Where have you gone Paul Volcker?

[XBoxBoy]

Don’t know if this guy is right or wrong, but interesting take on things.

http://www.marketwatch.com/news/story/have-you-gone-paul-volcker/story.aspx?guid=%7BFC39F929%2DB835%2D431D%2D90E7%2DC48585790133%7D

KAHULUI, Hawaii (YF) — We warned investors of the subprime mess, the real estate bubble, the troubles with the hedge funds and the stock market sell-off before these international headlines became reality.
Our next warning? Inflation. On Aug. 17, the Federal Reserve blinked when it lowered the discount rate.
In the summer of 2007, Fed Chairman Ben Bernanke encountered his first major crisis — and he panicked. Basically, the financial community coerced and forced him to do something he was totally against — give up the fight on inflation.
In the past, whenever the Federal Reserve attempted to rescue the financial markets, something bad ensued. A price needs to be paid. Ramifications follow.
Prior to the chaos in the global markets, the Fed clearly stated how inflation was its biggest worry. In fact, a day before the discount rate reduction, St. Louis Federal Reserve President William Poole proclaimed the central bank wouldn’t need to intervene in the stock market short of a calamity.
For months, Mr. Bernanke pointed out that inflation remained his number one concern. Furthermore, the inflation rate had been running over 2%. This pace hovered at the higher end of his target. Then a few weeks later, an orchestrated effort by international central banks to pump in billions in liquidity into the banking system took place. The plan was followed by the lowering of the discount rate by a half-percentage point from 6.25% to 5.75% in the U.S., an injection of funds to the tune of $120 billion. In addition, there’s talk of a decrease in the federal funds rate.
Economics 101
The aforementioned events translate to an open invitation to inflationary pressures; an engraved one to say the least. Some economists try to justify the action by saying how the greater good had been served. The monetary system, as we know it, was at stake.
The recent knee-jerk reaction by Bernanke is going to hurt U.S. currency. A weak dollar is inflationary in scope. The 46-year low in interest rates created an excess of liquidity. To reflate at this juncture will place the Fed behind the curve in the fight against inflation.
In the future, interest rates must be raised much higher than what would have been. The bottom line, the next recession will be painful. The Federal Reserve sought a short-term solution. The equivalent of prescribing aspirin to battle cancer. In other words, treat the symptoms instead of the disease. Long-term consequences are forthcomig.
It’s obvious to us that the Fed chairman had no desires to inflate the economy out of its problems. If he did, his first move would have been an overnight cut in the fed funds rate. That never happened. The movement could come later. But he is hesitating.
Losing credibility
As a rookie on the job, Bernanke wanted to avoid the perception of being another Alan Greenspan, his predecessor. Greenspan was known to cave in to the pressures from the financial markets. He always provided immediate assistance in times of monetary upheaval.
Mr. Bernanke could learn a lesson or two from another former Fed chairman: Paul Volcker.
In the 1970s, inflation surged to 13.5%. The rate was at 15% on a monthly basis. It ranks as the highest inflation level the U.S. ever experienced. Paul Volcker proceeded to limit the growth of the money supply. His very restrictive monetary policy made the prime rate hit 21.5% in December 1980 — a record. A significant recession developed. Unemployment reached the highest level since the Great Depression. Political attacks and widespread protests were hurled at the chairman.
However, by 1983, inflation had plunged to 3.2 percent. The criticism of Volcker changed to accolades, praises and compliments. He was labeled a “genius.” Today, the man has earned a legendary status in the annals of financial history.
Granted, the current inflation rate is not at double-digit levels. But according to the data of the Fed, information which the general public doesn’t have access to, inflationary pressures are already in the pipeline.
In all probability, plans by Bernanke for interest rate hikes in 2008 were already in the cards. Then came the credit crunch and a 360-degree reversal in monetary policy. Now the system is being flooded again with liquidity. A precusor to the return of inflation
No free lunch
In the past, whenever the Federal Reserve attempted to rescue the financial markets, something bad ensued. A price needs to be paid. Ramifications follow.
The misstep by the Bernanke virtually assures higher interest rates and a longer recession down the road.
As stated in this space at the end of February, we remain 90% in cash and 10% in the Rydex Ursa Fund

If Bernanke cuts the federal funds rate, and the stocks rally, our intent is to buy more shares in Ursa (a lower entry price based on the inverse price action). Ursa is going to soar once investors realize the reduction in rates eventually means inflation and higher interest rates in the not-too-distant future.
This deadly combination spells a recession.

