The Big Picture | Federal Reserve

WSJ: Fed's Stern Says U.S. Recession likely

Tuesday, May 13, 2008 | 07:30 PM

in Credit | Federal Reserve | Psychology/Sentiment

Q: Do you think we’re going to avoid a recession?

A: No.

But there are recessions and then there recessions. The previous two were short, and the most recent one was not only short but shallow. I think that’s what really matters to people. The average resident doesn’t distinguish between whether the economy is growing half a percent or one and a half percent. That’s not their interest. It’s more, how does this feel? Are conditions generally improving noticeably or aren’t they?

>

Wow, that's a pretty explicit admission from Gary Stern, president of the Federal Reserve Bank of Minneapolis. Stern is the co-author of “Too Big To Fail: The Hazards of Bank Bailouts.”

Stern suggested in an interview that the U."S. economy may face “subdued” performance for the next two quarters, with output that’s barely positive or barely negative."

You know, kinda like the last 2 quarters of 0.6% GDP.

I disagree with his assessment of the current environment being "similar to the early 1990s when “headwinds,” a phrase then Federal Reserve Chairman Alan Greenspan used to refer to the lenders’ reluctance to lend, weighed on the economy."

The rest of the interview can be found on the WSJ's Real Time Economic: Stern: Credit ‘Headwinds’ to Weigh on Economy Beyond 2008

Source:
Stern: Credit ‘Headwinds’ to Weigh on Economy Beyond 2008
Real Time Economics, May 13, 2008, 3:23 pm
http://blogs.wsj.com/economics/2008/05/13/stern-credit-headwinds-to-weigh-on-economy-beyond-2008/?mod=WSJBlog#comments

Ben Bernanke, Improvisor

Monday, May 12, 2008 | 08:03 PM

in Credit | Federal Reserve | Inflation | Markets

A must read piece is in the upcoming June 2008 Bloomberg Markets Magazine titled: The Improviser

"Ben Bernanke, the consensus-building academic who toiled in Alan Greenspan's shadow, is emerging as the most powerful--and inventive--Federal Reserve chairman in the 95-year history of the central bank. Paul Volcker says he's overreaching . . .

From Bernanke's standpoint, there are two major lessons to be learned from the Fed's reaction to the market crash of 1929 that are relevant today. The first is that the Fed should lower rates, not raise them, in the face of an economic contraction. The second is that the Fed must pay careful attention to the health of financial institutions, as lending plays a big role in economic growth.

In July 1928, when financial markets were still booming, the Fed raised its benchmark interest rates to 5 percent, the highest since 1921, effectively cutting the money supply, in order to reduce what it saw as excess speculation on Wall Street. It did so even though there were no signs of inflation, Bernanke said at the conference honoring Friedman. In October 1931, after the market crashed and GDP had begun to nosedive, the Fed raised rates again to prevent the dollar from falling in international markets. That made it harder for companies and individuals to borrow even as the economy was contracting 30 percent and deflation was setting in. A series of bank failures further reduced credit throughout the economy."

Go read the full piece now . . .

Source:
The Improviser
Steve Matthews
Bloomberg Markets Magazine June 2008
http://www.bloomberg.com/news/marketsmag/mm_0608_story2.html

When Should the Fed Bailout the Economy?

Sunday, May 11, 2008 | 09:27 AM

in Credit | Economy | Federal Reserve | Inflation | Politics

Peter Bernstein, author of such books as Against the Gods: The Remarkable Story of Risk, has an interesting piece in the Sunday NYT, titled, When Should the Fed Crash the Party?.

"In the darkest days of the Depression, Treasury Secretary Andrew W. Mellon, one of the richest men in the United States, opposed any government action to stem the tide of plunging business activity and soaring unemployment. Instead, he urged a policy of supreme indifference.

