Rate Cuts and You

Mike asks how the rate cuts will help the common man. In some ways this question cuts to the heart of monetary theory and policy. In principle the sole purpose of monetary policy should be to help the common man. Is that whats going on now.

Yes, and no. Its very very tempting for the monetary authority to focus heavily on assets prices and as such the upper class. You get instant feedback about expectations, liquidity, and overall wealth by looking a equity and credit markets.

To find out whats happening to the Joe on the street takes years and even then we are often not sure if we have the right metrics. Moreover, Wall Street is often clamoring for help while the Joe Sixpack may not even know what the Fed is.

However, cuts (and hikes) do wind up having their biggest effect on the weakest members of society.

Why?

Because, those members are the most vulnerable to inflation and unemployment. When the Fed cuts now the hope is threefold.

1) This will lead to more favorable mortgage and credit card rates which will relieve the payment stress on average consumers

2) That if consumers can slowly, rather than dramatically reduce spending growth (as they must) then businesses can adjust without resorting to mass layoffs.

3) That we can ease pressure on the banking system so that more people and businesses will be able to get credit when they need it.

All of these things should ease the stress on the common man. The reason I did not believe we would have cuts this morning and some economists are upset about them is because it looked as if the Fed was going to far to stem losses in financial markets.

This is a really hard call because losses in financial markets can lead to pains for the average worker if it means that corporations have a hard time raising capital and need to instead turn to layoffs.

At the same time, however, more vulnerable Americans who have relatively fixed incomes are susceptible to inflation and there is some evidence that inflation causes the entire system to be sluggish. Not to mention the problem of encouraging financial speculators to take risks if they believe the Fed will bail them out.

So, the upshot is that the cuts should reduce some stresses on average people and hopefully reduce painful layoffs.

Bernanke needs to Speak Tomorrow Before the Open

if this continues . . .

The key word is promptly. The Fed is prepared to act promptly to signs of further deterioration in output and employment.

Further the Fed is prepared to act to support the smooth provision of credit and stability in financial markets consistent with the dual mandate.

50 now and hints at Intermeeting Cut

I'll put up a more definitive rate preference and statement later, but right now I lean towards:

1) Cutting 50 bps on the 30th

2) Saying something like "The Committee is monitoring the data closely and is prepared to act promptly to increasing signs of deterioration in growth and employment"

A growing risk is now generalized, rather than simply asset, deflation. It is quite a difficult time for central bankers, when both inflation and deflation are credible risks.

This makes language crucial in communicating to the markets. In particular, participants need to know what the key data measures are so they can update their expectations. In particular I would point the markets towards unemployment and agricultural prices. Although these may not be leading indicators they are quite solid indicators of where the pressures are and we can feel more confident in taking large actions based upon them.

In particular if Ag prices fall I don't see how general inflation holds up in this environment. Not that Ag prices are pushing general inflation but they indicate a worldwide slowdown in demand growth.

Dark Matter in Action

The Economist is concerned about Sovereign Wealth Funds and it appears Washington is as well. My personal reaction when I heard that international investors were pouring another 12.5 Billion into Citi on top of the 7.5 Billion they received at the end of last year was a bit different. This, I thought, is Dark Matter in action.

Dark Matter was a much ballyhooed hypothesis that the US could manage to run such large trade deficits because it was making a killing on its investments overseas. Think of it this way. Suppose you borrowed $100,000 at 5% interest. You took half of that money, $50,000, and blew it on a big screen TV, new stereo, trip to Thailand etc. You took the other $50,000 and invested it at 15% guaranteed.

So you end up having to pay $5,000 a year in interest, but you are receiving $7,500 in interest. On net are in debt? What does it mean to be a net debtor if you are actually taking in more money on your investments than you are paying out.

Yet, someone who looked at your spending habits would say, "you borrowed $50K and blew on junk, you must be in debt."

In a nutshell is the situation the US finds itself in. Went spent a bunch of borrowed money on junk but we managed to invest the rest at incredible rates - or so it seemed.

A more careful examination of the data revealed that it wasn't that the US was earning amazing returns on its investments. It was that foreigners were getting a lousy return on the money they loaned to us or otherwise invested in the US.

