Posted on 11/29/2007 4:29:39 PM PST by shrinkermd
U.S. Federal Reserve Chairman Ben Bernanke said the latest bout of financial-market turbulence may put additional strain on the U.S. economy, signaling he is open to additional cuts in interest rates.
In a text of remarks prepared for delivery last night in Charlotte, North Carolina, Mr. Bernanke said the housing downturn and related mortgage troubles are adding "greater than usual" uncertainty to the economic outlook. "These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors," he said.
His comments echoed the statements of Fed Vice Chairman Donald Kohn on Wednesday, whose remarks led markets to conclude that Fed policy makers may cut interest rates to offset the risks posed by credit-market turbulence.
Separately, the U.S. government sharply raised its estimate of third-quarter economic growth, saying the economy expanded at an annualized pace of 4.9%, a full percentage point above the previous estimate. But that did nothing to alter perceptions that growth is grinding nearly to a halt in the current quarter.
Underscoring the spreading weakness was an increase in new claims for unemployment insurance to the highest level since February, an indication that the labor market is beginning to deteriorate
(Excerpt) Read more at online.wsj.com ...
"Dead" is a bit of an overstatement on my part - it's weak. Quite weak compared to the last several years. And that is a factor (or at least an indicator) in inflation.
I also note gold has slowed its climb and the stock market has become very volatile. More signs of potential deflation. Things can change quickly, but right now bond buyers are willing to buy the long bond at less than 5% on a regular basis. Sooner or later the Fed has to bring the short term rates (Fed Funds et Discount) down. So maybe Bernanke isn't such an idiot after all.
Gold's rise is slowing, meaning that the rate of decline of the dollar is reduced presently. The precious metal still serves as a barometer of currency value (and I wish I had more of it). But reducing the rate will lead to an increased number of dollars on the market, chasing the same quantity of goods - the classic price inflation formula. That will further depress the dollar value relative to other currencies and metals, all other things being equal (which they seldom are).
Also consider foreign investment in the US - it will drop if there's no gain to be had. I'm a little less enthusiastic about my savings account at this time, not to mention the small amount of emergency cash down in the safe.
Now I know that there's a bright side - American-made products will become less expensive in foreign markets, and that should help manufacturing and exports. I'm just not sure that the improvement will be as significant as the potential downside.
I won't say that I've got a better look at all the factors than Bernanke has, but I am skeptical of this potential move. I'm concerned for my own buying power for one thing. There's a great number of consumer products that we Americans like to buy that are not made in the US any more. At any price.
After you have extended credit to everyone who is qualified it, you can only further expand the monetary base (credit) by extending credit to those who do not qualify. Greenspan's 1.75% ARMs, which he touted himself calling folks dumb for not taking them, was his own personal effort to expand the monetary base by giving credit to those who were high risk, and would be taken down when rates went to "normal."
Yes they are the same thing.
Remember, however, that we have shifted from a manufacturing economy to a service economy, and manufacturing is much less important.
I think you need to distinguish between interest only and short term loans. The interest only feature when connected to a reasonable term has almost no impact on any of this. The problem is credit worthiness and short terms. If I take an interest only loan on my 500K mortgage the difference over ten years is whether I owe 440 or 500. That doesn’t make much difference at the end of the day with respect to the current crisis or my return on my investment. My return is the same either way. The only added risk here is in a major down turn I’ll have less equity and therefore be a greater risk. Again though that goes back to credit worthiness. Lastly find a ten year period when the housing market hasn’t increased to such an extent as to make the 440 v 500 comparison meaningless. The interest only feature is actually a great option and much maligned due to confusion IMHO. I don’t have one but would consider it again in the future. I will not however ever consider a 3 or 5 year ARM.
And where do you think the electricity comes from for the Volt? 60% of our electricity is generated by petroleum products. I think that number is correct.
Now, you might be able to charge it with solar power if you can afford the cells and the sun is shining. Or maybe put a wind charger on it. Otherwise it is wishful thinking to get away from the high price of oil.
If the regulators forbid you to extend credit on certain terms, you won’t... irrespective whether money is “available.”
BAvailable credit is not funds in circulation. Greenspan's policy was to get money in circulation.
It was very poor monetary policy and you need to keep your aim on the chief villain in this saga.
“He should have increased it more rapidly back in 2002-2003 after dropping it right after 9/11. Keeping it too low for too long presented cheap money - so cheap that even non-creditworthy borrowers had access.”