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he said. “It will purge the rottenness out of the system,” he added, and values “will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

John Maynard Keynes, for one, thought that prescriptions like Mellon’s were preposterous. The economist called those who held such views “austere and puritanical souls” who believed that it would “be a victory for the mammon of unrighteousness” if general prosperity were not “subsequently balanced by universal bankruptcy.” Keynes perceived too much good in prosperity to treat it as the enemy, and he revolutionized economic theory to prove his point.

Keynes won the argument, and government intervention to overcome rising unemployment and falling profits has been standard operating procedure forever after. Nevertheless, the debate over intervention is not ancient history. It replays in today’s headlines."

Its an interesting debate, but I read Bernstein as discussing the wrong debate. He is reviewing criticism of the treatment of the problem, namely, the Fed's clean up duties. But there is a debate brewing on preventative measures, also.

What makes this go round somewhat different is that the Fed's intervention was forced large numbers of people who were exceedingly reckless. Even by comparison to LTCM or the S&L crisis, the risk embracement was unusually widespread.

As we have seen, there is a cost to this.

This is more than a question of creative Federal Reserve intervention. Right now, the nation is only beginning a debate on several related issues -- including, ansd perhaps most importantly, regulation versus deregulation. If unrestrained financial engineering can lead to catastrophe requiring massive Fed intervention with great costs to the public (inflation, debt, etc.) than the "re-regulation" of the financial markets is a very likely outcome.

This is an important issue worth watching as the election season progresses . . .

Source:
When Should the Fed Crash the Party?
PETER L. BERNSTEIN
NYT May 11, 2008
http://www.nytimes.com/2008/05/11/business/11view.html

Trichet Warns of `Protracted' High Inflation

Friday, May 09, 2008 | 03:30 AM

in Federal Reserve | Inflation | Video

Unlike the Federal Reserve, Trichet and the EC are very concerned with high Inflation:

Click for Video

Remember, the EC has a single charge -- maintaining price stability -- and is not concerned with maximizing growth . . .

Source:
Trichet Sees `Rather Protracted' High Inflation
Gabi Thesing and Christian Vits
Bloomberg, May 8 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZrZpAw8DbmI&

Continue reading " Trichet Warns of `Protracted' High Inflation"

Greenspan Quote of the Day

Wednesday, May 07, 2008 | 02:30 PM

in Books | Federal Reserve

In Barbara Walters new memoir "Audition - A Memoir,'' she discusses dating Alan Greenspan.

We also learn that Greenspan, whom she recalls was a “nice dancer,'' gave Walters bad real-estate advice in 1977, counseling her not to buy a four-bedroom, Fifth Avenue co-op for $250,000 during New York's fiscal crisis. "So I didn't buy it. Today that apartment is worth at least $30 million,'' she writes.

At least he has been consistent throughout his career.

>

Source:
Walters Dates Greenspan, Rides With Castro, Courts Lewinsky
Robin D. Schatz
Bloomberg, May 6 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apj13ihKOpsw

Another Tool for the Fed ?

Tuesday, May 06, 2008 | 10:00 PM

in Credit | Federal Reserve | Finance

Have you ever even thought about this?

"The Federal Reserve is formally asking Congress for authority -- starting this year -- to pay interest on commercial-bank reserves, in an effort to gain better control over interest rates and more leverage to battle the credit crunch...

In 2006, Congress gave the Fed permission to pay interest on reserves -- the sums banks keep on deposit at the Fed -- but it delayed the effective date of the legislation until 2011 to postpone the cost to the Treasury.

Banks are required by law to hold a certain fraction of their deposits in reserve accounts at the Fed, but receive no interest on these deposits. Having the authority to pay interest would solve two technical headaches for the Fed.

If they earned interest from the Fed, banks would have no incentive to lend out excess reserves for less. That would make the Fed's benchmark federal-funds rate, which banks charge on overnight loans to each other, less likely to plunge below the Fed's official target -- now 2% -- on days when the banking system was awash in cash.

I'll bet this sort of stuff never even entered your thinking . . .