Which brings us back to Citi. Are foreigners swooping in to buy one of the US's venerable institutions at fire sale prices, or like the Mitsubishi purchase of Rockefeller Center, are they overpaying for a famous property that can no longer produce. My guess is that it is more the latter than the former.

On Going Issues

1) On Thursday Bernanke started to use the kind of language that I was hoping he would use. Hints that the FED would be highly responsive to further deterioration. Thats the kind of assurance that helps smooth the non-linear waters of the market. Sometimes, a big move or the potential for a big move can have a stronger effect than several smaller moves of equal total magnitude.

2) We'll get retail sales tomorrow. Thats the last piece of the January data set I expected to justify strong action. If retail sales is as ominous as I suspect we should start talking about 50 bps with a strong bias towards cutting.

I am also not completely and totally immune to arguments that push 75bps. Though I would have substantial hesitation on many fronts including the risk of spooking the market. I don't think we have seen a cut above 50 bps since the early 1980s.

3) I have mixed feelings about the increasing realization that subprime was just the canary in the mine shaft. Alt-A mortgages, credit cards and CDS on corporate issues are next. There is some sense vindication in that this is turning out not to be a housing bubble but a credit bubble all around. However, of course it would have been better to be wrong.

What Bank of America Was Thinking

I was on the inside of Bank of America for a while as a consultant. I signed a deal that said I wouldn't talk about anything I overheard for three years but it has been much longer than that and I am sure that my thoughts are generally old news. Nonetheless I think they are worth sharing.

Bank of America was heavily investing in Consumer Real Estate, thats what they call mortgages, when the subprime boom hit. The goal at The Bank, was to streamline the entire haphazard process of mortgage application and underwriting. In particular they wanted a single computer system that could automate the entire process. In the past there had be a hodge podge of different systems and departments that did everything from taking applications, to verifying income and assets, to making sure the house wasn't in a flood zone.

The idea here, and behind a lot what The Bank, was doing was that consumer banking was about information. Their real asset was that the mortgage application let them stick their noses in all of your nitty gritty financial information, which they could then use to sell you every product under the sun.

In particular a few key executives were really into this notion that The Bank could be a conduit for every imaginable service related to a home. Bank of America could arrange your lawn service, your pool service, your home security service, everything you wanted. And since, they knew so much about you they could figure out exactly what you wanted.

It was the fees on these service that were going to be real winners. So, what is The Bank getting when they buy Countrywide? They are getting the largest mortgage servicer in the country and access to lots of homeowners whom they plan to sell lots of other stuff to as well.

My concern, however, is this - Bank of America looks so responsible because they didn't really dip into the subprime waters like other banks. My feeling, however, is that this is because they already had a big project going when subprime came along and they didn't want to muddy the waters with this new poorly understood stuff.

However, The Bank is heavily into credit cards, which are going to be the next take a hit. The Bank also is taking on a lot of servicing responsibility with Countrywide. To the extent that
not just subprime but Alt-A and even adjustable rate prime mortgages start to go delinquent, The Bank is going to be responsible for advancing interest payments to the investors in those loans. That is a heck of a liquidity responsibility. I would like to hear more about how The Bank would fare if prime ARM delinquency rose substantially.

What Happened in New Hampshire

There is a lot talk about what turned the tide for Hillary; the cry, the contrarian nature of New Hampshire, Chris Matthews, the debate.

Yet, in my mind I cant help but wonder how many women in Iowa were afraid to tell their husbands and boyfreinds that they supported Hillary. Caucus is out in public and subject to public pressures. Women may have decided to keep the peace rather than echo their support.

The when the pollster called New Hampshire the next day the state was swept up in Obama fever. By Tuesday, however, when women were all in alone in the voting booth and had to decide whether they were going to kill the hope of Hillary being president or let her live for the day, they went with their gut.

Will The Recession Be Outsourced?

So, US consumption growth will decline - that much is clear. Indeed, in the short term consumption is likely to contract in real terms.

The quandary now is how much of that reduction in consumption will raise unemployment in the US. Traditionally, declines in consumption translate into declines in manufacturing employment. Yet, these days a smaller and smaller fraction of the US population is employed in manufacturing.

