Troubled Waters Ahead

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When the Fed drops the fed funds rate by 75 basis points and the market doesn’t react. . .well, that’s really, really scary.
I’ve talked with a number of economists this morning who are stunned by the lack of market reaction to the interest rate drop. This may take us back to debating what quick and real stimulus package makes sense because monetary tools may be very limited at this point.
— Steve Clemons

Comments

30 comments on “Troubled Waters Ahead

  1. Robert M says:

    Linda
    I’ll try doing a better job of being sarcastic.
    That said the issues you raise are valid. Ususally referred to as liberal capitalism of which I am a supporter

    Reply

  2. DonS says:

    another view of maestro Bernake: that he telegraphed panic
    http://tiny.cc/CaJTe

    Reply

  3. DonS says:

    another view: Bernake telegraphs “panic” in the worst possible way
    http://tiny.cc/HHDkv
    or cut to the chase at Davos
    http://www.msnbc.msn.com/id/22799358/

    Reply

  4. Linda says:

    Robert,
    Market forces with no “government intrusion” (which I would call “reasonable government regulation”) and greed gave us the robber barons, the Depression, the S&L and sub-prime debacles, Enron, bubbles, etc. When Lauffer and U of Chicago economics don’t work or pendulum swings to far toward them, everybody goes back to Keynes, Galbraith, etc.

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  5. Robert M says:

    What I find so amazing in this is the Republicans supporting a Keynesian approach to bailing out the economy. I thought stimulus’ promoted “liberal” thinking and big government intrusion into the economy as far as they were concerned. Where are the market forces sorting this out?

    Reply

  6. bob h says:

    Actually, the decline today was only about 1% at a time when other markets were down 5-10%. Europe turned around. Bernanke was successful in stemming the panic.

    Reply

  7. Carroll says:

    Shadia Drury?
    http://en.wikipedia.org/wiki/Shadia_Drury
    Posted by Gene at January 22, 2008 10:26 PM
    >>>>>>>>>>>>>>>>>>>>
    She probably is but even if not Drury is worth reading. I exchanged some mail with her about our neo’s and some of the things they had said that weren’t included in her articles (she was looking for the Ron Suskind quote) before I read her last book.

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  8. Gene says:

    erichwwk, the “lady professor in Canada” you mention, would it be Shadia Drury?
    http://en.wikipedia.org/wiki/Shadia_Drury

    Reply

  9. 777 says:

    The ecomony is being destroy so that the people come back to Jesus in the God awful hard times ahead. The only way to reform this society is to destroy it and build it up again in the name of Jesus. We’ve gone too far, past the point of redemption and must resort to total destruction to begin the cleansing. Bush is doing God’s work. The righteous wrath of American Christian Fundamentalism is at hand. Woe unto ye! Repent sinners, or you shall verily be dispatched forthwith into the flames of hellish damnation. Blessed is he who comes in the Name of the Lord! Amen.

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  10. arthurdecco says:

    Have any of you been reading Mike Whitney’s articles on the deliberate collapse of the American economy? If not, you should Google him. He’s revelatory. He utterly destroys the media mountebanks who are being paid to con dim-witted middle class Americans into economic penury. And he does it with facts rather than hyperbole.
    According to him, we are ALL in for hard times – even those of us who aren’t stupid, ignorant or greedy.
    And who can foresee the consequences for those who orchestrated this mess. They think they’re going to get away with it, but will they?
    Not if it were up to me…

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  11. Carroll says:

    carroll – if billmon ever comes back can you let us know? he was such a great read!
    Posted by … at January 22, 2008 03:56 PM
    >>>>>>>>>>>>>>>>>>>>>>
    Yes, I will….he never put out an e mail address.. although some people claimed they had one for him it wasn’t operational.
    I kept checking for a long time to see if he would come back and comment on current events but he hasn’t so far.

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  12. ... says:

    carroll – if billmon ever comes back can you let us know? he was such a great read!

    Reply

  13. pauline says:

    Let’s get one thing straight — American citizens aren’t the biggest cause of inflation — it’s the out-of-control fed spending and the Fed Reserve’s printing of fiat paper money. Yes, the price for a barrel of oil is also an increasingly large cause, which can be directly linked to the fed’s failed energy policy and their disgusting dependnace on foreign oil.
    The Fed Reserve is “Fed” in name only, but when they print more fiat money (backed by ABSOLUTELY NOTHING except pols’ hot air), it’s like adding more water to the soup. Eventually, the soup is worth less as our fiat money is worth less. It takes more “real soup ingredients” to make soup and it takes a much tighter money supply to control inflation.
    Oh, but the HRC’s of our congress will tell us, “our money is backed by the full faith and credit of the US govt”. Hey, wait a NY minute, that’s really us, not them greedy, useless b*st*rds!
    I knew this financial disaster was coming. Maybe the dark powers of DC are just getting us ready for the new Amero currency.