Source:
Fed Seeks Approval to Pay Interest to Banks
GREG IP
WSJ, May 7, 2008
http://online.wsj.com/article/SB121011673771072231.html

Blinder & McTeer on Fed Cuts

Tuesday, May 06, 2008 | 03:30 AM

in Federal Reserve | Inflation

Alan Blinder, former vice chairman of the Federal Reserve, Robert McTeer, former president of the Federal Reserve Bank of Dallas, Jim Bianco, president of Bianco Research, and Mike Ryan, head of wealth management research for the Americas at UBS Financial Services, talk about the Federal Reserve's decision to lower the main U.S. interest rate by a quarter of a percentage point to 2 percent, the Fed's communication about the U.S. economy and the outlook for Fed monetary policy.

Source:

Trims Rate to 2%, Signals Ready to Consider Pause
Craig Torres
Bloomberg, April 30 2008
http://www.bloomberg.com/apps/news?pid=20601068&sid=aFMety04E3Vc&

Tea and Subprime Sympathy Click

Monday, May 05, 2008 | 01:55 PM

in Federal Reserve

Eddie Elfenbein emails me:

Admit it. That bid is yours.

My answer:

I want him to autograph GREENSPAN'S BUBBLES for me.

The site says up to 4 people: Let's see, Me, Fleck, Kass, and maybe Jim Grant.

Think he'll show . . . ?

Click to Bid for lunch with Greenspan (Current bid: $16,000)

Includes: tea with Alan Greenspan and Andrea Mitchell at The Four Seasons in Washington, D.C. Valid for one year, up to 4 people, based on mutually convenient time.

Fed Opens Yahoo Lending Facility (YLF)

Sunday, May 04, 2008 | 07:06 AM

in Corporate Management | Federal Reserve | M&A | Web/Tech

When the Microsoft-Yahoo news came out last night, I suggested that "the Fed ought to kick in the additional $8 billion or so to make this happen."

Someone on the the Yahoo message boards of YHOO itself took the idea a step further:

"In response to recent events Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create Yahoo Lending Facility (YLF) to avoid significant stock market distruption and to support Yahoo! Inc shares. Yahoo! Inc and its authorized agents will be able to borrow from the facility to support stock price.

This facility will be available for business on Monday, May 5. It will be in place for at least six months and may be extended as conditions warrant. The interest rate charged on the credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

In addition, Yahoo! Inc shareholders who are unable to sell their shares at or above Friday, May 2 closing price, will be able to swap Yahoo! shares for the US Treasuries at the set price of $29.70 per share."

Fed opens Yahoo Lending Facility 3-May-08 11:58 pm

Hat tip: John Borchers

Previously:
Ballmer, Yang Agree to See Other People http://bigpicture.typepad.com/comments/2008/05/ballmer-yang-ag.html

Ballmer, Yang Agree to See Other People

Saturday, May 03, 2008 | 10:07 PM

in Corporate Management | Federal Reserve | M&A

Its not you, its me . . .

Is that it? After all that sturm und drang, the chase ends like this? Microsoft sweetened its offer to $33, knowing full well that Yahoo was going to stand firm at $37 a share, and reject the sweetened bid. Hence, Ballmer got his face saving way to walk without further humiliation.

Why am I not surprised? Two of the least sexy internet names end not with a bang but a thud. Could we have seen at last the end of the dinosaur mating dance?

My friend Paul at Infectious Greed observes:

"This has a been a risky and poorly managed affair from end-to-end. Both CEOs deserve immense blame -- Ballmer for vacillating; Yang for running a public company without the foremost regard for shareholders -- and they are likely to be the two people who suffer the most indignities (including possible termination) over the coming weeks and months."

Not a bad sentiment, but I doubt either board has the stones to fire their execs.

I have an idea for everybody involved: Why doesn't the Fed kick in the additional $8 billion or so to make this happen? I mean, isn't that the role of the central bank?