Can manufacturing still cause a recession when it employs only 10% of the workforce? Will the declines in employment cut deeply into the traditionally stable service sector? Or will the recession be outsourced? That is, will the decline in manufacturing jobs that typically accompanies a US recession really hit manufacturing employment in other countries.

My intuitive take is that the service sector will take an unprecedented hit but that much of the increase in unemployment will be exported. My pet theory is that we are moving into a strange world of recessions without large increases in unemployment.

The pain of the recession will be felt in asset declines, and workforce relocation. Workers will slide into lower paying less productive jobs but not on to the unemployment rolls. These working recessions will see declines in productivity and an evisceration of corporate profits.

But thats just a pet theory. Time will tell.

All For The Want of A Nail

So, John Berry looks like the standard bearer for those who think the sub-prime crisis is overblown. So Berry says

A more realistic amount is probably half or less than those exaggerated projections -- say $150 billion. That's hardly chicken feed, though not nearly enough to sink the U.S. economy

There are a couple of problems here. One, Berry isn't factoring in the effect of declining collateral values when he says

First, the mortgages are backed by collateral, a house or condominium, and in a foreclosure a home typically retains significant value. When it is sold, the lender often will get 50 percent to 60 percent or more of the loan amount after foreclosure expenses.

That’s in world where the value of the home often exceeds the value of the loan. This is not where many of the defaulting sub-prime borrowers will find themselves.

More deeply, however, Berry is conflating losses with defaults. Indeed, a commenter on Naked Capitalism summed up the no-big-deal viewpoint nicely when he said

If for the want of a nail the battle is lost, then the battle can be won for the price of a nail.

This comes from a poem often used to describe the Butterfly Effect

For want of a nail a shoe was lost,
for want of a shoe a horse was lost,
for want of a horse a rider was lost,
for want of a rider a charge was lost,
for want of a charge a battle was lost,
for want of a battle the war was lost,
for want of the war the kingdom was lost,
and all for the want of a little horseshoe nail.

Berry and the commenter seem to be implying that a $150 Billion nail is not a hefty price for the US economy to pay. The problem, however, is that we don’t know which nail is bad.

This is the essence of risk.

If for example, we knew exactly which homeowners were going to default then we could correctly value each Mortgage Backed Security. Once, we had written them down for the value of the bad loans they would be AAA securities, since there is no remaining default risk. The CDOs which hold those securities could be written down, the SIVs that hold them could be written down and so forth until the $150 Billion had been distributed accordingly. We could then all go about our business as if nothing had happened.

Alas, this is not the situation we find ourselves in. We don’t know which nails are bad and we don’t have the resources to check every horseshoe. To make matters worse the CDO revolution convinced us that bad nails didn’t matter and so we went about shoeing horses like crazy and sending their riders into far flung battles around the world.

In other words, because there seemed to be little risk in making loans, we made lots of very risky loans and drove up asset prices on the basis of those loans. Now, the whole thing is supported on a foundation that is not only not as secure as we thought but due to lax underwriting standards, less secure than normal. So we have higher assets prices supported by weaker fundamentals. That’s a prescription for a fall.

The real question then is not, how much we will lose from defaults. The real question is how much of a return would we have demanded to risk these types of defaults and how low asset values have to fall before they can guarantee us that type of return.

For example, Berry estimates a 12% loss after default rate for subprime mortgages. Well that means that we have to shed 12% of the value just to bring us back to the expected return we had before. We have to shed much more than that to compensate investors for the fact that an individual security might lose a great deal more than 12%.

Even more stunning than that is the fact that the huge profits coming out of the financials drove increases in stock indicies. Now the financials are taking losses on the very securities that made them so profitable. This means not only is there less capital inside of those companies but that the run of profits we saw before was an illusion. It wasn’t possible to generate those types of returns without taking on lots of risk.

So we have a smaller company now with lower growth prospects. This implies quite a bit of fall in value.

Stack on top of that the fate of the US consumer. For a while now the consumer has been spending like gangbusters no matter what happened to the aggregate economy. Now, it seems that this spending was likely fueled by imprudent loans.