    Reply

  14. Carroll says:

    Gawd, I love Billmon…I wish he would come back. He is the hero of all clear seeing cynics and realist.
    “We’ve got think tanks that can’t think, security agencies that can’t secure and accounting firms that can’t count (except when their clients ask them to make 2+2=5). ”
    “Our economy is based on asset bubbles, defense contracts and an open-ended line of credit from the People’s Bank of China, and we still can’t push the poverty rate down or the median wage up.
    I could happily go on, but I imagine you get my point. It’s hard to think of a major American institution, tradition or cultural value that has not, at some point over the past five years, been shown to be a.) totally out of touch, b.) criminally negligent, c.) hopelessly corrupt, d.) insanely hypocritical or e.) all of the above.”

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  15. Peter says:

    How come they didn’t mention that Ron Paul also wants to abolish the Social Security System instituted by that traitor to his class, FDR! They are purposely distorting Paul’s convictions to keep him out of contention. Disgusting.

    Reply

  16. Carroll says:

    Why am I not surprised that the economic “experts are surprised?
    Economist deal in “theories” and “models” and are forever trying to make the the real world of commerce conform to their theories…even when the real world doesn’t opeate on theories. It operates on ..can people, business and governments who borrow money actually and timely pay it back? At any interest rate?
    Listening to congress thus far the only person who has suggested even one half way long term correct action IMHO is DeFazio (D-Org.) He has suggested using the money to invest in the basics in the country, infastructure and other programs to create jobs to put money into the economy. Not passing out gov money for nothing of hard value produced and is nothing but a short term spike in consumer spending or bill paying.
    The last thing we need is to Stimulate and Grow the unregulated bag of shit on WS that currently passes for an economy and brought us this mess.
    This is all so familiar…don’t regulate “enterprize” and “capitalism”..that’s too much government interference!
    Just wait until it fails and falls on it’s ass and then “intefer” and bail out the bizness and congress’s failures with taxpayer money.
    I still remember the $6000 per taxpayer the S&L bail out cost us.

    Reply

  17. pauline says:

    KENNER, La. Ron Paul, a long-shot Republican presidential contender and Texas congressman, said Monday that the Federal Reserve is to blame for the country’s weakening economy.
    Paul highlighted his economic remedies, abolishing the federal income tax and returning to the gold standard, among them, on a three-city tour of Louisiana.
    The libertarian-minded Paul was the only candidate to visit Louisiana on the eve of the state’s Republican caucuses on Tuesday. The caucuses are an intermediary step in picking a favorite candidate. A presidential primary will take place on Feb. 9 and a state convention will convene on Feb. 16.
    Paul blamed the Federal Reserve for the current economic conditions; stock markets worldwide fell Monday after Wall Street declined last week. On his Web site, he said the Fed has taken the United States “into a terrible crisis.”
    Paul told an overflow crowd at a suburban New Orleans hotel on Monday that the Fed has allowed the dollar to weaken, which in turn, he said, has hurt the middle class and led to inflation.
    “I would enjoy being the next president to get rid of our central bank,” he told supporters. The crowd gave him a raucous welcome, chanting at one point, “Who dat? Who dat say they’re gonna beat Ron Paul?” – a riff on a popular football chant for the New Orleans Saints.
    Paul, on his Web site Monday, said his opponents’ economic policies are based on ill-advised “print-and-spend” theories. He added that he would cure the economic crisis by ending the “hyper-expensive, hyper-dangerous empire all around the globe.”
    Paul is a 10-term congressman from southeast Texas whose campaign differs on many points from most of his Republican rivals. He opposes the Iraq war and the death penalty, for instance, and votes against military appropriations.
    He would also like to abolish the Education Department, Energy Department and Internal Revenue Service. He is against abortion and gun control.
    In Nevada, Paul was a distant second to former Massachusetts Gov. Mitt Romney. Still, Paul called Nevada “a shot in the arm” and pledged to keep campaigning “all the way through a brokered convention.”
    As of late, Paul has been raising hefty sums, pulling in about $20 million in the last quarter of 2007, his campaign said.
    He’s been running an Internet-driven campaign, trying to appeal to and excite younger and libertarian-minded voters. Monday marked another so-called “Money Bomb,” in which his campaign aims to raise as much money online as possible in one day.
    from:
    http://www.chron.com/disp/story.mpl/headline/nation/5472753.html

    Reply

  18. Linda says:

    erichwwk,
    well, I meant the election years of 1932 and 1944, but I think we agree a lot. And your last three paragraphs made me LOL because of just a few words/references in them. When/if Steves reads this exchange, he will know what made me laugh. Steve knows me, and I assume knows you as well. I’m going to e-mail him to give you my e-mail address as I really would like to continue this discussion privately as anything further would be off-topic and not of any value to other TWN readers.