Source:
Microsoft Withdraws Its Bid for Yahoo
MIGUEL HELFT and ANDREW ROSS SORKIN
NYT, May 4, 2008
http://www.nytimes.com/2008/05/04/technology/04soft.html

Microsoft withdraws offer for Yahoo
Anupreeta Das
Yahoo Finance, 26 minutes ago
http://news.yahoo.com/s/nm/20080504/bs_nm/microsoft_yahoo_dc_12

Snow, Bies, Poole, Mobius, Faber Discuss U.S. Economy

Friday, May 02, 2008 | 03:30 AM

in Credit | Economy | Federal Reserve | Inflation | Video

click for Video:

Bloomberg:

Former Federal Reserve officials William Poole and Susan Bies said it wouldn't be wise for policy makers to cut the benchmark U.S. interest rate below the current 2 percent. "We have an adjustment in housing that has to take place,'' Poole, former president of the St. Louis Fed, said during a one- hour Bloomberg Television special, "Surviving the Slowdown,'' yesterday. "I do not think rate cuts are going to solve the basic problem.''

The former Fed officials' remarks underscore the risk that more rate reductions may fan inflation, which is accelerating because of rising prices of food, energy and other commodities. The Fed said "uncertainty about the inflation outlook remains high'' and indicated it's ready to pause its rate cuts by dropping a reference to "downside'' risks to growth.

Source:
Poole, Bies Say More Fed Rate Cuts Wouldn't Stem Slowdown Much
Vivien Lou Chen and Kathleen Hays
Bloomberg May 1 2008
http://www.bloomberg.com/apps/news?pid=20601068&sid=aWAYs4brrVwM&

Defending Bernanke

Wednesday, April 30, 2008 | 07:57 PM

in Commodities | Federal Reserve | Inflation | M&A

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?

Source:
Hey, Bernanke Bashers: His Moves Have Been the Right Ones
RANDALL W. FORSYTH
Barron's April 29, 2008
http://online.barrons.com/article/SB120939353075949559.html

Jittery

Wednesday, April 30, 2008 | 04:15 PM

in Federal Reserve | Psychology/Sentiment

Amusing:

Yahoo Tech Ticker

Wednesday, April 30, 2008 | 02:14 PM

in Economy | Federal Reserve | Inflation

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

Video: Bear Stearns Bailout "Worst Fed Mistake in a Generation"

Wednesday, April 30, 2008 | 03:30 AM

in Derivatives | Federal Reserve | Financial Press | Video

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")

Here is the video that was the basis of that article:
click for video, then select Reinhart from list

Previously:
Bear Stearns Bailout "Worst Fed Mistake in a Generation"
http://bigpicture.typepad.com/comments/2008/04/bear-stearns-ba.html

Sources:
What Lies Beyond the Credit Crunch? Part II
AEI, April 28, 2008 2:00 PM
http://www.aei.org/events/eventID.1712,filter.all/event_detail.asp#

Our Overextended Fed
Vincent R. Reinhart
Wall Street Journal, Wednesday, March 26, 2008
http://www.aei.org/docLib/20080428_ReinhartOurOverextendedFed.pdf

Inflation Abounds

Tuesday, April 29, 2008 | 01:00 PM

in Federal Reserve | Inflation

The Federal Reserve is now in day 1 of their two day meeting. The statement we get tomorrow, and the minutes we will read next month are likely to be intriguing.

Why? The longstanding official myth that inflation is modest, and contained is starting to be recognized for the fraud that it is.