Going into detail about this requires another post, but imagine if the American spending spree was conducted by a small portion of the population spending way beyond their means. Now, imagine that this is the very population who is being foreclosed upon right now. It is at least possible then, that the American economy could swing from a negative savings rate to a more traditional savings rate very rapidly.

That is, imagine that most people are saving just as they were 25 years ago, but a select few have been borrowing so much that it drove the average savings rate negative. When those free speding few have their Home Equity Lines of Credit canceled, we will be left with only the spending of the traditional consumer.

In the long run that’s a good thing. In the short run it’s a very painful thing.

All of these possibilities are why the credit defaults imply asset value collapses that are much greater in magnitude.

Fed Credibility

Henry Kaufman is significantly more critical than I am.

This post from Naked Capitalism is well worth the read.

In some sense Kaufman is saying that the market cannot be treated as an equal partner with the Fed when the market is in no position to bear the level of accountability the Fed must shoulder. The Fed can't make the market clean up its own messes because the market is not capable of doing so without damaging Main Street, the constituency the Fed is supposed to protect first.

Though it disturbs my liberaltarian sentiments, I find it difficult to disagree.

Precommitment

Given some of what I have seen on the net I need to do a serious (much more than this) post on asset prices and defaults. I think some people are conflating the decline in asset values from the bursting of the credit bubble with the value of defaults.

Indeed the former is significantly larger than the first. For example, if I told you that a bond you thought was perfectly safe when you bought it for $100,000 actually had a 25% chance of being worthless what would you be willing to sell it for? I guessing much less that $75,000.

Now suppose that a financial enterprise you were invested in had been raking in big profits by buying these $100,000 bonds that now have a 25% chance of default, how much less do you think your investment would be worth. Remember that this not only includes the fact that the bonds are worth less but the realization that the supposed big profits in the past actually came from buying stuff that is a money loser today. What does that tell you about the potential for future profits and how would that effect your valuation of your investment?

Alarmism and Rational Panic

Two commenters have pointed out that my last post seems excessively alarmist.

I think I may have obscured my own point. I am not attempting to get people to sell in a falling market, so much as admitting that the only honest advice I could give is to sell in a falling market. Given that I think people will eventually find their way to optimality, this indicates to me that the market response will be different than in times past.

There is good chance that the point will come where Floridians realize that to some extent this is a game of who can get out first. I think first mover advantages can cause rational bubbles, that is, bubbles in which each individual agent has a private incentive to buy into the bubble. In the same way a first mover advantage has the potential to create rational panic.

Given that rational panic is probably extremely rate in housing, I don't think the past will be a good guide for the future.

Home Price Decline Will Be Different This Time

Lots of people have been comparing the national experience today with Los Angeles in the 1980s. Overall prices are inflated roughly the same amount and so the same decline is expected. There are a few reasons why I expect the price collapse to be more rapid and further.

1) The supply of homes increased rapidly during the boom yet the supply of potential homeowners is now falling. I believe that the core driver of the worst parts of the housing boom was a dramatic increase in the number of potential homeowners, created by declines in lending standards. As lending standards rise the number of homeowners will fall off rapidly.

2) The best advice that I could give to someone who is underwater right now and in non-recourse state is to walk away from your home. Take the hit now and start rebuilding your credit.

3) The best advice that I could give to someone who still has equity in a bubble area is to sell. Sell now. Things will only get worse in real terms. You are losing equity when you could be earning interest. Worse yet if illness, job loss or family emergency force you to sell in a hurry then you could loose dramatically more.

In short if you live in a bubble region the only reason to stay in your home right now is because you love your home. A lot. Otherwise it makes sense to get out before everyone else does.

Walk Away Nation

Suppose, housing price to income ratio fall back to their historic norms. What are the worst consquences of massive declines in home equity.

My fear is that looking at years of being underwater and the likely prospect of having to move for family or job reasons some time in the next 7 years, that potentially hundreds of thousands if not more than a million Alt-A and perhaps even Prime borrowers will walk away from their homes.

We may reach point where walking away is the financially prudent thing for these people to do, not to mention the least painful in the short term. They become subprime borrowers for seven years but they we likely to be forced into selling the house for less than they owed within seven years anyway. Yet, in this case they get to move from what is bone crushing monthly mortgage payment to a much more reasonable monthly rent payment.