    Reply

  19. erichwwk says:

    Linda writes:
    “Our circumstances this year look strangely like 1932 and 1944”
    To me more like 1929 in US and 1942 in Germany, But close. Closest of all to me is USSR, after failing in Afghanistan. Billmon, in his “The Sixteen Acre Ditch” wrote an superb essay on this, archived here:
    http://tinyurl.com/yssdol
    and:
    “if I were any of the Democratic candidates or responder to Bush’s State of the Union Address, I’d be using the Economic Bill of Rights from FDR’s 1944 State of the Union Address. Does that make any sense to you?”
    Absolutely. That is EXACTLY where I’d start for LR solution. But SR sketched out by Sens. Bingaman and Wyden proposals also have merit for temp fix. It’s unrealistic for pols to care more about LR than what they can use in 2008 election.
    While FDR overstepped his bounds by attempting to stack SCOTUS (actually, add members, selected by him) scaring the heck out of the robber barons who caused the Great depression and wanted it all back, he was really on track for a society built on Rawls concept of social justice, where a nation was a family that cared about all its members, and not like the Hitler of Germany or the US of today, advocating discarding those who don’t contribute to the bottom line for the top one per cent. This is also how Adam Smith and Friedrich Hayek saw government as working, btw.
    At the heart of this is the Rockefeller private project, the University of Chicago, that while collecting some of the best economic minds, also applied those minds to preserving the wealth of the elite. This morphed into all the “think tanks”, eg RAND, AEI, Heritage Fnd. etc, that worked to thwart FDR’s Economic Bill of Rights.
    And the rest, as they say, is history.
    BTW, a little know fact, is that Rockefeller helped Strauss (who collaborated on a book with Carl Schmitt, the Alberto Gonzales/John Yoo of the third Reich, and who wrote the laws that were copied in America as the Patriot Act, War Crime Tribunals, et al.) get into the US, first at the New School. Scott Horton has written extensively on this as well as a lady professor in Canada, whose name eludes me.

    Reply

  20. erichwwk says:

    My $0.02 worth.
    While Cud is right that SR markets reflect irrational psychology, LR markets are brutally honest. The “panic and buy” scenario is the typical stockbroker comment, and while generally a reasonable rule of thumb when the market cycles due to risk, such a strategy is disastrous in times of uncertainty. As Knight drilled into folks (and Warren Buffet, Miller of the Legg Mason Fund)risk and uncertainty are VERY different phenomena.
    I strongly encourage folks to read the Marshall Auerbach article, and/or Frank Knight and the Austrians, and deciding for themselves what best represents the current situation, before blindly following simplistic “rules of thumb”.
    Of course, in the LR economies are very resilient. Folks in the hyperinflation in Germany still used money, getting paid three times a time to mitigate the effects. Japan, Germany,Russia, USA, are all examples of economies devastated by shock, that recovered quite nicely.
    But as Keynes said “In the long run we are all dead”. and my favorite quote (which i’ll paraphrase as it is not on this computer- original was in UK lbs.):
    “When you owe the bank a million dollars, you have a problem. When you owe the bank a billion dollars, the bank has the problem”.
    ““There is an old saying, or should be, that it is a wise economist who recognizes the scope of his own generalizations” –John Kenneth Galbraith

    Reply

  21. Linda says:

    erichwwk,
    Would love your opinion on my thoughts as you know a whole lot more econ than I do. Our circumstances this year look strangely like 1932 and 1944. So if I were any of the Democratic candidates or responder to Bush’s State of the Union Address, I’d be using the Economic Bill of Rights from FDR’s 1944 State of the Union Address. Does that make any sense to you?
    Linda

    Reply

  22. DonS says:

    Thanks for the tip Cud. But aside from the short term market timers, there is no good news here for anyone.
    What’s the proper metaphor: a pinball machine? A ponzi scheme? the last “holder in due course” to get out from under the bad paper?
    This whole doubling down approach, again amiably abetted by the Fed, only get’s worse.
    And still there is little truth telling.
    Sounds like we need another war.