Examples abound: The Times of London: Food-price inflation has already pushed up a typical family’s weekly shopping bill by 15 per cent in a year (Era of cheap food ends as prices surge). Yet here in the US, the BLS has food prices up only 4.5% year over year (that's with the dollar down ~2% vs. the pound)

The price of rice has increased dramatically in recent weeks due to crop failure overseas and resulting hoarding… Rice has doubled in price in six months. (Bay Area Shoppers Asked To Limit Rice Purchases)

During the first week of April…leisure fares from traditional carriers on 280 major routes rose 13
percent from the previous year...We've got an industry that's in trouble," said Vaughn Cordle, chief
executive and chief analyst at AirlineForecasts in Washington. "If oil prices stay anywhere near $100,
$120 for the year ... we'll have a massive restructuring of the airline industry." (Summer travel headaches loom as airlines' woes deepen).

All these obvious price increases are begining to undermine confidence int he Federal Reserve. We see article like this one in the San Diego Union-Tribune: The Fed's inflation gauge isn't realistic, critics say and this one in Harpers: "Numbers Racket: Why the Economy is Worse than We know."

Previously
Is the Fed Causing a Global Food Crisis? http://bigpicture.typepad.com/comments/2008/04/is-the-fed-caus.html

Sources:
Era of cheap food ends as prices surge
Steve Hawkes, Greg Hurst and Valerie Elliott
Times Online, April 23, 2008
http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/article3799327.ece

Moms' new battle: The food price bulge
Parija B. Kavilanz,
CNNMoney.com, April 21, 2008: 10:33 AM EDT
http://money.cnn.com/2008/04/21/news/economy/moms_foodshopping/index.htm

The Fed's inflation gauge isn't realistic, critics say
Dean Calbreath
San Diego UNION-TRIBUNE, April 17, 2008 http://www.signonsandiego.com/news/business/20080417-9999-1n17inflate.html

Bear Stearns Bailout "Worst Fed Mistake in a Generation"

Monday, April 28, 2008 | 05:00 PM

in Federal Reserve | M&A

Here's a glimpse at what must have been a fascinating discussion:

"The Federal Reserve's moves to prop up Bear Stearns Cos. will come to be seen as "the worst policy mistake in a generation," the Fed's past head of monetary affairs said. The action is comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, said Vincent Reinhart, a scholar at the American Enterprise Institute, who retired from the Fed last fall.

Mr. Reinhart's assessment, delivered at a panel discussion at the institute Monday, is one of the harshest appraisals yet by a high-profile observer of the Fed's decision in mid-March to lend money to Bear both as temporary funding to make a merger possible, and then to finance $29 billion of Bear's assets to make its takeover by J.P. Morgan Chase & Co. possible."

I'd love to get a recording or transcript of the speech. Any one have access?

Source:
Ex-Fed Official Declares Bear Deal Worst Mistake in a Generation
GREG IP
April 28, 2008 4:10 p.m.
http://online.wsj.com/article/SB120941300416350473.html

Greenspan's Long-Lost Thesis

Sunday, April 27, 2008 | 06:30 AM

in Federal Reserve | Real Estate

Barron's Jim McTague had a chance to review one of only two existing copies of Greenspan's 1977 NYU Doctoral thesis. Astonishingly, it focuses on Housing booms and busts.

Some highlights:

• A discussion of soaring housing prices and their effect on consumer spending;

• An anticipation of a bursting housing bubble. Greenspan even wrote: "There is no perpetual motion machine which generates an ever-rising path for the prices of homes."

• A failure to anticipate a broader housing mania spilling into the general economy;

• Its doubtful anyone in 1977 could forsee the securitization process of subprime loans, including Greenspan. He did write, however, "a sharp break in prices of existing homes would pull down the prices of new homes to the level of construction costs or below, inducing a sharp contraction in building."

• The thesis shows the future Fed boss was focused on housing early in his career. Barron's notes this casts doubt on his assertions about being surprised by the impact of this decade's housing mania.

• In the introduction to Greenspan's thesis, he noted that homeowners were refinancing for larger amounts than their original mortgage, in essence monetizing increases in their home's market value and spending the excess cash on goods and services. This broke new ground in 1977, as the economic models at the time were not tracking this source of income.

Fascinating stuff, Jim . . .

