If the Fed did what many here on ET suggest (i.e. nothing: hold rates steady) the US would possibly looking at going down the road of Japan post 1990. What's the lesser of two evils?
I would rather have the Japanese economy than Argentina economy anytime. Its not even close. The Japanese are filthy rich and the biggest whiners in the world. Their deflation was a huge boon for their trade surplus keeping the yen weaker than it should have with such low interest rates and allowing their international assets to get bigger and bigger. Americans could learn a thing or two from the Japanese.
actually credit concerns trump everything if you are talking systematic risk. if you have a couple major banks go under you create an argentina overnight. the lower dollar has allowed exports to make up for the housing loss in gdp (not total wealth) for four of the last five quarters. if we were on the verge of being argentina it is unlikely the foreign investment in our shaky banks would have come here at all. while i don't agree with all of the rate cutting it certainly hasn't caused an increase in the money supply to a large degree. hyperinflation isn't on the horizon. the best thing the fed has done is buying the mortgage securities. thornburg mortgage ceo said that the mortgages he was selling would only get 90 cents on the dollar from fellow banks but that the fed would give them 98 cents. i'd rather see more of this and less rate cutting. no bank really wants to be seen buying a lot of mortgages right now even if they are good ones. the fed can help facilitate the functioning of the credit markets by doing more tactical strikes like this and less nuking with rate cuts but when gdp growth goes from over 4% to .6% it is doubtful taht the rate cuts are going to do a lot of damage.
I am a bit puzzled by Bernanke's outlook versus his actions. His aggressive cuts make sense if we are facing a nasty recession. But he says the odds are that we *avoid* recession. If 3%, cutting lower by summer, is correct policy for a *growing* economy, what would he do if an actual 2 quarter contraction in GDP took place - put rates to 1%? The only way this policy can make sense is if he rapidly hikes rates as soon as the credit crunch is gone. He absolutely must avoid the Greenspan error of holding rates at 1% for 2 years after the contraction. So, if he hikes aggressively in late 08 or in 09, he can be considered activist but somewhat credible. If he cuts to 2.5% or lower, and keeps them there even when the slowdown/recession is done, then that's really bad IMO.
Pabst, In a perfect world, you might be correct. We live however in a world where businessmen are capitalists when things are good and socialists when they turn sour. Unemployment is far less than the average during the last 30 years and people act like we are in the Great Depression. People are outraged that the banks expect payment on the no money down, no doc,liars mortgages they took out to buy $1million properties with no job and no assets, and in many cases, no legal residency. Congress' reaction is to freeze foreclosures and let deadbeats live free in houses they never should have been allowed to buy in the first place. So you have to accept as a given that the government is never going to let the system flush itself. The irresponsible will be bailed out, whether they are lenders or borrowers. At the end of the day, all Bernanke is doing is lowering the cost of the bailout by preventing a total credit seize-up. The results will be pretty much the same whether we pump money in through the Fed or let congress piss it away on stimulus packages and bailouts. Of course the dollar gets trashed, but since europe will soon be doing the same thing , it won't be all that terrible. The dollar actually appeared to stabilize last week. As for inflation, all politicians deeply believe that it is far preferable to deflation. Moreover, it is true that much of the commodity inflation is not a Fed-created problem. Chinese demand coupled with an insane ethanol policy should get plenty of credit. War in the middle east and a congress that won't allow drilling and blocks new coal and nuclear plants don't help. Bottom line I agree that Bernanke has been a disaster. My reasons differ from yours however. I feel he should have recognized that there was a serious problem developing in the housing/mortgage/CMO sector and brought rates down more quickly.
thanks beltway like you i would also have liked for the fed to see this a little earlier. even under greenspan they just sort of sat there while loans were being made that were obviously more risky than they were marketed to be. spitzer said today "garbage in garbage out" but everyone sat there acting like a bunch of crappy mortgages packaged together weren't risky because there was a bunch of them. the ball was in the fed's court on that one. they knew it and did little.
Bernanke cites the textbook nonsense Textbookwise, he's right. Real world, like Nixon, he couldn't be more wrong.
IF you do not like what goes on in America, move to Sudan or Sri Lanka and start baking cow dung patties...