The FOMC Cuts the Federal Funds Rate to 4.50%

The Federal Reserve Open Market Committee has decided to cut the federal funds rate to 4.50%. The decision was not unanimous with Kansas City Fed president Thomas Hoenig preferring no change. Thus, the vote was 9-1 (the committee currently has two positions unfilled). Also, only six banks submitted requests to lower the discount rate. It's clear from the statement that the Committee does not want to set up expectations of further cuts with the fairly direct statement that "after this action, the upside risks to inflation roughly balance the downside risks to growth."

Here's the Press Release:

Press Release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.  However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.  Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.  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.

Voting for the FOMC monetary policy action were:  Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.  Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

Comments

[jan perlwitz]

The Press release says:
"Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."

How is the Lowering of the Fed funds rate and the discount rate supposed to do that? Through what causal relationship?

[esb]

I submit that the "statement" accompanying the action is little more (or nothing more) than an attempted con whose purpose (or hope) is to prevent the rise of crude above $100 and gold above $800.

They will fail in this attempt. The investment community has taken the measure of BB and found him to be the con man that he is. We will only watch what he does and will not hear his words.

And, to repeat the quip again making the rounds in the trading rooms, "all rise."

Arthus Burns is smiling though, having been nudged off of the position of least responsible central banker of the post WWII era.

[hari]

After Feds action to cut rates to 4.5% recession is now more likely, and with oil and gold prices on steep rise, the rule of the market will most likely be downward spiral with dollar tanking against majour trading currencies.

Is this the beginning of some thing more than a pause, I don't know.

[esb]

I recall Gerald Ford's caustic 1967 comment that "The Great Society of Lyndon Johnson has become a runaway locomotive with a wild-eyed engineer at the throttle." With a little adjustment this is an apt description of the BB Fed, 'a runaway locomotive with a wild-eyed depression-fearing engineer at the throttle.'

[donna]

Dollar is toast. Spend it while you can, peeps! Growing more worthless by the day, if not the hour.

[anon.fedwatch]

jan perlwitz:

Good question. Even better was your broader question on the last Tim Duy post.

Banks that participate in the fed clearing system must meet minimum reserve requirements. Part of this requirement is in the form of bank clearing balances with the fed – their bank accounts with the fed. You were right in your previous comment that reserves are tiny relative to the balance sheet of the banking system.

The fed has absolute control over the level of these clearing balances for the system as a whole. By withdrawing or injecting funds, the fed can affect the level of the daily fed funds rate through supply and demand. Periodically the fed will reset the administered ‘target rate’ for funds as they did today. They’ll probably put in a little extra money into the system to make sure that funds start to trade at their target level.

The fed funds rate affects other short-term interest rate in the banking system in the sense that the market and the banks set other rates so that spread relationships make sense relative to the prevailing fed funds rate. E.g. the banks cost of borrowing money through short term CDs will decline – otherwise they can borrow form each other at a lower fed funds rate and buy each other’s CDs at a profit. E.g. the banks lowered the prime rate today because lowering of fed funds will cause other money market funding rates to decline – they can lower the prime rate now and still maintain their margins. E.g. and most importantly in this case, this allows banks to set lower rates on adjustable rate mortgages of which there are hundreds of billions coming up for repricing in the near term.

So there is a ripple effect from the funds rate out to all other short term market rates and administered rates. And the effect of lower short-term rates may influence longer-term rates as well depending on how the bond market begins to estimate the future path of the fed funds rate.

So all of this rate resetting affects trillions on bank balance sheets and shifts the benefit (today) from lenders to borrowers in terms of lower interest rates generally.

Other things equal, lower rates therefore will be generally more stimulative to economic activity, compared to what would have been the case without lower rates. The fed right now is trying to prevent the economy from falling into a stall speed and also trying to preempt further problems in the credit markets.

But the key point relative to your question is that the fed has enormous leverage over the entire banking system through a relatively small pot of money – by the effect that its control over that pot of money has on the fed funds rate and in turn by the effect that the fed funds rate has on all other rates in the banking system. The key word is leverage.