    Reply

  23. erichwwk says:

    And now I’m watching Pat Roberts, R.Kansas.
    Disgusting!! Except for an example of what’s wrong with Congress.

    Reply

  24. erichwwk says:

    Steve writes:
    “I’ve talked with a number of economists this morning who are stunned by the lack of market reaction to the interest rate drop.”
    Steve, you’re talking to the wrong economists. As I wrote yesterday, one can’t push on a string. Read the report by Marshall Auerback of your own (at least at one time)JRPI. This is NOT a liquidity problem, although as I wrote in a reply to Dave Lindorff’s oped (in CommonDreams), it helps IF (and only if) it is targeted ONLY to low income (w/o investment subsidies), and as a sign that Congress recognizes its role in causing the problem.
    Did you ever meet Axel Leijonufvud while you were at UCLA? While old (with time to discover some issues Axel didn’t get right) the overall thesis has stood the test of time. The title of the book?
    “Keynsian economics and the economics of Keynes”
    The two are quite different; Keynes (and the Austrians) aqpproach was MUCH more sophisticated than the simple than the IS-LM graphical model John Hicks claimed in his 1937 article “”Mr Keynes and the Classics: A suggested interpretation.”, Econometrica” soon after Keynes’1936 “The General Theory of Employment, Interest, and Money.
    That article was such a GROSS simplification, I taught it at the University level only as an example of how people prefer to copy thoughts of others, rather than think things through for themselves. This sort of nonsense is MUCH more common than one might think.
    A comparable analysis I found in Physics is attempting to explain flight by the Venturi principle; curve on top surface of wing decreases pressure as same volume has further to go, creating lift, etc. Only problem with that is we’ve all seen airplanes fly upside down. Correct principle is Newton’s first law, ie for every action there is an equal and opposite reaction, such as one likely as verified as a child by angling ones hand out of the window of a moving car.
    I know its tough, Steve, with most economists acting as shill’s for corporate interests, to separate the nonsense from the truth. Hopefully your panel Wednesday includes some who understand Keynes and the Austrians, and Axel Leijonhufvud and the neo institutionalist, rather than the rather childish income-expenditure folks (Edmund Phelps, or other folks who base maco-economics on micro-economic foundations comes to mind).
    Also, markets are more honest than economists. How do your economist ‘experts” explain THAT???
    BTW, the interchange I am watching on C-span between Peter Orszag of CBO, and the Senate Finance Committee gives some hope, esp. comments by NM Sen. Bingaman and Oregon Sen. Wyden.

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  25. Cud Slow says:

    The day is young. The weak hands have be washed out of the market in panic, and the Dow will close up at the end of the day and stabilize through the week in response to the rate cut which is proportionate, although late, to the present financial fix we are in. Buy.

    Reply

  26. Dan says:

    And we really haven’t seen the bottom of this yet. I think we’re just at the start.

    Reply

  27. LInda says:

    I believe that this all started with Reaganpmics and really was not that much better under Clinton. Until we re-regulate much of the economy, it will just be one disaster, bubble, disaster after another. Savings and loan debeacle, sub-prime, and on and on. Congress and all Presidents share the blame as they are supposed to identify and solve the problems. And they haven’t done either for decades. It’s a myth that taxes are bad, and if left alone, we can take care of ourselves. If that were the case, then people couldn’t be lured into massive credit card debt or sub-prime market. And we’d have an economy that is not consumer-spending driven. Tax and spend may not be good, but it beats spend and cut taxes during a war. It costs us more when we end up in a recession or a depression.
    The rising tide definitely has not raised most of us at all and perhaps has caused a worldwide tsunami.

    Reply

  28. Steve Clemons says:

    I agree Nick…the flurry may be making things worse.
    Steve

    Reply

  29. Nicholas Weaver says:

    What I really don’t understand is why isn’t this causing MORE short term panic.
    This feels like the fed is saying “OH MY F#@)(* GOD!”, a .75% cut, out of cycle. Has this ever happened before?
    Its not just the severity of the cut, its that its the fed publically stating “We are in panic mode”?!?
    What does the fed know that we don’t, that is causing the fed to panic?

    Reply

  30. jonst says:

    No, what’s really scary is when so called leaders, from both parties, including all the candidates but Paul and Edwards, refuse, either because they are clueless, or because they fearful of the consequences from a full airing (and their roles in it)of what has gone wrong. You want unfettered, deregulated, capitalism? Ya got it.

    Reply

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