Randall Forsyth does a good job explaining what FOMC Chair Ben Bernanke has done right:
"Yet much of the criticism seems unfair and after the fact. Not only have Bernanke's unorthodox moves staved off a full-fledged financial meltdown, but they also have done so while reducing the inflation risks inherent in the traditional policy response of merely slashing interest rates.
That's not my opinion. It is the one rendered by the currency, credit, Treasury, equity and gold markets. Since the credit crisis peaked (or reached its nadir, depending on your point of view) on St. Patrick's Day, the Monday after the Sunday night special with the Bear takeover by JPMorgan Chase, the extreme tensions in all those markets have eased.
It was not just the Bear deal per se. The Fed established the Primary Dealer Credit Facility, which let Wall Street investment firms to borrow from the central bank, a privilege reserved for commercial banks, except for the rarest instances in the Great Depression.
The PDCF joined other, new Fed instruments to funnel liquidity where it was needed most. Last December, the central bank began the Term Auction Facility, or TAF, which permitted banks to borrow anonymously for longer periods than via the traditional discount window borrowings, which were to cover overnight shortfalls. TAF also permitted borrowing against lesser-quality but still prime collateral.
The Fed also established the Term Securities Lending Facility, which allowed banks and dealers to swap their illiquid but high-quality government and mortgage-backed securities for Treasuries. It was like a pawnshop for the financial system, allowing Wall Street to exchange their (real, not fake) Rolexes for good-as-cash obligations of Uncle Sam."
What say ye? How much of the benefit of the doubt do you want to give Ben Bernanke?
Hey, Bernanke Bashers: His Moves Have Been the Right Ones
RANDALL W. FORSYTH
Barron's April 29, 2008
Yahoo Tech Ticker
Twice in one day!
I am off to the Nasdaq, to discuss the Fed decision, and the Microsoft/Yahoo merger / tea party. So I will be out of pocket by the time the news gets released.
Feel free to use the comments to elucidate . . .
UPDATE: APRIL 30, 2008 5:33PM
Worldwide Fertilizer Usage
Speaking of inflation driven food prices: Here's a little infoporn for anyone who followed us into Mosaic (MOS) or trade in Potash (POT) or others:
Shortages Threaten Farmers’ Key Tool: Fertilizer
KEITH BRADSHER and ANDREW MARTIN
NYT April 30, 2008
Congratulations! Its a Recession!
It doesn't take too much advanced mathematics to note that by several historical methods for determining whether the economy is contracting or expanding, we are now in a recession.
Consider a true inflation measure of GDP, per capita measure, or the NBER methodology. All three show economic contraction.
Let's start with our "Reality-based" analysis:
The only conclusion an honest read of inflation produces is that both Q4 2007 and Q1 2008 were positive in nominal terms, but negative in Real terms. Remember, the goal of GDP should be to figure out how much the economy is expanding or contracting -- not how much prices rose.
By any honest measure of inflation -- and not the 3.5% BEA price index for gross domestic purchases -- both of the past two quarters would have been negative. How can we have an understated inflation rate of 4%, and a GDP Price Deflator of just 2.6%?
2) The NBER methodology: The 2 consecutive quarters of GDP contraction is not the only metric for identifying recessions. According to the econo-geeks at the National Bureau of Economic Research, a recession is defined as a "significant decline in economic activity spread across the economy, lasting more than a few months."
Here's their specific language:
"Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology."
Hence, if we follow what the people who actually determine what is and isn't a recession say abnout the matter, and not just limit our analysis to GDP, then its pretty clear we are now experiencing an economic contraction.
Rex Nutting reminds us that 1) After-tax inflation adjusted incomes have been stagnant since September; inflation-adjusted sales have fallen at a 5.2% annual pace in the past three months, and are essentially unchanged from six months ago; industrial output has stalled;
UPDATE: Rex adds that spending on services rose 3.4%, including a 14% rise in real spending (seasonally adjusted) on household heating. It’s quite likely that this figure doesn’t accurately adjust for the rising cost of natural gas and heating oil this year. About one-third of the total increase in GDP ($17.4 billion) was an increase in the spending on heating costs ($5.5 billion). Hence, even more Inflation-driven GDP.
By any reasonable measure of the NBER delineated metrics, we are already in a recession.
3) Per Capita Measure, favored by Merrill Lynch North American Chief Economist David Rosenberg, is to simply look to see if the economy is expanding faster than the population. With the US population expanding by 1.0 - 1.5% per year, it takes economic growth of at least that merely to stay in place. Hence, Rosenberg's claim that GDP growth on a per capita basis is actually are contracting sine Q4 2007.
Merrill Lynch: Per Capita Recession Began in Q4 (April 2008) http://bigpicture.typepad.com/comments/2008/04/merrill-lynch-p.html
GDP, Inflation & Recession
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008 (ADVANCE)
APRIL 30, 2008
Business Cycle Dating Committee, National Bureau of Economic Research
NBER, January 7, 2008
Global Inflation Continues to Accelerate
Economics Blog, April 29, 2008, 11:30 am
U.S. could have recession without drop in GDP
Analysis: Growth isn't everything; jobs and incomes count more
MarketWatch, 8:50 a.m. EDT April 30, 2008
GDP is . . . 0.6%
I will be out of pocket when GDP gets released, so feel free to go to the official BEA release; use the comments below to update/discuss the actual GDP data points.