The publicity shy Irwin Yamamoto has been managing money on the beautiful island of Maui for 30 years and is editor of the Yamamoto Forecast investment letter. He’s as contrarian in his business as he is in his stock picks, choosing to forgo advertising, Web sites, e-mail or even a toll-free phone number. Investors interested in his monthly newsletter should write to P.O Box 573, Kahului, HI, 96733.

[AK]

Big Volcker fan here …

But there are those who hold him responsible for destroying the U.S. manufacturing sector. I doubt he’ll win any popularity contests south of the border either, as his policies helped precipitate the Latin American debt crisis.

Tight money whipped inflation, but at a high price in unemployment and homelessness. I think that given the unenviable situation, he picked the lesser of two evils. Given the current situation, I can only hope that Bernanke has more than one evil to choose from …

[AK]

Big Volcker fan here …

But there are those who hold him responsible for destroying the U.S. manufacturing sector. I doubt he’ll win any popularity contests south of the border either, as his policies helped precipitate the Latin American debt crisis.

Tight money whipped inflation, but at a high price in unemployment and homelessness. I think that given the unenviable situation, he picked the lesser of two evils. Given the current situation, I can only hope that Bernanke has more than one evil to choose from …

[AK]

Big Volcker fan here …

But there are those who hold him responsible for destroying the U.S. manufacturing sector. I doubt he’ll win any popularity contests south of the border either, as his policies helped precipitate the Latin American debt crisis.

Tight money whipped inflation, but at a high price in unemployment and homelessness. I think that given the unenviable situation, he picked the lesser of two evils. Given the current situation, I can only hope that Bernanke has more than one evil to choose from …

[My Opinion]

This article by economist James K. Galbraith also discusses that August 17th turnaround by Bernanke.

His take is that Wall Street likes volatility, so the system is built for credit bubbles. The reason for creating a large pool of high risk (such as all the shaky loans) is so that the Fed is blackmailed into coming to the rescue if there is an implosion.

http://www.motherjones.com/news/feature/2007/08/great-american-mortgage-crisis.html

[SDHousehunter]

Just finished reading “Secrets of the Temple: How the Federal Reserve Runs the Country” by William Greider.

Excellent read.

Having grown up in the 80s and 90s I am currently unable to correlate the economic crisis of the real estate cycle today with those cycles that occured during Nixon/Carter.

This book has helped fill in many gaps and has provided unique parallels to our current real estate cycle.

Based upon my reading, I forsee a period of progressive credit tightening that has no emotion and is based purely on mathematical logic. Bottom Line: Millions of Americans, homebuilders and real estate investors are going to go bankrupt. Its for our nations own greater good that they do so in such a manner that preserves the structure of the existing economic system.

According to the author’s analysis the individuals who make the most profit during a period of interest rate hikes (recession) are the wealthiest 10% who control 86% of the assets and the banking industry.

Who (banks) will benefit most from raising interest rates?
Who (banks) owns the Fed?
Who benefits from a falling dollar (Gold Bugs)?
Who owns (Big Oil) most of the gold mining?
Who is the figurehead of the White House (Big Oil)?
Who ran up the spending to devalue the dollar (White House)?
Who (banks) handles the transaction fees as the dollar is valued or devalued?

I think the banks made far more in fees than they lose on defaults. Worse case scenario it was a wash. Best case they made a killing and the Chinese/Europeans picked up the mess.

So the politicians will do a dog and pony show for the media and the politicians will throw a bone to the american public, however in the end the Federal Reserve will make the decisions.

Although it is sad that the American public self-duped itself to believe that their “assets” were increasing in value as their dollar decreased globally it merely reflects that much of our population are financial “sharecroppers.”

