Emergency Rate Cut

I can't say I expected this to happen today. So far so good, stock markets are recovering, at least for the moment, but the 75 basis point cut is aggressive and makes me wonder if there are things the Fed knows that we don't. In that sense, I hope this move calms markets rather than reinforcing their worries. First, the statement from the FOMC:

FOMC Statement: The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

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; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin. In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.

Here's Greg Ip of the Wall Street Journal:

Fed Cuts Key Interest Rate As Recession Fears Well Up, by Greg Ip, WSJ:  Federal Reserve Chairman Ben Bernanke, putting caution aside, orchestrated a steep cut in interest rates just a week before a scheduled policy meeting in an effort to short-circuit a downward spiral of investor confidence and tightening credit.

The three-quarters of a percentage point cut in the Fed's short-term interest rate target -- to 3.5% -- could help restore confidence to investors and counter the threat of recession. But the reduction risks making the Fed look like it panicked in response to market developments.

The move is unlikely to be the last cut, the Fed indicated. "Appreciable downside risks to growth remain," it said, vowing to "act in a timely manner as needed to address those risks." ...

The immediate market response was positive. The Dow Jones Industrial Average, down as much as 464 points early in the morning, recovered much of those losses by midday. European markets, which were falling steeply, reversed course and closed higher on the Fed's action.

The Fed said it acted because of "weakening of the economic outlook and increasing downside risks to growth. Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

The Fed statement suggested a downshift in its worries about inflation. It said it expects "inflation to moderate in coming quarters" though it will "monitor inflation developments carefully."

The move would be "pointless" if it merely shifted a scheduled rate cut ahead by a week, said former Fed governor Laurence Meyer, now vice-chairman of consultants Macroeconomic Advisers LLC. "Instead, today's move was driven by a desire to get a larger cumulative change in the federal funds rate by the end of the month." He predicted a half-point cut next week. ...

The move was the first rate cut between scheduled meetings of Fed policymakers since the immediate aftermath of the Sept. 11, 2001 terrorist attacks...

The Fed last cut the target for the federal-funds rate, charged on overnight loans between banks, by as much in 1982, when it was lowered a full point. Prior to 1994, however, fed funds rate cuts weren't announced, and the Fed relied on the less-important discount rate, charged on direct Fed loans to banks, to signal its actions. It cut that rate a full percentage point in 1991. ...

The rate cut follows five months of gradualism in which the Fed has seen each of its last three rate cuts rapidly overtaken by events, as the credit crunch and housing collapse deepened. Mr. Bernanke had been balancing those risk against still-high inflation. But he signaled on Jan. 10 that he had shifted his focus principally to supporting growth as employment, retail sales and manufacturing activity all weakened sharply. While some Fed officials mulled the merit of an intermeeting cut then, Mr. Bernanke figured the speech would serve to recalibrate market expectations enough that he could wait until next week's meeting.

That game plan changed Monday in response to a double dose of bad market news: first, that several major bond insurers could lose their triple-A credit ratings, which would shift the risk of default on an additional billions of dollars of debt back onto banks, further constraining their lending; and then, on Monday, the global stock market rout, which cast into doubt the rest of the world's ability to ride out a U.S. recession. ...

And, Brad DeLong points to Rex Nutting:

Fed cuts rates 75 basis points in emergency move - MarketWatch: WASHINGTON (MarketWatch) -- Hoping to halt a market meltdown and prevent a recession, the Federal Reserve lowered its overnight lending rate by three quarters of a percentage point to 3.50% on Tuesday in a rare move between formal meetings.

The 75 basis-point surprise cut came after global financial markets sold off in dramatic fashion on Monday on fears that bad bets in credit markets could spread further and drive the U.S. economy into recession. See full story on London markets.

"The committee took this action in view of a weakening economic outlook and increasing downside risks to growth," the Federal Open Market Committee said in a statement. The Fed also lowered its discount rate by 75 basis points to 4%. It was the largest cut in the federal funds rate since 1982, after the FOMC had driven rates to 20% to kill inflation.

U.S. stocks opened with huge losses. The Dow Jones Industrial Average was down more than 450 points, or more than 3%. Treasurys rallied. "This move is not an instant fix," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics. "The economy is still staring recession in the face, but at least the Fed now gets it." With the move coming just eight days before the next scheduled meeting, "there can be no doubt that the timing of this morning's move is aimed at supporting global financial markets after yesterday's global equity meltdown," wrote Joshua Shapiro, economist for MFR Inc. Some traders said the Fed's move sniffed of panic. "I think that there's an element of thinking that, if the Fed is so worried that it is cutting rates, then that is feeding into fears that the U.S. economy is in really bad shape," said David Page, a strategist at Investec Securities in London.