Hope that helps.

[Farrar Richardson]

I see it's trick or treat time again, but is the above press release a trick or a treat?

Trick or Treat candy suggested by Susan C. Walker at Prudent Bear
http://www.prudentbear.com/index.php?option=com_content&view=article&id=4811&Itemid=57

Wall St. Whoppers – These poisoned malted milk balls are for the ratings agencies that kept up the fiction that collateralized debt obligations (CDOs) backed by junky subprime mortgages were high-grade investments.

Mounds of Debt bars – These coconut and dark chocolate candies now stand for the mounds of debt that surround homeowners and the U.S. economy, not to mention the mounds of bad debt accumulated by the institutions that heavily invested in CDOs backed by subprime mortgages.

Almond Despair – These chocolate-covered coconut and almond candies used to be called Almond Joy. This latest version is reserved for all those regular folks who took on more house than they could afford and who now can't get to sleep at night, worrying about how they are going to make the higher mortgage payments on their adjustable-rate mortgages that have been reset.

Nestle Credit Crunch bars – As foreclosures lower house values, lenders aren't so eager to lend more money, which means they deserve this not-so-sweet candy known as a Nestle Credit Crunch bar. Most credit crunches in the past have led to recessions and stagflation.

Non-Life Savers – This favorite trick-or-treat candy tells investment banks that took chances on risky CDOs that it's time to face the bad-debt music. After all, they made money for years by using short-term money to buy long-term assets. But now, some of those assets, such as subprime mortgages, aren't worth as much as they thought. It's time for them – and their shareholders – to take the hit to their bottom lines instead of being bailed out by the proposed superfund.

Skittish Skittles – The perfect Halloween candy treat to remind Wall Street that investors don't like the way they've been treated and are skittish about buying more commercial debt based on shaky collateral.

Jelly Casus Belli – And these sweet little jelly beans are reserved for those who have run up a war bill that the Congressional Budget Office says will amount to $2.4 trillion over the next decade – that's $8,000 for every man, woman, child and vampire who resides in Alaska, the lower 48 and Hawaii.

[Farrar Richardson]

This one will definitely NOT be a treat -
The Ghosts of Halloween Haunt the US Dollar
http://www.safehaven.com/article-8725.htm

[Patricia Shannon]

Farrar Richardson , thanks for the dark humor.

[jan perlwitz]

anon.fedwatch wrote:
"Banks that participate in the fed clearing system must meet minimum reserve requirements. Part of this requirement is in the form of bank clearing balances with the fed – their bank accounts with the fed. You were right in your previous comment that reserves are tiny relative to the balance sheet of the banking system."

In addition to that, it is worth to mention that there isn't any relationship between the Fed reserves the banks are holding and the volume of loans they give out. Reserves have stayed about the same since the end of last century, but the volume of loans has increased strongly. I would expect that the interest rates charged for these loans rather depend on the general economic and market conditions, but not on the Fed funds rate.

"The fed has absolute control over the level of these clearing balances for the system as a whole. By withdrawing or injecting funds, the fed can affect the level of the daily fed funds rate through supply and demand. Periodically the fed will reset the administered ‘target rate’ for funds as they did today. They’ll probably put in a little extra money into the system to make sure that funds start to trade at their target level."

To be sure, one of the functions the Fed fulfill is to inject or withdraw liquidity according to the needs of the banks due to the conditions in the short term paper market. This is mainly done using repurchase agreements.

In contrast, there hasn't been any permanent cash injection into the system by the Fed after the Fed funds target rate cut in September. They only announced the rates will be lower now, nothing more. Thus, besides helping the commercial paper market through a squeeze, which is certainly important, no effect on economy through this way.

"The fed funds rate affects other short-term interest rate in the banking system in the sense that the market and the banks set other rates so that spread relationships make sense relative to the prevailing fed funds rate. E.g. the banks cost of borrowing money through short term CDs will decline – otherwise they can borrow form each other at a lower fed funds rate and buy each other’s CDs at a profit."