Sources:
Looking at Greenspan's Long-Lost Thesis
JIM MCTAGUE
Barron's, APRIL 28, 2008
http://online.barrons.com/article/SB120917419049046805.html

Immoral Hazard

Saturday, April 26, 2008 | 07:55 PM

in Federal Reserve

Have a look at Jeremy Grantham's latest missive: Immoral Hazard

The 1Q 2008 letter looks at asset bubbles and puts the role of the Fed under the leadership of Greenspan and Bernanke under the microscope, with a wistful nod to Paul Volcker:

It’s not that the former Fed boss Greenspan was incompetent that is remarkable. Incompetence is common enough after all, even in important jobs. What’s remarkable is that so many people don’t seem, even now, to get it. Do people just believe high-quality self-justifying blarney? Or is it just that they apparently want to believe that critical jobs in a great country attract great talent by divine right.

Sometimes, of course, they do, but sometimes the most important jobs – even that of a presidency or a Fed boss – end up with mediocrities. Let us pause here to regret the absence of Mr. Volcker and wonder what a parallel Volcker universe would have been like. Just as we can wonder how much a few votes in Florida or a vote in the Supreme Court would have changed our world from what it is today.

Paul Volcker inherited about as big a mess as we have today. He worked out what he had to do and did it with unusual lack of concern about what Congress thought of the necessary pain involved and the number of enemies he might make. He paid the price for forthright behavior by being replaced, despite a record for correct and tough behavior that makes for the most invidious comparison today. When Volcker was replaced, by the way, he did not moan and groan but like an old soldier quietly disappeared. There were no high-proﬁ le announcements about the economy or any $300,000-an-evening appearances paid for by ﬁnancial ﬁrms. . . .

Continued

Source:

Immoral Hazard
Jeremy Grantham 4/25/2008
https://www.gmo.com/websitecontent/JGLetter_ALL_1Q08.pdf

Bagehot's Lessons for the Fed

Friday, April 25, 2008 | 09:25 AM

in Credit | Economy | Federal Reserve | Fixed Income/Interest Rates | Inflation

Apropos to our earlier criticism of the US Central Bank is this piece by Stanford prof Ronald McKinnon, titled Bagehot's Lessons for the Fed.

In today's WSJ, McKinnon writes:

"By slashing interest rates too much in 2007-2008, the Fed has accentuated the foreign drain and thus made the alleviation of the domestic drain more difficult. Yet, despite this mistake, Bagehot would approve of other actions the Fed has taken to deal with the domestic drain by unblocking specific impacted domestic markets. These include (1) swapping Treasury bonds for less safe private bonds, (2) opening its discount window to shaky borrowers, and (3) maybe even rescuing Bear Sterns. He would also approve of the relaxation of capital constraints on Fannie Mae, Freddy Mac and so on, for mortgage lending. Yet these measures will be insufficient if the foreign drain continues.

To repeat Bagehot's Rule: "very large (domestic) loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain." The Fed, and the U.S. government more generally, have so far got it only half right."

The entire piece is worth a read . . .

Sources:
Bagehot's Lessons for the Fed
RONALD MCKINNON
WSJ, April 25, 2008
http://online.wsj.com/article/SB120908336730343529.html

Is the Fed Causing a Global Food Crisis?

Friday, April 25, 2008 | 07:20 AM

The Federal Reserve's irresponsible bailout of Wall Street's most reckless players is having very significant repercussions, both in the US and abroad.

It starts with the US dollar, now off 40% from its highs earlier this decade. This has had a huge impact on commodity prices, and is the prime reason so many countries are considering dropping their peg to the US Dollar.

Overseas, price spikes in basic foodstuffs has led to riots and political unrest. Considering that in many regions of the world most of a family's income goes to basic survival purchases such as food shelter and energy, it doesn't take much in the way of price rises to lead to significant turmoil. According to Bloomberg, the average household in India spent 32% of its income on food last year. Compare that with 6% in the U.S., and 43% in Indonesia, or 36% for the Philippines.