After a conference call Monday evening among the 10 voting members of the Federal Open Market Committee, the FOMC released a statement early Tuesday saying downside risks to growth remain. One member of the committee, William Poole, president of the St. Louis Fed, voted against the move. One other, Fed Gov. Frederic Mishkin, was absent. "While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," the FOMC said. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets." "Appreciable downside risks to growth remain," the statement said. "The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks." The statement barely mentioned inflation, only saying that the FOMC expects inflation to moderate and will monitor inflation carefully...

I teach most of today and can't so much on this, so here's more from: Jim Hamilton, Paul Krugman, Andrew Samwick, WSJ Economics Blog (here and here too), Bloomberg, Financial Times, Felix Salmon, Wilhelm Buiter, and Barry Ritholtz. 

 

Comments

[Total Debt Levels Limit Options]

Debt levels are very high compared to the past. If interest rates were raised to 20% to fight inflation like Volker did, the number of bankruptcies would likely be catastrophic. Even 5% seems to stress the system to the breaking point.

[ECONOMISTA NON GRATA]

My opinion is that the Fed acted as they should have. It was most certainly predictable considering yesterday meltdown in the Asian and European markets, the U S futures indexes and this mornings activity. However, it ain't over yet.

Both the U S economy and the global economies are in serious danger of posting severe and prolonged recessions. I doubt that this will be the final cut, or that further cuts will be enough to sustain values in equities, real estate and collateralized debt obligations.

To suggest that a cut in the FF rate was not warranted or expected is naive, to say the least.

Best regards,

Econolicious

[save_the_rustbelt]

I repeat my comment from below...

"Wall Street seems to be applying an interesting form of extortion, using CNBC as a megaphone.

"If there are not enough tax cuts the market will crash."

"If there are not enough interest rate cuts the market will crash."

Wall Street threatens and the Fed responds.

How long can this continue?

[billy]

http://blogs.ft.com/maverecon/2008/01/the-bernanke-pu.html

Tuesday, January 22, 2008
The Bernanke put: buttock-clenching monetary policymaking at the Fed

It is bad news when the markets panic. It is worse news when one of the world's key monetary policy making institutions panics. Today the Fed cut the target for the Federal Funds Rate by 75 basis points, from 4.25 percent to 3.50 percent. The announcement was made outside normal hours and between normal scheduled FOMC meetings.

This extraordinary action was excessive and smells of fear. It is the clearest example of monetary policy panic football I have witnessed in more than thirty years as a professional economist. Because the action is so disproportionate, it is likely to further unsettle markets. Even the symptoms of malaise that appear to have triggered the Fed's irresponsible rate cut, the collapse of stock markets in Asia and Europe and the clear message from the futures markets that the US stock markets would follow (a 500 point decline of the Dow was indicated), are unlikely to be improved by this measure and may well be adversely affected.

In the absence of any other dramatic news that the sky is falling, I can only infer from the Fed's action that one or both of the following two propositions must be true.

* The Fed cares intrinsically about the stock market; specifically, it will use the instruments at its disposal to limit to the best of its ability any sudden decline in the stock market.
* The Fed believes that the global and (anticipate) domestic decline in stock prices either will have such a strong negative impact on the real economy or provides new information about future economic weakness from other sources, that its triple mandate (maximum employment, stable prices and moderate long-term interest rates) is best served by an out-of-sequence, out-of-hours rate cut of 75 basis points.

The first proposition would mean that the Fed violates its mandate. The second is bad economics.

This panic reaction is destabilising in the short run because it is likely to spook the markets. When the Fed loses its nerve, "things fall apart. The centre does not hold". In the medium term it subordinates the price stability target to the real economic activity target. It also lays the foundations for the next credit bubble, after the recession of 2008 has become a distant memory.

It would have been far preferable, particulary because the stock market decline is a global phenomenon, to have a coordinated modest rate cut of, say, 25 basis points, by all leading central banks at some later date, when this would not look like a collective knee-jerk response to a fall in global equity prices.

With this irresponsible act, the Fed has just become part of the problem. Interesting times indeed.