That I don't understand. When does a spread relationship "make sense" and when doesn't it? And if the banks bought their CDs from each other and borrowed from each other at a lower rate how would they make a profit? If it were possible to make a profit in this way what would prevent them to do that? Sounds like a financial perpetuum mobile to me.

Interestingly, when I look at the CD-interest rates as published by the Fed, for instance at 6-months CDs,

http://www.federalreserve.gov/releases/h15/data/Business_day/H15_CD_M6.txt

I will see that the rates already have been moving down before today's Fed decision. Why is that? The effect happens before the cause? Or is it, that the Fed doesn't really determine the interest rates in the markets, but mainly reacts to market trends which are there anyway?

"E.g. and most importantly in this case, this allows banks to set lower rates on adjustable rate mortgages of which there are hundreds of billions coming up for repricing in the near term."

The question is whether this relationship really exists between the Prime rate and mortgage rates. I really would like to see some evidence for that.

Here is a graph of some historical data:

http://mortgage-x.com/general/historical_rates.asp

From what I see in this graph, the prime rate lags the changes in the mortgage rates somewhat, not the other way around. For instance, the rates had been falling since summer 2006. Then they peaked again in summer 2007. In September they started to drop before the Fed funds rate was lowered by 50 basis points.

You also can see it in the weekly data since August 2007:

http://mortgage-x.com/x/ratesweekly.asp

The 1-year ARMs peaked in the week ending August 31. Then they were decreasing before September 18 already. After the Fed Funds target rate cut, they went up in October again. There isn't any visible effect of the Fed Funds target rate cut.

Here is another graph which is from HSH Associates Financial Publishers who ask the question, whether the Federal Funds rate affects the mortgage rates. Their answer is "No":

http://library.hsh.com/?row_id=90

They say, that mortgage "rates ignored most of the 17 increases in the Federal Funds rate, eventually rising with rising inflation. After holding firm for 14 months, the Fed cut rates in Sept 2007, but mortgage rates were already falling."

I suspect we would see something similar for other loan types, e.g. treasuries, loans to businesses, credit cards, too.

Instead of being determined by the Fed funds rate, I rather would think the market interest rates are a function of general economic and market conditions. And the Fed only reacts to these conditions. When the general market interest rates go down due to an economic downturn or an oversupply of liquidity, the Fed will lower the Fed Fund target rate, too, and when the market interest rates go up the Fed will increase the Fed Funds rate, too.

[bob niederman]

anon.fedwatch:

2 points:

this allows banks to set lower rates on adjustable rate mortgages of which there are hundreds of billions coming up for repricing in the near term.

I thought most adjustables were tied to LIBOR, which is much less dependent on Fed Funds.

And the effect of lower short-term rates may influence longer-term rates as well depending on how the bond market begins to estimate the future path of the fed funds rate.

But the estimate of future inflation also pays a role in long term rates, and BB just gave that a shot in the arm, I think.

[jan perlwitz]

bob niederman wrote:
"But the estimate of future inflation also pays a role in long term rates, and BB just gave that a shot in the arm, I think."

Does lowering the Fed funds rate increase future inflation? How?

[anne]

Good grief; bond yields are the best gauge of what to expect from the Federal Reserve and what to expect of long term price movements. Long term interest rates have been notably stable for the year, and the stability shows that investors just are not worried about a coming inflation.

There is reason to be cautious, and cautious investing has been most profitable through this astonishing international bull market period. But, the economy is growth nicely so far while the international economy is growing at the fastest rate in 60 or more years. There are structural problems in the economy, but the broad economy has stayed health so far.

[anne]

Watch the bond market for a broad sense of the economy. So far the resilience of the economy in line with Federal Reserve policy has been remarkable. I have all sorts of structural complaints, but not Federal Reserve complaints.

[esb]

anne ...