If you read what he stated recently...he knew very well exactly what he was doing back then would cause this exact bubble. His intentions were to boost the economy regardless of what would happen further on down the pike.
If this was 1999, I would agree.
But for 3-years, economic hit-jobbers -- AP/Business, CNBC, all local newspapers -- have endlessly proclaimed the "coming recession" just around the corner.
CNBC (one of the main financial outlets) endlessly proclaims real estate "crash" stories, over and over and over. (real estate goes up 100% in five years, and drops 3 percent on six months, and to CNBC pundits, that's a serious tragedy)
Meanwhile, "The Commerce Department reported that the economy grew at a 4.9 percent rate from July through September, the fastest pace in four years.", according to ?? I forget the news agency.
I am of the belief the economy is fabulous. Exceptionally strong.
But President Bush has faced five years of headwinds -- NOT from the 9/11 slowdown of the "war on Terror drain" as claimed by liberal pundits -- but by doom and gloomers on CNBC, the AP, Reuters, and countless other writers who desperately want the Republican Administration to fail.
“Greenspan’s policy was to get money in circulation.”
No. Greenspan rode the market down. His position always was that if the economy cooled, interest rates would fall. So he did nothing, and waited for interest rates to fall. Unfortunately, that only happens if the economy declines.
Bernanke is a bit smarter. He anticipates the decline, and tries to counteract it. We’ll see whether that is a better move very shortly. We’ll know by March, I think. If we aren’t in a recession, then he played it right, unless we’re dealing with runaway inflation.
So the solution to low rates is...low rates ?
The 'dollar-sheep' are about to be shorn again.
Why not simply pay me to borrow money?
Up to about June of this year gold, xau were doing better than the bond yield; however, they were parallel to each other. Since June gold and the xau have soared while at the same time the 30 year bond yield has declined.
Sophisticated investors (that leaves me out) seem to be buying 30 year bonds even though their rates have gone from 5.x to 4.4%. This is an anomaly and, perhaps, indicates stock market fear and a search for a safe haven more than an increasing probability of inflation.
Asset deflation, commodity inflation.
The middle class is being squeezed from both ends. I hope that does not portend a retail sales drop but what else could it imply ?
A barrel of crude oil might be high, but in reality the price of energy in mainland USA is not that high, not by a long stretch.
Until recently, I could buy a gallon of gasoline for $2.41 a gallon, right here on the NJ/Pennsylvania border.
Yes it has risen to $2.95 in recent weeks, but even THAT is not catastrophic.
Most of the "crude oil" rise can be directly attributed to the falling US dollar, which in fact helps keep US consumer goods cheap, and thus it keeps inflation lower, less than 2%
Unemployment remains at historic lows.
GNP ..in the 3rd quarter, is HIGH at 4.9%
Lastly, in my neck of the woods, contractors STILL are nearly fully employed. Jobs are going begging.
Best Buy and the local grocery stores are jam packed to the gills each Friday, and all weekend.
Black Friday I could not even get a parking spot at my local mall, the Oxford Valley Mall.
I could go on and on.
Please, don't fall prey to the propaganda of the 'get Bush' media.
Last I checked, the Fed wasn’t responsible for insuring the Dollar’s value in an open market. Historically, it’s been to excercise sound judgement in monetary policy with respect to the growth of money supply, inflation, and general economic conditions, in addition to it’s supervisory role over the US banking system in general. Somehow, I don’t recall the value of the Dollar vs. the Euro being part of the equation.
Because the Fed won't let the default on those loans harm the people making the loans. They always step in and bail them out. The Fed needs to step away and let those who profited from the upside of the housing bubble pay for the downside -- instead of making Mr and Mrs Prudent Investor pay for it instead.
LOL!
The oil is down 33% from it’s peak vs a basket of currencies. Oil is up 500%. You cannot claim that huge of an increase in oil is due to the weak dollar.
Oh don't be silly. Rates did not fall to 1.75% while the Federal Reserve fiddled and the stock market burned. Rates were brought down through the deliberate monetary policies of the Federal Reserve.
Federal Greenspan's Reserve Report to the Congress July 16, 2002 states: "The Federal Reserve had moved aggressively in 2001 to counter the weakness that had emerged in aggregate demand; by the end of the year, it had lowered the federal funds rate to 1-3/4 percent, the lowest level in forty years. "
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