municipal bonds were nearly the safest of all investments, we have now found out that the firms that insure muni-bonds, like MBIA, AMBAC, FGIC and ACA, have also been insuring far more risky securities, like derivatives linked to sub-prime mortgages and other arcane vehicles.

Suddenly, with those debt instruments collapsing in value, the insurers are on the hook for tens of billions of dollars or more of insurance payments and they simply don't have the money to back the bonds they insured. As a consequence, their impairment could lead to a wholesale liquidation of municipal bonds, since those who bought them, thinking they were insured, might dump the bonds for lack of protection that as promised by these wayward insurers.

These insurers are so tapped out right now, MBIA announced a better than $2 billion loss this week, they could never make good on the insurance they promised for municipal bonds, let alone the crazy credits they backed in the last several years.

Regulators are looking at ways to extend emergency credit lines to the insurers, which could stop this budding bond problem dead in its tracks. The only problem with the bailout plan being discussed, is that few institutions have the wherewithal to back the bond insurers; given the immense financial problems they have themselves.

But enough gloom and doom talk for one day. The Fed will continue to cut interest rates until the markets are calm, financial institutions can lend again and the economy shows signs of life.

The President and Congress are working to pass an economic stimulus plan that should, or could, give the economy a short-term shot in the arm.

And regulators are working to fix the foreclosure problems in residential real estate and potential problems in other areas of the markets.

So, as they say on Wall Street, let's put a little lipstick on this pig and hope the idea sells! If it doesn't... pork bellies all around!

Comments

[dadw5boys]

WHY IS NO ONE ASKING WHY BUSINESS CAN'T EXPAND WITH SUPER LOW INTEREST RATES.
THE ECOMONY WAS BOOMING WITH 11% INTEREST RATES UNDER CLINTON.
Big Oil has dried up all the free cash and low interest means they won;t make loans?????
COME ON WAKE UP THEY WANT A RECESSION OR DEPRESSION TO DRIVE DOWN U.S. LIVING STANDARDS. THEY BANKS ACTUALLY WANT IT!@

[willo]

Basically it means printing more money based on nothing but thin air. More fuel for the fire. What about those of us that actually save money seeing it undermined and devalued by such policies. What do you think it does to interest rates paid to the people trying to save money. It's a double kick in the ass.

[ajax2]

$3 trillion Bush's proposes spending in 2009 would be the first time that milestone has been reached. Bush also presided over the first budget to hit $2 trillion, in 2002. It took the government nearly 200 years to reach the first $1 trillion budget, which occurred in 1987 during the Reagan administration.

[Robert59]

So explain to this inquiring mind how is the Fed's action going to make my dollar go further? Will it drive down the price of anything we import, from oil to clothing to more and more of our food? Will it increase the value of all those hyperinflated houses? Will banks and other lenders want to finance those houses at their inflated worth?

This rate cut is good for no one but lenders. They will have access to cheaper money they can loan out for higher interest rates allowing them to recoup some of their losses. Of course we know the American taxpayer will ultimately be asked to recoup the remaining losses.

You say home construction is suffering its worst recession since the Great Depression, but I disagree. It would be a recession if salaries and house prices were in synch. They, however, weren't so it's just a bubble, pyramid scheme, or whatever you want to call it that's burst.

The true fallout is just beginning and what it reveals should make everyone rethink social security privatization. A great many cities and states and pension managers invested in these CDOs because they were considered low risk and promised great rates of return. Those investments are now worthless.

The financial industry is a necessary evil, like law enforcement, military, medicine, manufacturing, and the law. All need a great deal of oversight because all are capable of horrible abuse and misuse.

[mbaty]

Most of us don't have much sympathy for the big banks and credit lenders who are in many ways responsible for the whole mess. It's not like they were sympathetic with us, whose debt fuels their profits and whose exorbitant, unnecessary, non-negotiable, and wholly counter-productive fees create personal defaults, and thus, large collective default amounts. The economy will have to be fixed from the bottom up, not with more credit lines or rate cuts that lead to more borrowing and more defaults.

[realitytrumpsbull]

Is that before or after they send in the police death squads to 'reset' the housing market?

[WorkingClass]

Whats the fed gonna do when unemployment is at 20%, milk is going for twenty dollars a gallon and people are dying in hospital parking lots? As long as the DOW stays up I guess that other shit doesn't matter anyway.

[FightingTheRight]

I read this as sarcasm.

I hope I'm right or your keyboard should be taken away.

Average Americans aren't spooked about a recession because of the stockmarket.

From their economic standpoint, higher oil prices increasing the cost of gas, home heating, food and many other day to day expenses tell them the real story of the economy.

Add to that, multiple houses for sale on every street and road they travel on, the increasing cost or lack of affordible health insurance, along with stagnant wages and they see a bleak picture of the current economy.

[olephart]

Using your logic the best treatment for heroin addiction is heroin. I could go into an extensive argument about inflated home prices, unmanageable levels of debt both public and private, unregulated lending practices, fraud and a myriad of Government policies but why bother? Just crack a srcipt at your local Fed and shoot up. Ahhhhhh, more printed and borrowed money, now I feel better.

[joebaggadonuts]

You mean long-pork bellies?

[Novista]

Who cares if the markets are calm? They have moved so far from fundamentals, reality, they need a good correction. A painful one.

Why should banks and the rest get a free pass? They engineered the catastrophe, so let them feel the pain. Sharing is good, right? And, to be fair, including the ratings firms, and the GSE overseerers.

[OpusIsUnderTheBed]

Hey Ron. The big financial institutions are in big trouble. But it's ok, they have insurance protection. Wait, wait, the insurers are in big trouble. But it's ok, the big financial institutions are going to help the insurers.

I feel so stupid that I'm not a top level, financial executive. They'll survive this with their personal assets intact. Me? I'm unable to avoid being screwed by big, corporate business.

[zizyphus]

So the FED in it's infinite wisdom thinks the problem is not enough credit. The FED is helping the banks, whose unregulated and injurious lending practices, along with variations on a sophisticated Ponzi scam called securitization, are the root cause of this mess the country is in. They can only cut rates down to zero-then what? The misguided Republican policy of letting big business get away with any crime they can dream up is also at the root of the problem.

The FEDs rate cuts are having the effect of devaluing my meager savings. People like me don't know whether to put our soon-to-be worthless dollars under the bed, in case of a run on the banks, or use it for kindling to heat the house. That is what the working poor are considering. We think a full-on depression is coming. To my ears, when the FED says recession, it is a euphemism for a full-scale bread-line type depression that they are seeing in the near future. When the bank runs start in earnest, will the gangsters in the White House declare Martial Law and cancel the elections?

[peaceandfreedom]

Dropping the rate devalues my dollar
Dropping the rate makes US purchasing power less.
Dropping the rate makes saving less likely.
Dropping the rate makes higher debt easier.
Dropping the rate discourages investment in America by the very Foreign countries we depend on now to keep this house of cards up.

So explain for me again how the Fed is helping anyone but the Corporations who will use these low interest loans to make more imaginary money while we finance their bailouts?

Did I miss anything?

[Dandy12]

These are perceived as desperate measures around the world. Our problems are proportionate to the massive trade deficits and national debt. No one wants to address the fundamentals, and solve the real problems!
The Fed and this administration have it all wrong!