Two things:

One ... In the "old days" (pre-2002) I took your position with respect to the signalling value of 7+ year "T" paper rates. But now long T paper has essentially fallen under the influence of buyers and holders who simply do not consider yield to be a significant factor. As long as the PBC and other central banks continue to buy and inventory T paper to the extent that they presently do one should simply ignore long T paper rates as indicating anything other than the voracious appetite of the PBC and others.

Two ... I know that you have good or excellent contacts in the investment banking community. Make some calls to your contacts as far up the organization charts as you can get and ask one simple pointed question, "Do you fully trust the work product of the Bureau of Labor Statistics." The majority of the senior decision makers in the investment banking community no longer do. Most are now using internal proprietary inflation measures. Those measures are flashing bright red.

[anne]

Well, logic says otherwise since private price expectations are still reflected in bond yields but the questions are worth asking. International long-term bond prices also reflect our evident stability but again the issue is worth playing with. I know there is reason for caution from relative stock price movements, but the international economy may be the healthiest ever.

Curious, almost no mention is made is the election is Argentina beyond the election of the wife of the President, but not only is she a skilled professional but Argentina is in fine shape after a terrible internationally induced "depression."

[anne]

Argentina's recovery, by the way, shows just how to resist IMF destructiveness. Joseph Stiglitz was so right, but we have no little sense of Latin America now, let alone much of Asia and regions of Africa which are growing steadily these 6 hopeful remarkable years.

says...

Anne,

You have no idea what you are talking about. What do you base your opinion that she is a skilled professional? You know nothing about her besides the fact that she is a woman. Argentina's crisis is not the IMF fault, it is our fault. The IMF did not cause the deficit in the 90's, the IMF didn't send raids of people to loot the city. And the current miracle is just the party before the next crisis. Who are you going to blame then? The IMF for staying out? The Chicago Boys? They are none left in the Government but maybe we will put one in the ministry (like Mario Blejer) and then use him as a scape goat.

[anon.fedwatch]

jan perlwitz:

You’re correct – there’s no relationship between the level of reserves and bank lending. I didn’t say there was.

But there has to be a relationship between the level of the funds rate and bank lending – obviously there will be greater demand for loans if the prime rate is lowered than if it isn’t. And it’s obvious the prime rate is a function of the funds rate. It usually changes on the day of a funds rate change. This is not the same as suggesting that there will be some reliable historical regression fit between bank lending and the funds rate – obviously that’s unlikely because other economic relationships are shifting so much.

Mortgage rates have all sorts of basis (spread) relationships with the funds rate, but the funds rate determines sets the general level of short term money market rates, including libor. Short term mortgages rates are set off these rates.

Market rates lead the funds rate. I didn’t say they didn’t. Obviously, with the fed funds futures, they do. But market rates only do this because they anticipate an expected fed funds rate decision. Market rates don’t force a particular fed funds decision unless the fed agrees with the market indication, which they did today in terms of their final decision.

[James]

The Looting will continue until the middle class either rises up and changes it.

SEC EYES GOLDMAN SACH'S GOOD FORTUNE
October 31, 2007 -- NY POST

THE Securities & Exchange Commission is looking into whether Goldman Sachs cheated its way to enormous profits - even as the rest of the financial industry was suffering through a massive downturn.

The central issue, as best I can determine, is whether Goldman had any insight that other firms didn't have during the May and June period when subprime mortgage securities were deteriorating in value.

In June, brokerage firm Bear Stearns was one of the first firms to shock Wall Street when two of its hedge funds reported massive losses on risky mortgage loans.

Since then a number of other investment firms have reported similarly dismal results.

The bad news culminating in the last two weeks with a massive $8 billion write-off by Merrill Lynch that led to the ouster of its chairman, Stanley O'Neal.

One person who discussed the matter with the SEC says the investigator seemed curious as to whether the investment banking side of Goldman's business could have tipped off the trading side of that brokerage firm to the extent of the problems that would soon be encountered by Bear and others.