There may be some sense of embarrassment for many middle class borrowers to walk away from their homes and become renters but its the type of phenomenon that could become rapidly more popular once the first, most desperate home owners do it with few consquences.

In this case we are looking at a rapidly accelerating rate of foreclosures and perhaps a housing bust that begins to feed on itself and even overshoots the long run equilibrium by a substantial amount. How possible is this scenario? I don't know but it worries me.

Fed Statements Coming Back To Haunt Them?

Repeatedly your blogger suggested that the Fed's credibility might take a blow during this financial crisis, without more aggressive efforts to manage market expectations.

I suggested that they hold in Oct, but signal high levels of responsiveness. That would have paved the way for a "shock and awe" 50 bps cut in December with a similar signal that the Fed is prepared to move rapidly. If they held in Oct, it is unlikely that the market would have been expecting 75 bps.

When they disappointed the markets in Decemeber they should have made mention to the strong GDP numbers in Q3. Let the market know that they see the future but we are in fact coming out of a rapid expansion and the Fed has to be sensitive to that.

Instead we have had a series of confusing statements and moves.

I do not envy the FOMC, Bernanke in particular. They are facing what may be the toughest challenge since the Great Depression. However, I do think that now is not the time to experiment with transparency.

Now is the time to offer statements that will serve to boost market confindence.

Now is the time to say that we are prepared to act rapidly when bad data comes in. Remind the market that the Fed takes employment and output to be the variables of interest, not asset values. However, as threats to employment and output materialize there will be a strong and vigilant response.

We can probably expect data that supports, what everyone believes to be true by mid January, thus implying that the Fed will move strongly in Jan and March to relieve stress to the real economy.

By the bye Nouril Robini is starting to convince me. More one that later.

Was There A Housing Bubble . .

or a simply a credit bubble.

This may seem like a widly pedantic inquiry. What difference, if one even exists between the two, does it make whether there was a housing bubble or just a "credit" bubble? Prices are falling and that is obvious to anyone.

I do think it makes a bit of difference, though, in thinking about how this whole thing is likely to unfold and how to prevent it again.

Some people lay the blame for this crisis at the feet of Alan Greenspan and his failure to diffuse what was obviously a growing problem. The question for me is - from a macro perspective how obvious was it?

My own take is that the current crisis has most of its seed in the structured debt boom. Housing prices started to rise early in the decade from easy money and a decline in world wide long term interest rates. To the extent that this was the whole story we wouldn't have that serious of a problem on our hands.

Tightening monetary policy would have slowed down the rise in housing prices and we probably would have been able to pull of a soft landing. The problem is that at exactly the time monetary policy was tightening, credit standards were loosening, big time.


There was a sense, ill-placed as it may have been, that risk could be managed with far greater efficiency than ever before. And managing risk is terribly important. Had structured debt lived up to its hype it would have meant a revolutionary change for millions of Americans. It would have meant the opening of opportunities, the forgiveness of pass indiscretion and new chances which would lead to an eventual unleashing of entrepreneurial ingenuity. That, however, was not to pass.

So it turns out that people have fewer opportunities and banks are less willing to overlook imprudence. Thus, the dream home and dream opportunities that would have been yours, cannot be. This is real and it is a loss.

That's important, because it means that the bursting of this bubble is not as William Buiter suggests, a zero-sum game. We are not simply transfering income from current homeowners back to future homeowners. We slashing the opportunity sets of millions of current and future homeowners a like. Such an adjustment will be inevitably painful in the short term and I am not sure there is effective means for preventing something of the sort from happening again.

Inequality and Growth

Quick post to get feedback on an idea.

I am beginning to think that inequality, in and of itself maybe an important component in at least the level of economic activity if not the rate of growth.

Why?

Well, traditional economic theory is based on the idea that people either work or not. If they work they get the prevailing wage. Higher wage can potentially encourage people to work more but even this is controversial since higher wage people don't "need" to work as much.

The thing is work is not work is not work. That is, the same person doing two different jobs could enjoy radical differences in productivity and hence income.

For example, it is not uncommon for an investment banker to be paid on the order of $500 an hour. Unless we think that the investment bank is in the business of giving away profits we have to concede that she is then producing at least $500 in value for the firm.