Hence, the 50% rise in the price of rice in recent months is leading to increasing turmoil.

In the US, the results aren't nearly so dire. With Sam's Club and Costco limiting rice purchases to four 20 pound bags per visit, starvation isn't an issue. But the Government's credibility is, as more and more folks come to the realization that the official statistics are nonsense. And, the absurd Fed focus on the core rate of inflation has people shaking their head in wonder over how out of touch our Central bankers are. Consider this recent San Diego Union Tribune column:

"For the Federal Reserve, the core inflation rate amounts to a green light to continue its policy of lowering interest rates in order to keep the economy from falling into a deep recession. A higher inflation rate could conceivably make the central bank freeze or raise interest rates.

But many economists say the core rate does not show how inflation is affecting the typical consumer. Because salary raises for most people are not keeping pace with the rising cost of living, people are using a greater percentage of their wages to buy a smaller amount of goods."

That's typical of the sort of coverage that is gaining traction -- and it only took $120 Oil and $5 milk to get some attention focused on the issue.

We've been beating the drum on this for years now. The cat is out of the bag, and we will have to see if any of the candidates have the stones to step up and address the issue.

Digging deeper into this situation is the cover story of the May 2008 edition of Harpers is titled "Why the Economy is Worse than We know" ~~(pdf)~~ (print). It contains a review of the myriad ways the government has corrupted the way official statistics are reported for jobs, inflation, GDP, etc. (I have a brief mention in it).

The article is by Kevin Phillips, the author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.

