The Bloomberg report on Minneapolis Fed president Gary Stern’s hawkish views noted that he has a more sanguine view of the health of the financial system than other FOMC members do.
From Bloomberg:
The Federal Reserve shouldn’t wait until financial and housing markets stabilize to raise interest rates, central bank policy maker Gary Stern said.
“We can’t wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course,” Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview today. “Our actions will affect the economy in the future, not at the moment.”
The comments by Stern, a voter on the rate-setting Federal Open Market Committee this year, reinforced traders’ forecasts for a rate increase by year-end. Stern indicated that Treasury Secretary Henry Paulson’s rescue plan for Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump.
I’m not sure I buy that logic. Making it clear to Congress that guarantees to housing have a real economic cost, which is what the rescue does, may constrain their efforts to launch more housing initiatives. The rescue of Fannie and Freddie do not improve the fundamentals of the housing market.
Back to the story:
Traders’ estimates of a rate increase in October rose to 64 percent after Stern’s remarks were published, from 58 percent earlier today….
“This is a very challenging policy environment,” Stern said today. “I don’t think we ought to pretend that” an end to the credit crisis “won’t take some time,” he said.
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fnm/fre are perfect examples of lightly regulated, liquidity fire-hoses, furiously greasing the gears of capitlism until the brakes don’t work and we all crash.
That also kinda sounds like practically every otc market on the planet.
I am not at all sure that when it comes to Congress, anything will constrain their worst spending impulses. Unfortunately, in my opinion, we seem to be at a point at which there is no choice but for Fannie and Freddie to get bigger and to do so quickly. Starving the mortgage market of liquidity is not an option. Probably, the only way to do so is either to nationalize them directly or do so indirectly via the Paulson plan. I don’t like that option and would hope it would be only temporary but sometimes you have to play with the hand fate deals you.
Today’s gambit from Freddie about raising new capital seems to be a last ditch effort to maintain the status quo. Since it was accompanied by talk of shrinking its balance sheet, the likelihood of its success seems dubious at best.
The areas of worst inflation are not demand side but supply side, think food and fuel.
Increasing the discount rate will only make things worse.
We don’t have the Japanese option of controlled deflation because we do not save and we do not have a trade surplus.
We have now reached a peak oil plateau that will cause demand destruction around the world. When the depletion rate kicks in the fractional reserve banking model will implode.
i believe this is called “jawboning”
After the catastrophic Greenspan Bubble Era, there is no optimal policy for the interest rate central planners.
Hold the current negative real rate, and inflation will scream.
Whack inflation with rate hikes, and the economy will nosedive as banks die like flies.
Indeed, with the remarkable “reverse Midas touch” of Ben Bernanke, we may be able to achieve both outcomes simultaneously. The last few days, with the announcement of 5% y-o-y CPI, the IndyMac failure, and the scary dip into bear market territory, provided an illuminating preview.
Within his premises, Stern may be a reasonable guy. But his central-planner premises are flat wrong. CENTRAL BANKERS CANNOT ADD VALUE BY MANAGING THE ECONOMY. Don’t tamper with the Fed Funds rate, Gary. Just resign, and work to abolish the Creature From Jekyll Island. You’ve done enough to us, dude.
How is it that the “longest serving member” has suddenly got religion. Come on. This is all part of the pr offensive that began with wells Fargo lifting its dividend. That was an orchestrated move lacking anyth fundamental underpinning. The announcement by fne that it was seeking to raise 10 billion and stock does up. Come on. Lok at the charts of all the banks. I challenge you to fbd anthing that looks like that in history. This is the federal government forget that othe chart you sighted. This isn’t a clasic short squeeze either. The only thing more reduculous than his statement is that anyone even takes it seriously. Well at least I have tucked off the final check mark on bernanke plan for deflation that of the fed or teaairy issuing debt to buy equities or assets. There is no way we are coming out of this intact despite the best inten tipna of the bilge crew
A snippet from F.William Engdahl on the crisis:
“…The Federal Reserve is rapidly becoming the world’s largest financial garbage dump, as for months it has agreed to accept banks’ asset-backed securities, including sub-prime real estate bonds, as collateral in return for US Treasury bond purchases. Now it agrees to add to that potentially $6 trillion in GSE real estate debt.
Yet the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses were made public. In 2003, William Poole, then president of the St Louis Federal Reserve, publicly called for the government to cut its implied guarantee of Freddie Mac and Fannie Mae, claiming then that the two lacked capital to weather a severe financial crisis. Poole, whose warnings were dismissed by then Fed chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout.
Meanwhile some investors are viewing the Paulson bailout not as a bid to rescue the US economy but a lifeline for his former Wall Street cronies as the country’s big banks teeter towards a financial implosion. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from sovereign wealth funds in Saudi Arabia and elsewhere to remain in business…”
Ah, if only adults could be supervising this madhouse. My own opinion is to let them fail, at least go into receivership. The stockholders should be whacked 100%. Then we could move on to the bondholders. Maybe renegotiate the rates being paid back. Keep in mind the adage “if you owe your banker $10,000 and you don’t have the money, you have a problem. If you owe the banker $100 million and you don’t have the money, the banker’s got a problem.” In this case the bondholders become the banker. We could kvetch about contract law, but restructuring or defaulting should be considered as the primary options.
At one level, if we defaulted, no one would loan us more and we wouldn’t be able to fund the $700 bil/yr trade deficit. OK, that comes out to around $2350 per person in the US. We really need to have a well-publicized reality check, not further pandering. Can we have a new state, No-Baloneyia, where we don’t do this stupid stuff? Paul Volker for emperor.
What Mr. Stern is doing is creating a better entry point for your long Fed Funds futures position. There is no way rates will be raised this year. No way.
Mara,
You wrote:
Ah, if only adults could be supervising this madhouse. My own opinion is to let them fail, at least go into receivership. The stockholders should be whacked 100%. Then we could move on to the bondholders. Maybe renegotiate the rates being paid back.
Assuming that your are talking about Fannie and Freddie, the problem with whacking the bondholders is that you would be whacking most of the banks in this country big time. They invest their reserves in the debt securities of the two per regulatory guidelines. Take them down and you devestate the banking sector. Just another example of unintended consequences.
We have weaved a very tangled web that is going to take a lot of money and pain to unwind. Don’t count on anything more than more webs, however.