And there also seemed to be a philosophical discussion as to whether that would constitute insider trading even if there was such a leak. The SEC doesn't comment on any investigation it might be undertaking. My sense is that the SEC's interest is preliminary.

If someone had known the scope of the subprime mortgage mess ahead of time he could have profited handsomely.

During a second quarter that saw most of Wall Street take it on the chin, Goldman scored an 88 percent jump in profits to $2.85 billion.

By comparison, Lehman Brothers' earnings were down 2 percent, Morgan Stanley's profits fell 8 percent and Bear Stearns' net was off 62 percent.

In its quarterly financial statement Goldman said "significant losses in non-prime loans and securities were more than offset by gains on short mortgage positions."

In other words, Goldman made some very lucky trades to avoid the fate of the others.

The same person who spoke with the SEC's New York office said the commission also seemed interested in the relationship between Goldman and The President's Working Group on Financial Markets.

People who follow the actions of The Working Group, which is nicknamed the Plunge Protection Team, assume that it was the organization that rallied the banking industry behind a recent plan to rescue banks endangered by the subprime mess.

They also assume that much of what The Working Group accomplishes is done through Goldman, where Treasury Secretary Hank Paulson had been chairman before heading Treasury.

Paulson is the former chairman of Goldman Sachs, as was Robert Rubin, another former Treasury secretary who is currently a highly paid executive with Citigroup.

Citigroup also had problems with subprime lending that's gone bad.

Goldman didn't return my telephone call asking for a response.

john.crudele@nypost.com

[anne]

Cristina Fernández de Kirchner has more experience in politics than her husband, and notice how chagrined I am by the comments of fools. Me, I think Argentina will do just fine with Christina Kirchner as President.

[anne]

Imagine having a woman President; happy Argentina, happy growing Argentina.

[johnchx]

There is in fact a relationship between reserves and bank lending: the quantity of deposits a bank can take is effectively limited by its reserves, and the quantity a bank can lend is limited by the deposits it can take.

What makes the picture more complicated is that the relationship between a bank's reserves and it's deposit limit is non-constant. That's because only a portion of bank deposits (balances in "transaction accounts") are subject to the regulatory reserve requirements. But it's customers who decide how much of their bank deposits should be held in "reserve-required" accounts and how much should be held in "reserve-free" accounts...and customers can change that allocation at any time. (You can do this yourself: move some money from your savings account to your checking account. Boom! You've just raised your bank's required reserves.)

Some illustrative numbers (from June of 2007, because that's what I've got handy). Bank deposits (checking, NOW, savings, and CDs) totalled about $5.6 trillion. Just under 11% of this (about $606 billion) was deposited in transaction accounts, and therefore subject to reserve requirements. Now, reserve requirements are on a sort of sliding scale: zero on the first $8.5 million, 3% on the next $37.3 million, and 10% on the rest. So the effective average reserve requirement also depends upon how "spread out" deposits are among institutions. Lots of little banks = low reserve requirements. In June, the effective average reserve requirement worked out to be about 7% of the transaction account balances. That works out to about 0.7% of all balances (assuming that customers go on keeping about 11% of their deposits in transaction accounts).

So, the effective reserve requirement is 0.7%. Put another way, every dollar in increased reserves increases the banking system's deposit limit by $134 ( = 1 / .007 ).

Banks' ability to lend is subject to two simultaneous constraints: capital adequacy and having deposits to lend. But bank lending can create bank capital (take out a loan and use it to buy treasury stock in a bank), so the hard constraint is the limit on banks' ability to take deposits.

(Of course, both lending and capital creation are also subject to supply and demand constraints; that is, there are only so many willing and credit-worthy borrowers, and only so many investors willing to borrow to buy bank stock.)

[anon.fedwatch]

“ the quantity of deposits a bank can take is effectively limited by its reserves, and the quantity a bank can lend is limited by the deposits it can take “

True for an individual bank but not true for the banking system. The causality is reversed at the macro level. So long as the fed is satisfied with the level of the fed funds rate, it supplies required system reserves as new deposits generate new reserve requirements. Reserve and deposit distribution are then dynamic at the micro level – individual banks compete for their share of system reserves already supplied by the fed by attracting deposits from other banks, which gives them a credit balance at the fed (increased reserves).