Meanwhile, more and more people are recognizing the reality beneath the spin. The President and members of congress seem genuinely perplexed at the public's negativity. (Public's View of Economy Takes Fast Turn Downward). They keep blaming the Iraq war for this, despite the fact media coverage has dropped significantly (and completely disappeared from Fox News).

~~~

The Fed meets again next week, and the expectation is for "only" a quarter point rate cut. That is how distorted our perspectives have become -- parts of the world is having food riots, and merely taking rates down another 25 bps is somehow perceived as a moderate action.

Previously:
Inflation ex-inflation
http://tinyurl.com/4qaek6

Agflation !
http://bigpicture.typepad.com/comments/2007/06/agflation.html

Sources:
Asia Risks `Silent Famine' as Food Soars, WFP Warns
Jason Gale and Paul Gordon
Bloomberg, April 21 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axuenSYeMBJU

Hard numbers: The economy is worse than you know
Kevin Phillips, Harper's Magazine
Tampa Bay Times, Sunday, April 27, 2008
http://www.tampabay.com/news/article473596.ece

The Fed's inflation gauge isn't realistic, critics say
Dean Calbreath
San Diego UNION-TRIBUNE, April 17, 2008 http://www.signonsandiego.com/news/business/20080417-9999-1n17inflate.html

Public's View of Economy Takes Fast Turn Downward
Jennifer Agiesta and Jon Cohen
Washington Post, Friday, April 18, 2008; Page A07
http://www.washingtonpost.com/wp-dyn/content/article/2008/04/17/AR2008041703769.html

Related:
Era of cheap food ends as prices surge
Steve Hawkes, Greg Hurst and Valerie Elliott
Times Online, April 23, 2008
http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/article3799327.ece

Moms' new battle: The food price bulge
Parija B. Kavilanz,
CNNMoney.com, April 21, 2008: 10:33 AM EDT
http://money.cnn.com/2008/04/21/news/economy/moms_foodshopping/index.htm

Download HarpersMagazine-2008-05-0082023.pdf

Will the Fed Pause After the Next Cut?

Friday, April 25, 2008 | 12:30 AM

in Economy | Federal Reserve | Fixed Income/Interest Rates | Inflation

Greg Ip of the WSJ:

Source:
Fed Weighs Pause After Next Rate Cut
Inflation Worries Loom as Economy Continues to Stall
GREG IP
WSJ, April 24, 2008; Page A1
http://online.wsj.com/article/SB120899756185139975.html

Is The Worst of the Credit Crunch Behind Us?

Monday, April 21, 2008 | 06:47 AM

in Credit | Derivatives | Federal Reserve | Psychology/Sentiment

One of the more common refrains we keep hearing is that the worst of the credit crisis is behind us. Not only that, but banks have written down so much bad debt, that there is an upside surprise ahead of us!

I'm not so sure about that. As to the first part, credit spreads, mortgage rates, and the actions of the Bank of England strongly imply we are still in the thick of it. As to the latter, I simply doubt management has been that forthcoming.

I am not the nly one with such doubts. The WSJ looks at the specific accounting quirks that allow banks to write down much less bad debt -- about 20% less -- than they actually have:

"Outsize losses reported last week by Citigroup Inc. and Merrill Lynch & Co. could have been a lot worse except for a quirk in the way companies account for different types of securities.

Citigroup took $15 billion in write-downs and credit charges, leading the big bank to report a first-quarter loss of $5.1 billion. But $2.3 billion in other write-downs didn't hit the company's income statement.

The same was true at Merrill. The broker had $6.6 billion in write-downs, leading to a loss of $1.9 billion. But Merrill took at least $3.1 billion in other write-downs that didn't count toward its loss."

Best of all, its all legal according to the accounting rules:

"So, where did those other charges go? Into a special bucket in shareholders' equity called "other comprehensive income." The beauty of this bucket is the charges land on the balance sheet, but don't dent the companies' bottom line.

It all gets down to how a company classifies a security. A company can say it plans to hold a security until it matures, that it is available for sale or that it is being actively traded. Securities being held to maturity are held at their original cost and their value is written down only if they are deemed to be impaired. Securities that are traded are always marked to market, and gains or losses immediately hit profit.

The available-for-sale category is a middle ground in which the value of the securities is written down or up depending on market prices, but the loss or gain ends up in the "other comprehensive income" bucket. It stays there until the change in value is considered more permanent. At that point, a company finally takes the losses out of the bucket, and they hit the bottom line.

How much worse the balance sheets of the major banks and brokerages will get before the credit crunch is fully behind us is still anyone's guess. Those of you who have been trading the beaten up banks best be nimble enough to reverse course if another leg down starts.

As to BoE, their announcement today of a plan to swap about "50 billion pounds ($100 billion) of government bonds for mortgage-backed securities to lower credit costs" shows the global impact of the credit crunch remains unabated:

The plan will "unfreeze the situation we've got at the moment,'' Chancellor of the Exchequer Alistair Darling said yesterday in an interview with the BBC, without specifying how much would be made available. "What the Bank of England will do is, in effect, lend the banks that money. In the meantime, the Bank of England will take a security.''

Prime Minister Gordon Brown's government is trying to encourage lending after a surge in borrowing costs prompted banks to withdraw their best mortgage offers, threatening to exacerbate the worst housing downturn since 1992. The plan is a change of approach by the Bank of England after three interest-rate cuts since December failed to ease the logjam."

Some people have been calling the banks an opportunity of a lifetime. I am far less sanguine about the sector over the intermediate and longer term. This remains a troubled sector, with its losses not fully realized yet.

Related:
Credit crisis a "global calamity"--Kaufman
John Parry
Reuters, Fri Apr 18, 2008 11:40am EDT http://www.reuters.com/article/ousiv/idUSN1845613820080418

Sources:
A Way Charges Stay Off Bottom Line
DAVID REILLY
WSJ, April 21, 2008; Page C1
http://online.wsj.com/article/SB120873768772029985.html

Bank of England Will Unveil Swap to Ease Home Lending
John Fraher and Gonzalo Vina
Bloomberg, April 21 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a1Xcc.MQyy.g&