[Charles Young]

Current US monetary and fiscal policy initiatives both have one clear aim: to encourage Americans to save less. Is this what is needed in a country with a current account deficit around 5% of GDP? Next stop: a dollar crisis.

[anne]

The funny thing especially after the Financial Times Herbert Hoover droning idiocy, * is that the Federal Reserve has just made it more desirable to save in addition to saving being wonderfully desirable for so many years.

* When oh when will the Chinese buy the Financial Times?

[pgl]

Buiter & Salmon do seem to have a very different take on this cut than DeLong & Hamilton. Good stuff from both sides. EconoSpeak's The Sandwichman calls the latest FED bashing from "economist" (aka "doofus") Ben Stein "Comic Relief". More on this over at Angrybear.

[Patricia Shannon]

The financial situation might be sufficient to motivate the rate cuts, but I wonder if their actions are being influenced by a desire to influence the primaries.

[lonesome_moderate]

The only thing that surprised me about the rate cut today was that they were able to do it without triggering a further panic in the market (i.e. I somewhat feared that more people would take the attitude of the FT blogger quoted above).

I have been wondering for the past week or so why the Fed DIDN'T do something like this. It has been obvious (at least to the bond market) that they were going to cut rates much further, That should be very helpful, since the base problem has been defaults and pseudo-defaults on mortgages in this country. However, the inflation danger limits their room to maneuver, and the more money congress throws away on "stimulus", the more limited the room will be. Rates need not just to go down, but to say down for long enough to significantly limit further defaults, while giving banks and other financial institutions time to acknowledge the write-downs and offset them with profits from other operations. The best way to minimize political pressure on the president and congress to "do something" would be for the Fed to "do something" ASAP, but not so ASAP as to make (too many) people think they were panicking.

Today's "crisis" reminded me of the old joke about how the Chinese supposedly write that word with two characters--one for "danger", one for "opportunity". Looks like Bernanke took advantage of his opportunity.

[anne]

Even now, with the Federal Funds rate down from 4.25% to 3.5%, the 10-year Treasury closed at a slightly lower rate of 3.48%. I would expect and hope for a mild increase in the long-term rate, but there was just no choise for Fed. Investors needed convincing banks will readily be able to build assets, and investment markets needed to be correspondingly settled.

Should stocks fall sharply from here, I am sure there will begin to be declared buybacks from corporations and imagine there were buybacks this day. I imagine there will be stabilizing measures internationally tomorrow, should volatility continue. A sharp slowing of the economy along with international market volatility is too dangerous to ignore.

[anne]

The characters for danger and opportunity do not become the Chinese character for crisis, but Chinese characters I keep being shown are strikingly descriptive as such.

[lonesome_moderate]

Anne is right of course, I suppose rather than "joke" I could have said something like "urban legend". As urban legends go, though, it's not bad, especially on days like today.

[lonesome_moderate]

Greg Mankiw quotes Paul Krugman:When monetary expansion is ineffective, fiscal expansion...must take its place. Such a fiscal expansion can break the vicious circle of low spending and low incomes, "priming the pump" and getting the economy moving again. But remember this is no by any means an all-purpose policy recommendation; it is essentially a strategy of desperation, a dangerous drug to be prescribed only when the usual over-the-counter remedy of monetary policy has failed.

[esb]

When Bush returned from his tour of the ME and Gulf late last week he was informed by Hank Paulson that the CDS counterparties were about to begin a chain of defaults with risks far more menacing than from any financial crisis ever witnessed in a modern state. The talk over at GS is that HP used the expression, "the CDS counterparty 'credit ring' has[or is] broken." I have this from two separare sources, one of which is absolutely unimpeachable. Supposedly, the progress of the probable defaults is simply nowhere near the point at which a clear understanding can come into focus.

It is somewhat exciting to watch the WH, Treasury, Congress and (one-trick-pony) central bank race around in a sudden, fullest panic mode.

One thing is for certain, the monetary/fiscal policy panic now underway assures us of another compressed boom/bust cycle immediately following the market/economic bottom expected later this year.

For those of you who do not enjoy riding the roller coaster, let me submit that you are living at precisely the wrong point in history.

[hari]

Clearly this a PANIC decision...and one doesn't know what other action(s) will now follow when they meet as scheduled by next week.

[pgl]

lonesome - thanks for the Krugman quote as provided by Greg Mankiw. Greg has been busy making the case for the use of monetary rather than fiscal stimulus. He makes it well. But that dnagerous drug quote by Paul was a classic!