[anne]

http://www.democracynow.org/print.pl?sid=07/10/30/1341208

October 30, 2007

The Pink Tide: Cristina Fernandez de Kirchner to Become Argentina's First Elected Female President

JOCELYN OLCOTT: I think there are several ways to read this, but certainly two of the biggest ones is it’s clearly a rejection of -- the soundest rejection of the neoliberal project, and so it’s an endorsement of continuing with Kirchner’s program, which was an emphasis on social programs over, you know, the IMF project. Argentina has really aggressively rejected the IMF and structural adjustment project. And the only reason it hasn't gotten more attention is because people are so distracted by Venezuela. They haven’t really focused as much on Argentina. But Argentina has been very clear on that. And so, this is really a vote to continue with that project....

It’s interesting because it’s part of what, you know -- she forms part of what some people are calling this “pink tide,” really a turn in Latin America toward -- as part of this new left. What distinguishes this left turn from former left turns really is an emphasis on gender issues....

And she’s tremendously popular. She also, I think it’s worth noting, she was a senator before he was a presidential candidate. I mean, she has a career in her own right. I think that people get distracted in cases like Michelle Bachelet or Cristina Fernandez de Kirchner, by the fact that they’re women. And the fact is, they’re very accomplished professional women before they become politicians. I mean, you know, Bachelet was an epidemiologist and has a whole career behind her, in addition to being president of Chile.

MARK WEISBROT: I think it’s true she had a more prominent political career than her husband did, actually, before he was elected president, so the comparisons to Hillary Clinton and Evita Peron are not really appropriate.

But I think the economy was a big thing. And the government did a bunch of things that they haven’t gotten enough credit for. One was getting their basic macroeconomic policy right. We don’t often pay much attention to these things, and I think we should, because it’s tremendously important. The economy grew about 8.2% annually for the last five-and-a-half years, and a lot of that was just because they did the right thing in a lot of areas.

They had an exchange rate policy that was unorthodox, where the central bank targeted the exchange rate, which is something that you’re not supposed to do, and the neoliberal or even any orthodox central banks in this hemisphere wouldn’t do that. They’re only supposed to care about inflation. So the government said, we care more about growth, employment, poverty, than we do about having the lowest possible inflation rate. And that’s extremely important. They pulled eleven million people out of poverty in the last five-and-a-half years. They cut unemployment from 21.5% to 8.5%. And, of course, real wages increased by more than 40% during this period. So that’s why you had such an easy victory for Cristina.

But also they had to confront the IMF in order to do this. The IMF was opposed to all of the major policies, including the debt default. Obviously they couldn’t pay their debt. But the IMF was pressuring them enormously to pay more to the foreign creditors, and they didn’t do it because they knew that that would hurt the recovery. And they were under a lot of pressure. They stood up to the IMF. They even defaulted to the IMF temporarily in September 2003, which was a very gutsy thing to do, and the IMF backed down. And nobody knew really what was going to happen at that time, because they could have been punished very severely for that. So that was a historic move as well, because it helped break the grip of the IMF and of Washington. Not only Argentina, but Latin America, was a major stage in that process of breaking up this creditors cartel, which had determined economic policy for so long in Latin America.

Jocelyn Olcott, Professor of Latin American history at Duke University.

Mark Weisbrot, Co-director at the Center for Economic and Policy Research in Washington, DC.

[anne]

http://www.democracynow.org/print.pl?sid=07/10/30/1341208

JOCELYN OLCOTT: Kirchner, like Chavez, has put a lot of emphasis on social issues, and so rather than leaving everything to market forces, really, an understanding that you have to have the government involved in creating social infrastructure in order to promote development. I’m not sure if this is where it’s going to go, but certainly the election of Cristina Fernandez de Kirchner is an endorsement of projects like what Chavez has done, in terms of promoting social programs. Chavez actually has a part of his constitution and legislation, that women who are homemakers, if they demonstrate need, get paid minimum wage. So it’s a sort of wages for housework thing....