Suppose that same women were to become a cashier at the local dollar store. Now, no doubt she will be a great cashier. She will probably be faster and make fewer errors than the typical cashier but how productive could she be really? Could she produce ten dollars an hour, maybe at the outside fifteen dollars an hour worth of economic product.

Lets say she produces ten dollars an hour. Then the choice of this young woman to become a cashier rather than an investment banker will cost the economy $490 per hour of output. That's the same as if 49 cashiers had become unemployed.

Therefore, it much more important that we get this young woman to work in the correct field than it is that we get her to work at all.

Getting her to work in the right field doesn't depend so much on what the average wage is, or what the average tax rate is for that matter. It depends on the inequality in after tax wages between fields.

One thing that is striking about Europe is the intellectualism of the working class. Waiters on Champs-Elysees are able to and interested in discussing all manner of geopolitical issues. Socialist tend to applaud this as a mark of France's egalitarian nature. Even the wait staff are literate members of the body politic.

Yet, I am struck by the economic waste. If this person is both capable of and interested in geopolitics then they should be assisting the world in geopolitical decisions, not serving baguettes.

If it turns out that we can both educate and interest everyone in geopolitics, finance and the like, then no one should be employed as a waiter. After all, its not that difficult to grab your own baguette.

The Height Tax Properly Understood

Greg's height tax is receiving some renewed attention. When originally proposed I objected to the tax on the grounds that if a part of the redistribution schedule were based solely on height it could have the unintended consquences of transferring money from a poor tall person to a wealthy shorter person.

Greg responded by email that there is no reason to tax the poor tall or give payments to the wealthy short. The tax could be non-linear.

Now, such a tax is still somewhat disturbing to my sentiment Yet, I've come to believe that this is based on the inability of my moral compass to digest non-linearity. That is, when thinking about the tax it is difficult for me to intuit the effects of a redistribution principle that depends simultaneously on two values potentially moving in opposite directions.

So how about this. Suppose using God's Current Population Survey (by that I mean one that is all knowing and completely infallible) we are able to determine the individuals who achieved success because they were tall and those that were denied it because they were short. We can also effortlessly transfer a portion of income from the lucky tall to the unlucky short. Would it increase or decrease equality to do so?

In other words, let's forget about the fact that Greg's paper depends on correlations, non-linear tax systems and economic approximations. Let's pretend that we know for a fact that some people have gained benefits solely because of their height and others have incurred costs. Would it then still be unjust to redistribute.

My gut says no, and this makes me believe that sentimental problem with the tax is not due to the outcome but the opacity of the method. The tax doesn't strike as moral because it's so darn morally confusing.

However, as economists we shouldn't let that stop us. The minimum wage doesn't strike most people as being unjust to the poor but careful analysis reveals that it often is. Likewise, the height tax doesn't strike us as a just way redistribute, but if we are willing to imagine a simpler redistribution system which accomplishes the same goal we see that such a system can improve justice.

Fed Cuts - Very Dovish Statement

The real statement below, with commentary in bold italics

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent. Widely expected

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Starting with the outlook for growth. Not even recognizing the strong numbers from Q3. This is very dovish in my estimation. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time. Almost as if they are saying we actively working to stop what is an imminent recession.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.I wouldn't read too much into this. Failure to mention commodity prices in this market would be dereliction.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. I expected this at the top of the statement.The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. No explicit bias, but one has to assume that we are in a cutting cycle based on the language at the top.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting. Wow! This is what caught my attention. No votes, not even Hoenig, to hold and a single preference for 50 bps.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

I am surprised by the softening of business and consumer spending language. I am surprised at no mention of Q3 numbers. I am surprised that no one voted to hold.

My best guess is this is a way of saying. We see a recession coming. We are working to stop it, but there remains a chance we could be wrong.

One Amazing Meme

Via Mark Thoma

It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.


One of the most resilient memes in the western (if not human) conscious is that of the ever profiting powers that be. Its one thing to argue that Countrywide, Citigroup and others created the subprime mess, its another to think that they are profiting from it.

Since, when is facing a 10 Billion dollar write down and widespread rumors of bankruptcy profiting to the tune of hundreds of billions of dollars.