[Cynthia]

Although similarities exist between Japan's most recent recession and the recession facing America today, there's an underlying difference between the two: Japan is a creditor nation, whereas the US is a debtor one...

While a creditor nation is always afforded the luxury of spending its way out of a recession, a debtor nation must eventually come to the grim realization that it must save its way out of a recession!

*Spending* one's way out of a recession is fairly quick and painless, but alas, *saving* one's way out of a recession is gonna be long and painful.

[STS]

esb:

So if the CDS ring is broken, what does that translate to in terms of further write-downs? Bill Gross threw out $250B as an estimate, ISDA countered with a low-ball $15B. Jamie Dimon made a comment on the JPMorgan call about unpleasant "secondary" effects, but didn't put a number on it.

And if your source is "unimpeachable", is it safe to say he isn't President Bush? ;)

[Fred]

We will end up repeating all of Japan's mistakes it appears. Monetary policy is NOT the answer. The correct approach is HIGHER interest rates, followed by a reduction in household and junky corporate debt via bankruptcy, with massive fiscal stimulus (tax cuts, state/local revenue sharing, and maybe additional federal, spending but only if carefully planned, not some idiotic bridges-to-nowhere boondoggles) to avoid and economic slowdown and a high tariff to avoid leaking demand through a trade defict. We need a massive asset price deflation, in other words. If this causes households to become nervous about their high levels of indebtedness, then let the households they must accumulate credits quickly in the form of federal bonds, implying a massive increase in federal debt implying a massive federal deficit.

The Japanese error was NOT faulty monetary policy, but rather an unwillingness to allow a bonfire of bankruptcies and foreclosures and the accompanying massive asset deflation (get the necessary pain over with quickly rather than dragging things out) combined with an unwillingness to really put the pedal to the metal with regards to fiscal stimulus. The Japanese topped out at maybe 8% of GDP deficits. I guarantee 20% deficits would have stopped their slump. If govt spendign is 30%, then 20% deficits still leaves 10% of GDP for taxes on the rich, with a tax holiday for everyone else.

[Bob]

3.5% interest rates and the economy is still going down.

That tells you everything you need to know.

Hell these rates would have even been considered good in the 1950's

[anne]

No; these long-term interest rates would have been considered high in the 1950s and 1960s, and the Federal Funds rate following 1990 was lowered to 3% and kept there till February 1994.

[Fred]

Before someone accuses me of recommending Mellon liquidationism plus Smoot-Hawley tariffs, let me remind everyone that the govt was much smaller in 1930 than it is today, so 20% of GDP deficits were not feasible. With GDP at $14 trillion, 20% means $2.8 trillion/year in new federal bonds that must, by definition, end up owned by either households or foreigners. By imposing a tariff, we eliminate the trade deficit and that prevents the debt from ending up in the hands of foreigners, which means it must end up in the hands of households. $2.8 trillion over the next 3 years should be enough to rebuild household balance sheets ravaged by declining stock and housing prices.

[esb]

STS ...

My guess is that the key decisions are now completely out of the hands of "The Decider." The man behind the curtain is no longer RBC but Hank Paulson.

Trying to put numbers on the CDS losses is simply not possible right now, and what is most important is not what they are but where they land. For example, if the net net losses were simply zero but represented a transfer of one trillion dollars of "wealth" to GS from everyone else, would that be a survivable outcome? No, and it would actually lead to GS being forced to trade against its own positions in order to avoid a systemic debacle.

Hell, that is exactly what they are doing right now, in order to prevent a number of irreversible feedback loops from getting under way.

This is unlike anything anyone has ever seen before, anywhere, anytime.

BTW, a friend over at FSNM said this today, "how can you cover your shorts when you're losing your shirt?" Haven't heard that since the '70s.

Somebody get me a bottle of Chateau Latour '82.

Quickly ...

[One Salient Oversight]

I'm very unhappy with the rate cut. Like Fred, I think Higher interest rates are needed but the reason I have is the incipient inflationary pressure building up because of the low dollar.

Of course, there is the question of whether or not the deflationary effects of a potential recession will counteract the inflationary effects of a lower dollar. History has shown us that nations with plummeting currencies end up having both a recession and an outbreak of inflation at the same time. It happened in South America and it happened in Asia and it happened in Russia.