Many of us here paid of debts, refused to believe the hysteria and prepared ourselves for these lean times coming. Although the wealthiest 10% need not worry, we can at least join them for a coffee at Starbuckswhen everyone is afraid of paying $8 US for a Venti Cappucino (It’s $3.55 now!). Although we will have thousands or tens of thousands in or checking accounts both us and the 10% will be earning 8-15% interest in the years to come as the rest struggle to manage their “payment.” Today I have no car payments, no debts, a good living, own all my furniture, have a stream of positive cash flow, reserve allocation and a rent that is $12K annualy cheaper than owning after tax benefits.

To all those who educated themselves. . .congratulations and enjoy your success/survival you earned it.

[bsrsharma]

The Federal Reserve’s rescue has failed

The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) “term-auction” market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.

“I never thought I would see anything like this in my life,” said James Steele, an HSBC economist in New York……

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml

[bsrsharma]

The Federal Reserve’s rescue has failed

The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) “term-auction” market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.

“I never thought I would see anything like this in my life,” said James Steele, an HSBC economist in New York……

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml

[bsrsharma]

The Federal Reserve’s rescue has failed

The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) “term-auction” market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.

“I never thought I would see anything like this in my life,” said James Steele, an HSBC economist in New York……

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml

[bsrsharma]

The Federal Reserve’s rescue has failed

The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) “term-auction” market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.

“I never thought I would see anything like this in my life,” said James Steele, an HSBC economist in New York……

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml

[bsrsharma]

The Federal Reserve’s rescue has failed

The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) “term-auction” market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.

“I never thought I would see anything like this in my life,” said James Steele, an HSBC economist in New York……

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml

[XBoxBoy]

Yes it definitely appears that the fed’s rescue has failed. But here is the thing I’ve been wondering for several months now:

What do the fed governors and BB really think? Given that if they say negative things, there’s a good chance real panic will happen, the question is what are they really thinking and saying to each other in private. Do they believe what they say, that things aren’t that bad, or in private do they roll their heads and mutter, “hey guys, We’re f*ckd. Interest rate cuts aren’t working and inflation is totally getting out of hand.”

I keep seeing the fed governors give speeches in which they talk about how it’s important that we don’t allow “inflation expectations to become unmoored.” (Is it just me, or do others keep seeing that phrase?) And every time I see that phrase I wonder, “What in god’s name are you talking about? Inflation expectations broke away from the dock months ago! Don’t you guys even look at the press? Have you seen all the articles talking about how inflation is clobbering people? And have you seen the price of everything from gold to oil to wheat?”

Then add to this the fact that the fed governors are now talking about how if (if??? if??? wtf is with the if?) inflation expectations get unmoored they will have to reverse their rate declines rapidly. Huh???? WTF? How in the world are they going to keep the economy from full collapse if they throw in the towel and reverse their rate declines?

So, the final question here is how does this play out? Everyone is certain the fed is going to keep cutting rates, (and god help us if they change course, cause that will really unhinge the markets) Which so far clearly means that inflation is gonna keep right on going full steam ahead. (Despite what Mish and the deflationista’s say) Are we headed for a long period of stagflation? At what point will policy change? When the dems take the white house will they throw BB out and bring in a Paul Volker? (I find that hard to believe but what do I know) How long are we going to have a slowing economy and rising inflation?

Always wondering… XBoxBoy

[XBoxBoy]

Yes it definitely appears that the fed’s rescue has failed. But here is the thing I’ve been wondering for several months now:

What do the fed governors and BB really think? Given that if they say negative things, there’s a good chance real panic will happen, the question is what are they really thinking and saying to each other in private. Do they believe what they say, that things aren’t that bad, or in private do they roll their heads and mutter, “hey guys, We’re f*ckd. Interest rate cuts aren’t working and inflation is totally getting out of hand.”

I keep seeing the fed governors give speeches in which they talk about how it’s important that we don’t allow “inflation expectations to become unmoored.” (Is it just me, or do others keep seeing that phrase?) And every time I see that phrase I wonder, “What in god’s name are you talking about? Inflation expectations broke away from the dock months ago! Don’t you guys even look at the press? Have you seen all the articles talking about how inflation is clobbering people? And have you seen the price of everything from gold to oil to wheat?”