I think that what we're seeing is really a dramatic turn, in terms of what Latin American countries are willing do to stand up to the IMF and to the Washington Consensus. I think it’s hard to overestimate how important this is.

AMY GOODMAN: Hugo Chavez agreed to refinance $5 billion of Argentina's debt?

JOCELYN OLCOTT: Yeah.

[anne]

There really is a Latin America, there are our neighbors, and there are remarkable changes that have been occurring in our neighboring countries that we might now and then pay attention to and assist in but we are focused elsewhere and evidently too little interested in the promising peaceful development by our neighbors. We are also evidently not interested in development that does not correspond to our prescribed models however lacking in success they have been historically.

Imagine, a pink development tide in Latin America.

[anne]

When, by the way, have we read of an attention to women's needs anywhere in Latin America, and especially in Venezuela, when the protection of and well-being of women is a critically important factors for successful development? Too little attention was given to a Nobel Peace Prize to an African woman intent on ecological soundness as well as to womens' needs in development, and the importance of such emphasis.

says...

They cut unemployment from 21.5% to 8.5%. And, of course, real wages increased by more than 40% during this period. So that’s why you had such an easy victory for Cristina.

Real Wage went up by 40% after it took a huge free fall with the devaluation. Argentina has price controls, fake CPI numbers and nominal wage increases signed off by the president which create the illusion of the 40% increase in real wages. Unemployment fell because real wages fell and social plans cover more people (which then are not counted as unemployed).

They had an exchange rate policy that was unorthodox, where the central bank targeted the exchange rate, which is something that you’re not supposed to do, and the neoliberal or even any orthodox central banks in this hemisphere wouldn’t do that.

And that is new? The Neoliberals (Menem and Cavallo) in the 90's had the Central Bank fix a target for the exchange rate. The only differences is that the target was moved from $1 to $3.10 and it was made implicit instead of explicit.

But also they had to confront the IMF in order to do this. The IMF was opposed to all of the major policies, including the debt default. Obviously they couldn’t pay their debt. But the IMF was pressuring them enormously to pay more to the foreign creditors, and they didn’t do it because they knew that that would hurt the recovery. And they were under a lot of pressure. They stood up to the IMF. They even defaulted to the IMF temporarily in September 2003, which was a very gutsy thing to do, and the IMF backed down.

The default was in 2002 before the Kirchner's and in 2005 the Kirchner's payed almost 10b in cash to the IMF to cancel the debt with them so apparently the IMF is more important to them than their own citizens who had government debt.

Kirchner, like Chavez, has put a lot of emphasis on social issues, and so rather than leaving everything to market forces, really, an understanding that you have to have the government involved in creating social infrastructure in order to promote development.

Perhaps you didn't know about this case involving Argentina and Venezuela

http://www.miamiherald.com/news/columnists/andres_oppenheimer/story/204836.html

which is not the only strange story surrounding the current government. Among others you have the case of the Finance Minister, Felicia Miceli (Girl Power!)

http://www.usatoday.com/news/topstories/2007-07-16-3627475947_x.htm

[anne]

Interesting the need, the need beyond control, to use a slur in addressing women. As though there iks a need for prejudice and the intimidation of prejudice that is beyond control. Now for another slur against women.

[anne]

Interesting that Cristina Fernandez de Kirchner was, well, elected President of Argentina. Now for another slur against women. Say what?

[anne]

Christina Kirchner won 45% of the Argentina vote as opposed to 23% for the closest rival, and a primary support base was from relatively poorer Argentines who found hope in the development policies of Néstor Kirchner and similarly hope for Christina. Respect is due, and assistance should be due to our neighbor.