A few things to look for beyond the actual number: Corporate profits, PCE, and seasonal adjustments.
UPDATE: April 30, 2008 9:47am
If we ignore the real (inflation adjusted) factor, as we delve deeper into the data, we see that Q1 spending (personal consumption expenditures) rose just 1.0% versus 2.3% in Q4. This matches Q2 2001's gains.
How did the rest of the numbers look?
GDP increased 3.2% to an annualized $14.19 trillion (in current dollars);
Gross private domestic investment was down -0.7%;
Business fixed investment: -2.5%.
Residential investment data actually accelerated downwards; the number -26.7% was the biggest drop since 1981. (who keeps calling those Real Estate bottoms?)
Purchases of durable goods fell 6.1%
Q1 non-durables spending dropped 1.3%.
Business spending fell by 2.5%.
Investment in structures went down 6.2%.
Equipment and software outlays decreased 0.7%.
The Final sales of domestic product (GDP less change in private inventories) fell 0.2%; final domestic sales (gross domestic product, excluding additions to stocks and international trade) dropped 0.4%. THIS WAS THE FIRST DECLINE SINCE THE 1991 RECESSION.
A few positives: First-quarter spending rose 1.0%, Services gained 3.4% and exports rose by 5.5%. While local governments are struggling, Uncle Sam remains profligate: Federal Government consumptions were +4.6% versus State and Local Govt: +0.5%.
Also helping to keep nominal GDP in the green: Inventory builds. They rose slightly for the quarter by $1.8B, versus going down $18.3 billion in Q4. That contributed 0.81% to Q1 GDP, and without it, the Q would have been negative.
courtesy of Barron's Econoday
GDP, Inflation & Recession
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008
GDP, April 30, 2008
GDP, Inflation & Recession
At 8:30am, we get the advance GDP data from BEA. Consensus is for a marginally positive data point -- 0.3%. This will follow Q7 2007 of 0.6%.
In terms of debunking the misleading data stats, today is the day where the rubber meets the road. Why? Well, if the official inflation data was reported in a way that was more reflective of reality, Q4 last year would likely have been anywhere from 0.75% to 1.5% lower (if not more), sending it into negative territory.
The same will be true for today's GD data point, with the probable overstatement enough to keep it marginally positive or flat.
Why does inflation matter so much to GDP? Gross Domestic Product (GDP) is the "broadest measure of aggregate economic activity and encompasses every sector of the economy." If you want to know understand how weak or strong an economy is, GDP is where you begin. But, you need to determine how much of GDP is nominal, and how much is real (i.e., after inflation growth).
Consider an economy that sold $100 worth of goods and services in one quarter. The next Q, it produced $110 worth. When determining the GDP of this economy, you want to know how much of those gains was additional output, and how much merely price increases. Its usually a combination of more widgets and higher prices, so if you want to know exactly how much the economy expanded, you need to know exactly how much inflation there was. Understate inflation, and you overstate growth.
If today's GDP is marginally positive, following Q4's marginally positive GDP data, then we officially will not be in a recession by the classic "2 consecutive quarters of negative GDP growth." This means that if the correct inflation deflator was built into GDP, we would have our two consec quarters.
Hence, for the reality based community, the recession will be officially here.
Of course, if you believe that actual inflation is running about 2.5%, then you should feel free to ignore this analysis.
Video: Bear Stearns Bailout "Worst Fed Mistake in a Generation"
On Monday, I pointed to a WSJ article, regarding the Fed's past head of monetary affairs comments on moves to prop up Bear Stearns. (Bear Stearns Bailout "Worst Fed Mistake in a Generation")
Bear Stearns Bailout "Worst Fed Mistake in a Generation"
What Lies Beyond the Credit Crunch? Part II
AEI, April 28, 2008 2:00 PM
Our Overextended Fed
Vincent R. Reinhart
Wall Street Journal, Wednesday, March 26, 2008
You may have noticed that I run a bit of video a few days a week on the site, usually overnight.
As part of the redesign, I am setting up a tab for Video (hence, the slow loading video won't impact the main page). As such, I have been compiling a list of Business-related Video for the update, and this is what I came up with.
(Have I missed anything significant?)
Financial Times (FT)
Business of Innovation
Yahoo Finance Tech Ticker TV
New York Times
Media Appearance: CNN Money (04/29/08)
I am on CNN Money - Glenn Beck's show tonite, discussing Inflation Ex-Inflation, and the dubious way the government creates CPI.
I should be on the half hour at 7:30, 9:30, and 12:30.
UPDATE: April 29, 2008 8:30pm
That was pretty cool -- I got to discuss how misleading the CPI data is, show charts of the various CPI-lowering adjustments, and speak uninterrupted.
Beck definitely gets that the whole system is full of crap thing.
You folks in comments should watch to see if you think the appearance was worth it. (I'll post it as soon as CNN makes the video available)