Then add to this the fact that the fed governors are now talking about how if (if??? if??? wtf is with the if?) inflation expectations get unmoored they will have to reverse their rate declines rapidly. Huh???? WTF? How in the world are they going to keep the economy from full collapse if they throw in the towel and reverse their rate declines?

So, the final question here is how does this play out? Everyone is certain the fed is going to keep cutting rates, (and god help us if they change course, cause that will really unhinge the markets) Which so far clearly means that inflation is gonna keep right on going full steam ahead. (Despite what Mish and the deflationista’s say) Are we headed for a long period of stagflation? At what point will policy change? When the dems take the white house will they throw BB out and bring in a Paul Volker? (I find that hard to believe but what do I know) How long are we going to have a slowing economy and rising inflation?

Always wondering… XBoxBoy

[XBoxBoy]

Yes it definitely appears that the fed’s rescue has failed. But here is the thing I’ve been wondering for several months now:

What do the fed governors and BB really think? Given that if they say negative things, there’s a good chance real panic will happen, the question is what are they really thinking and saying to each other in private. Do they believe what they say, that things aren’t that bad, or in private do they roll their heads and mutter, “hey guys, We’re f*ckd. Interest rate cuts aren’t working and inflation is totally getting out of hand.”

I keep seeing the fed governors give speeches in which they talk about how it’s important that we don’t allow “inflation expectations to become unmoored.” (Is it just me, or do others keep seeing that phrase?) And every time I see that phrase I wonder, “What in god’s name are you talking about? Inflation expectations broke away from the dock months ago! Don’t you guys even look at the press? Have you seen all the articles talking about how inflation is clobbering people? And have you seen the price of everything from gold to oil to wheat?”

Then add to this the fact that the fed governors are now talking about how if (if??? if??? wtf is with the if?) inflation expectations get unmoored they will have to reverse their rate declines rapidly. Huh???? WTF? How in the world are they going to keep the economy from full collapse if they throw in the towel and reverse their rate declines?

So, the final question here is how does this play out? Everyone is certain the fed is going to keep cutting rates, (and god help us if they change course, cause that will really unhinge the markets) Which so far clearly means that inflation is gonna keep right on going full steam ahead. (Despite what Mish and the deflationista’s say) Are we headed for a long period of stagflation? At what point will policy change? When the dems take the white house will they throw BB out and bring in a Paul Volker? (I find that hard to believe but what do I know) How long are we going to have a slowing economy and rising inflation?

Always wondering… XBoxBoy

[XBoxBoy]

Yes it definitely appears that the fed’s rescue has failed. But here is the thing I’ve been wondering for several months now:

What do the fed governors and BB really think? Given that if they say negative things, there’s a good chance real panic will happen, the question is what are they really thinking and saying to each other in private. Do they believe what they say, that things aren’t that bad, or in private do they roll their heads and mutter, “hey guys, We’re f*ckd. Interest rate cuts aren’t working and inflation is totally getting out of hand.”

I keep seeing the fed governors give speeches in which they talk about how it’s important that we don’t allow “inflation expectations to become unmoored.” (Is it just me, or do others keep seeing that phrase?) And every time I see that phrase I wonder, “What in god’s name are you talking about? Inflation expectations broke away from the dock months ago! Don’t you guys even look at the press? Have you seen all the articles talking about how inflation is clobbering people? And have you seen the price of everything from gold to oil to wheat?”

Then add to this the fact that the fed governors are now talking about how if (if??? if??? wtf is with the if?) inflation expectations get unmoored they will have to reverse their rate declines rapidly. Huh???? WTF? How in the world are they going to keep the economy from full collapse if they throw in the towel and reverse their rate declines?

So, the final question here is how does this play out? Everyone is certain the fed is going to keep cutting rates, (and god help us if they change course, cause that will really unhinge the markets) Which so far clearly means that inflation is gonna keep right on going full steam ahead. (Despite what Mish and the deflationista’s say) Are we headed for a long period of stagflation? At what point will policy change? When the dems take the white house will they throw BB out and bring in a Paul Volker? (I find that hard to believe but what do I know) How long are we going to have a slowing economy and rising inflation?

Always wondering… XBoxBoy

[Author]

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