The difference between the regions just mentioned and the situation in America as its stands is that the devaluing of currencies was essentially what caused their recessions. In America's case, however, a recession was already brewing. The plummeting dollar results from this problem, and will exacerbate it.

At some point in the next three months, inflation indicators will begin to get quite loud. At that point everyone will be confused and say "why do we have inflation AND a recession"? Of course Americans are not used to the inflationary effects of a plummeting currency, which means that analysis has been blinkered. American analysts and economists, unused to experiencing inflationary conditions, have completely factored out the inflationary effect of the Fed's rate cut. When it is realised that America is actually no different to the rest of the world and that the basic laws of economic activity actually DO apply to America as well, there will be a clamour of activity arguing that higher inflation is justified in order to keep the markets running and people in jobs. A minority of economists and commentators will invoke Paul Volcker and the rate increases of the early 1980s as evidence that inflation needs to be conquered first, but then the pro-inflation majority will probably argue that the fundamental laws of economics has changed and blah blah blah.

Now that the Fed has acted accordingly, there is a good possibility that America will see out 2008 with comparatively high inflation. Presidential candidates will stutter in their solutions, many simply blaming Bush and Greenspan and occasionally Bernanke. A stimulus plan from congress will go ahead but will actually do little in stopping the recession and will have an inflationary effect. At some point after the election, Bernanke will either resign or be sacked.

I also predict that at some point the Fed will realise what is happening and increase rates to kill off inflation. This will cause a double-dip recession.

So, that is my prediction. If I get it right, will someone out there in the world of business reward my prescience? Online Kudos is one thing. Cold hard cash is another.

[2slugbaits]

PGL,

In general I would agree with Mankiw and Krugman's point that monetary policy should be our first choice; however, there a few mitigating factors here. First, as Krugman himself notes, monetary policy has its limit and that limit is a zero interest rate. With interest rates already low and we're only at the front end of the recession, that doesn't give the Fed a lot of wiggle room down the line. The other concern is that if the Fed believes growth is likely to hover around 2.5% even if things go well, too much liquidity could bring back our old friend Mr. Stagflation.

Was it really only 8 years ago that we all talking about paying down the debt too fast and asking questions about the economy's new "speed limit"?

[One Salient Oversight]

as Krugman himself notes, monetary policy has its limit and that limit is a zero interest rate.

That assumes that monetary policy is limited only to interest rates. In practice, any central bank can print enough bills to expand the money supply (which is what low interest rates do).

[skeptonomist]

It's encouraging that there is such unanimity about what is wrong with the economy and how to fix it. We know that valid science converges as more is learned, so this must show that economy is a science.

[skeptonomist]

I meant "economics" is a science.

[Movie Guy]

When the FOMC gets to 2%, what's Plan C?

>>

[dd]

Plan C is to nationalize mortgage markets.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2NjVSM4X_T4&refer=home

[mrrunangun]

The Fed is probably seeing some very scary stuff going on in the banking sector and has decided that it must choose the lesser evil of high inflation to the collapse of credit. Some very bad tasting medicine is on the way.

[dirtyal]

OK, here's a question for this august board of economic experts:

What if I were a pretty Machivellian "leader of the free world" who was worried about all the long-term debt the US had taken on. Would I go around talking about how great a few years of inflation would be? No, I would talk about how important it was for the Fed to fight inflation in the same way I talked about how important a "strong dollar" was while doing everything in my power to weaken it!

So, how much inflation for how long would it take to bring our long-term deficit down to size? Who would win and who would lose? What would it do to the international governments and sovereign wealth funds who buy our debt? How long could we perpetuate this charade before the buyers of our debt figured the whole thing out?

I'm thinking more and longer than you might think. After all, we don't have the World Bank and the IMF on our backs to keep inflation at bay.

Maybe I am just paranoid.

[Fred]

>worried about all the long-term debt the US had taken on

You flunked bookkeeping 101. For every dollar on the debit side of the ledger there is a dollar on the credit side. Disregarding debt owed to foreigners, which we can repudiate as long as we have a strong military, that means that the entire domestic federal debt is owned as credits by the households, either directly or indirectly via their ownership of corporations. It all cancels out. The federal debt can grow infinitely large or shrink to nothing, and the country is neither richer nor poorer as a consequence, because the debt and the credits all cancel to zero. Go take bookkeeping 101 if this still doesn't make sense.

