March 19, 2008
SUPPOSE, FOR A MOMENT, THAT MARKETS WERE RATIONAL...:
Even experts can't grasp this crisis (David Leonhardt, March 19, 2008, NY Times)
Raise your hand if you don't quite understand this whole financial crisis.It has been going on for seven months now, and many people probably feel as if they should understand it. But they don't, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn't afford, and now they are falling behind on their mortgages.
But the overwhelming majority of homeowners are still doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?
I'm here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.
...and it's easy enough to write the Just So Story. In recent years you've had the Fed crank interest rates despite people having no expectation of inflation in the future. You've had oil prices go up to absurd heights on the basis of speculation, rather than supply. You've had media hysteria about housing prices, the debt, entitlements, etc.
It would be perfectly reasonable, under such circumstances, to keep your extra money in low risk savings accounts until matters shake out a little. You've still got your house. You're still buying stocks in your 401k or IRA or whatever. But you're being cautious with your own cash and the business you work for is being cautious with its cash. All that caution may be decelerating the velocity of money enough to create some genuine problems. In effect, folks could be having a fairly rational response to what are basically emotional issues. The Fed's difficult task is to try to break the psychological barrier that's built up in order to get the flow going again.
Posted by Orrin Judd at March 19, 2008 11:00 AM** In recent years you've had the Fed crank interest rates despite people having no expectation of inflation in the future. You've had oil prices go up to absurd heights on the basis of speculation, rather than supply. **
It may also be possible that oil and natural gas prices have shot up as an indicator of inflation, that the fed was right to worry about it (in which case, injecting liquidity is going to make things worse).
Time will tell. I would sure prefer your version to prove out.
Posted by: Kevin Whited at March 19, 2008 2:33 PMI'm beginning to think regardless of what happens in the next few months, we will know two things:
1. Ben Bernanke and the Fed have more tricks up their sleeve to get the velocity of money sped up than we were ever led to believe, and thus any notion that he should not be renominated is insane.
2. The interest rate yield curves are currently configured in such a manner that we will see one of the biggest booms in a generation once the skittishness ceases.
Just gotta get the nail biting to stop, that's all.
Posted by: Brad S at March 19, 2008 4:07 PMKevin:
Here's an easy thought experiment. Suppose one eventuality: OBL's head is turned in for the reward. What would his proved death have to do with supply? What would it do to the price per barrel?
The inability of the price to sustain what's essentially a non sequitir makes it a bubble.
Posted by: oj at March 19, 2008 4:49 PMIf the brittleness of Chinese rule is expanded beyond just Tibet (in the run up to the Olympics), any kind of economic stall there will be another pin zooming in on that bubble.
The WSJ had a piece today where Wen Jiabao said that 2008 would be a difficult test for the Chinese economy. Last year, it was pet food and toys. This year, it is heparin. What is next?
And if there is a boycott of the opening ceremonies, look for the Chinese to lash out at Europe and the US. Which means cyber-attacks and bluster towards Taiwan, because it is all they know.
Posted by: jim hamlen at March 19, 2008 8:48 PM