Money Sage (archive)

Well folks, brace yourselves for the impending tsuanmi of analytical detritus which will shortly be inundating our audio and visual senses. We expect the Greek Chorus of Doom to pick up the new banner of looming disaster. We expect this new rallying cry to amount to the following: rate-cutting by the FED isn't working and isn't going to work! Indeed, we have already seen the outliers of this nonsense in recent days. One "analyst" announced that "all the FED can do" is lower interest rates. Said guru stated that this would not work. This "assessment" is akin, in our view, to saying that the only thing that the heart can do is pump blood. Try having a heart that declines to pump blood, on the grounds that it won't do any good. Well, what can we say? Such is the quality of contemporary financial analysis and reportage.

It is this same far-behind-the-curve school of FED officials, Wall Street sages, and their self-interested mimics in both the financial and general media who will pick up the latest "analytical" ball and run with it. This new "wisdom" serves a dual purpose. In the first place, if it is widely accepted, it will serve to diminish pressure on the FED to generate liquidity. This, after all, is the very last thing many FED "policymakers" wish to do. Liquidity, after all, fuels the SUPREME EVIL OF INFLATION. As such, it is the devil's spawn. If lower interest rates, translated into greater liquidity, will not help ameliorate the stress in the banking and financial systems, and the weakening of the economy, there is no need to consummate the hated policy. Moreover, since lower interest rates are of no use, the FED's temporizing since the sub-prime crisis erupted and generated the frightening reverberations with which we are by now all too familiar, is NOT a significant factor in the parlous situation both the financial system and the economy now confront. FED policy, in other words, was just dandy. Our monetary policymakers have done a fine job. In addition, the generality of economists has nothing to apologize for in continuing to focus on the "inflation threat" and in adhering to the growth will continue to be robust line, to which the great bulk of them adhered even as the profoundly deflationary and contractionary sub-prime implosion was underway. Economists wish to preserve their reputations and their ability to generate lucrative fees for their priceless "advice" and "forecasting." The interest-rate-cutting-does-not-work line thus serves their own interests. They too can be exculpated for buying the FED's inflation monomania, rather than providing independent analysis which could have provided a very useful heads-up.

A second function the new "wisdom" will serve is that of fear-generation. As we have noted in this blog many times, fear sells newspapers and increases talking-head viewership. As such, fanning fear is monetarily advantageous to the media.

We do not wish to imply that there is any sort of conspiracy involved here. It is simply a case of decision-making and decision-advising folk seeking the easy way out. This, after all, is their way. They practice "easy forecasting," as we would term it. This amounts to echoing the FED line and sticking with the herd consensus. This tactic provides them with SAFETY -- if they are wrong, so is everyone else, so they can hardly be blamed, nor their fee-generation capability curtailed. Additionally, they are spared the need to do their own intellectual labor, as well as the difficulty of taking an uncomfortable stand in opposition to the herd.

As for the specific content of the forthcoming wave of guru-speak, let us just say that the prior analytically incorrect consensus view -- first, that the economy would remain very strong and rising inflation would pose the most serious threat in 2008, then the alarums about a forthcoming economic collapse -- are no longer serviceable. Something new is needed -- the consumer always needs something new, of course, and if you want to stay in the business of selling, you had better provide it. Moreover, the future wave of commentary -- to the effect that FED rate-cutting is not working -- satisfies a particularly contemporaneous American craving for INSTANT GRATIFICATION. No, rate cuts will not work immediately in the sense of ending at once the pressure on the banking system and the economic system. Monetary policy works with a LAG -- a substantial time lag. Just as the prior tightening policy took quite a while to "slow" the economy (and is only now really starting to slow in the lagging indicator of employment), so will the accommodationist policy only impact significantly over time. Consider, though, what the situation going forward would look like if rates were 100-200 basis points HIGHER than they are, with no cuts impending.

The forthcoming clamor about the ineffectiveness of the rate-cutting policy will be but a repeat of the clamor during and after the 2001 recession that FED rate-cutting and liquidity expansion WOULD NOT work. To put matters into a bit more historical perspective, we would recall that for the brief period in the early 1930s when the FED did increase liquidity, FED policymakers quickly concluded that the unorthodox strategy of monetary accommodation would not work, and they hastily REVERSED THIS BREACH OF MONETARY ORTHODOXY, with horrific and long-lasting consequences. (This sequence is very nicely detailed in Milton Friedmann and Anna M. Schwartz, "A Monetary History of the United States."

In any event, we expect a new wave of guru-babble. Gurudom will be consistent in one key respect: IT WILL BE WRONG AS USUAL.