[Patricia Shannon]

johnchx says... What makes the picture more complicated is that the relationship between a bank's reserves and it's deposit limit is non-constant. That's because only a portion of bank deposits (balances in "transaction accounts") are subject to the regulatory reserve requirements. But it's customers who decide how much of their bank deposits should be held in "reserve-required" accounts and how much should be held in "reserve-free" accounts...and customers can change that allocation at any time. (You can do this yourself: move some money from your savings account to your checking account. Boom! You've just raised your bank's required reserves.)

Maybe that's the reason SunTrust raised it's interest on savings accounts enough (to 2.95%!) that I opened a savings account and moved half the money in my checking account into it. My hopes are to get to the point where I can start buying CDs.

[Patricia Shannon]

I find it interesting that I keep hearing that our economy is doing well because of good GDP statistics. At the same time, retailers are concerned because of sinking sales. And half of Americans (including me) believe we're already in a recession. With the track record on lies from the Bush administration, any statement from them, including labor business statistics, should be suspect, as ESB referred to. Even if the GDP statistics are accurate, it shows the problem with the government definition of "recession", which is in terms of the effects of the economy on the rich. If a small percentage are spending enough (eg., on $13,000 watches) to make up for a much larger percentage who are not spending much because they are out of work, we will not be considered to be in a recession, even if we had 90% unemployment.

[Patricia Shannon]

http://www.ajc.com/services/content/business/stories/2007/10/30/RECESSION31_COX_F9713.html?cxtype=rss&cxsvc=7&cxcat=6

In a Bloomberg/Los Angeles Times survey conducted Oct. 19-22, two-thirds of the respondents said a recession is "likely" next year. A recent poll by CNN and Opinion Research Corp. found that nearly half of Americans believe the country already is in a recession.

says...

Christina Kirchner won 45% of the Argentina vote as opposed to 23% for the closest rival, and a primary support base was from relatively poorer Argentines who found hope in the development policies of Néstor Kirchner and similarly hope for Christina. Respect is due, and assistance should be due to our neighbor.

So what? Menem was elected president 2 times by the same poor people, and the third time he ran for president he got the most votes in the first round (but then retired from the race because he knew he couldn't win the second round). De la Rua was also elected president (this time by the middle income people) and then he had to escape his office in a helicopter that landed on the roof of the "Pink House" when both the poor and the middle income wanted to burn the city. I have nothing against Cristina in particular, I'm just a skeptic about any politician that runs and wins an election in Argentina. Also I learn that things turn very quickly in Argentina so I don't judge a president by the wave in the cycle that he or she got to ride (just look at Menem's first and second terms).

[kthomas]

anne, sorry to diverge from the theme here, but did you switch to decaf today?

[anne]

At the least, I can understand being cautious about any Argentine government. There we have no disagreement, and like the Argentines, I am only hopeful as there is a seeming willingness to learn of and reflect on Argentine history and understand the self-defeating authoritarianism that so long marked the government. Argentina, a marvelous land, has been marked by hope unrealized for gerations.

K Thomas, no matter, I still appreciate all your comments even when I complain.

[anne]

During the period of the Argentine currency peg to the dollar, I remember reading and hearing continual praise of Argentine economic policy. This puzzled me and still does, because while the peg kept Argentina from inflation as the dollar strengthened Argentina was continually beging priced away from export markets whether in important market of Brazil or Spain. There was little American trade to rely on.

The Argentina economy weakened steadily, but the praise for the peg continued. To keep the peg as the dollar strengthened and the economy weakened Argentina become more more austere in monetary and fiscal policy and the economy weakened further. The finance minister was a Harvard graduate, who I thought quite mad in complacency as the economy went fromn recession to depression.

[anne]

Beyond Paul Krugman and Joseph Stiglitz, I remember no writing of the need for Argentina to turn from American self-serving business analyst advice and look to the increasingly fierce domestic needs. So, I take the turn in policy to the independence of Nestor Kirchner and the willingness to look more truthfully to Argentina history as encouraging. I could be easily disappointed, however.