[Dickeylee]

Am I the only one who wonders is this the next depression about to devour us? Are we in our "Wiemar Republic" era? And just wondering who's madly typing away on their Mein Kampf as we speak?
Really, don't mean to alarm you, but the possibility is a tad bit more than possible. Debtor prisons anyone?

[daveNYC]

Disregarding debt owed to foreigners, which we can repudiate as long as we have a strong military...

That and not needing to borrow money for a while. We tell treasury holders to bug off, we're going to have to balance our budgets because nobody will be lending us anything.

[JAC]

It strikes me that, despite all the recriminations, most deserved, about the stupid thinking leading to the mortgage mess, this is probably the most anticipated recession in U.S. history--certainly it seems one of the most aggressively met by government action. In that way, it seems a good test of economic experts like Bernancke, and whether an economist guided federal policy can prevent or ameliorate a severe economic downturn. I'm actually watching with some interest to see what happens. Of course, if government action fails, unemployment will give me even more time to watch and read economist's blogs on what went wrong.

[donna]

I still want my helicopter.

Yes, the whole damned helicopter. Ben owes us each one.

[sglover]

Of course, if government action fails, unemployment will give me even more time to watch and read economist's blogs on what went wrong.

...if you get one of those foot-pedal laptops.

[One Salient Oversight]

Disregarding debt owed to foreigners, which we can repudiate as long as we have a strong military, that means that the entire domestic federal debt is owned as credits by the households, either directly or indirectly via their ownership of corporations.

I didn't think reneging on international debt was a required teaching option for bookkeeping 101.

The fact is that the US has been borrowing money from overseas investors in gigantic sums for about 20 years now. The US has a current account deficit of around 4.8% of GDP which, according to latest figures, meant that the US borrowing $752.4bn in the third quarter 2007.

Overseas investors are now giving up the ghost. Many don't believe that their US investments are going to provide a decent return so they are pulling out - which is why the US Dollar is falling.

And what happens when a currency falls? Inflation people.

Reneging on overseas debt is unthinkable - with a debt the size of the US the result would be trade sanctions against the US and an even tinier currency. Everybody loses - but the US most of all.

[gordon]

Maybe the real issue about monetary vs. fiscal policy is that playing with the former avoids the necessity to involve the US Congress. After all, we don't want out-of-the-loop Congressmen making silly speeches about the effects of a financial meltdown on "Ordinary Americans", do we?

[F. Frederson]

So far so good, stock markets are recovering, at least for the moment

Good grief, did you really say that?

Are you channeling Cramer or some other CNBC hack for any particular reason?

[Lafayette]

s-t-r: Wall Street threatens and the Fed responds. How long can this continue?

Global Equity Market Scenario

This comment is an exaggeration of the truth. The rout was not due to Wall Street plutocrats alone.

The virus came from the Far East and largely infected local indexes. Why? Because the conventional wisdom said that an American Recession would affect the profits of Far East exporters.

This belies the fact that (1) a recession is in the offing and (2) should it happen is serious enough to substantially influence Far East imports. Far East stockowners, novitiates to the game, had over-bought and they naively panicked.

That sense of panick was quickly picked up by the next Equity Market to open its doors chronologically, that is, Europe. So, the rout continued here and would have progressed to the US had Monday not been a holiday.

The Fed had thus a day to react and did so, not at the behest of Wall Street but, in fact, of all those American stockholders who would have panicked in suit.

American plutocrats on Wall Street, from companies like Goldman Sachs, are all in Davos, Switzerland schmoozing at the World Economic Forum -- not the least bit worried about global Equity Markets.

They are sitting on last year's highly profitable laurels and are more concerned that the Champagne has been properly chilled and the caviar copious.

[Lafayette]

OSO: The fact is that the US has been borrowing money from overseas investors in gigantic sums for about 20 years now.

Spot on.

The Trade Deficit went from a negative 1.4% in 1997 to a negative 5.2% in just seven years. See here, last figure below on the page.

Buy Chinese. Your children will (continue to) pay the debt financing. (If they don't immigrate to China beforehand ... ;^)

[Cynthia]

Fred,

So what you're saying is that debt doesn't matter...I guess I'd flunk your class on bookkeeping 101, too!

[lonesome moderate]

Is it possible that this whole thing--the huge and puzzling drops on Monday and early Tuesday, followed by the equally huge and puzzling recovery on late Tuesday and Wednesday--was because of that one French guy who figured out how to beat the system? Is a $7 billion say enough to move the whole world market that way?

[lonesome moderate]

$7 billion sale, not "say".