Monday, August 9, 2010

Will Lower Long Term Rates do Anything for Anyone?

Another Monday in the books. Hard to believe that August is already a week old. The summer is getting away! Today is the funky sequential 08-09-10 date as well for whatever that is worth.

Will Lower Long Term Rates do Anything for Anyone?
I have not pulled up a Yahoo Finance article in a while, so I am going to take a look at one tonight.

As recovery loses speed, Fed mulls ways to help
Right off the bat I have to ask, didn't the Treasury Secretary just pen an article welcoming us to the recovery? Things move fast I guess as the recovery is NOW losing speed. Amazing.

Every one's attention is turned to the FED meeting tomorrow. Wall Street and the banks are licking their chops at an extension of easy money and maybe even more help making record profits.

From the article:
WASHINGTON (AP) -- Federal Reserve policymakers are in a bind: they want to say and do things that will energize the economy, but in doing so they risk making things worse by sending signals that the recovery is in really bad shape.

I always love this logic; if the FED says "boo" everyone will panic, but if the FED says nothing everyone will panic. I wonder if business at this point is taking their cues from the FED as to how the economy is doing. More:
Economists say Fed officials have a handful of options at their disposal, but would likely consider two options for perking up the economy:

-- Clarify that the Fed will keep short-term interest rates at record lows for as long as it takes to encourage more use of credit.
-- Use the proceeds from the Fed's investments in mortgage securities to buy government debt on a small scale. That could help drive down long-term interest rates.
Both steps would signal to markets that money could be borrowed cheaply for a longer period of time, giving businesses and individuals more confidence to finance major purchases. Still, economists doubt how much practical impact they would have. Interest rates are already at historic lows and that hasn't generated more buying activity.

A bolder step would be to restart programs undertaken during the financial crisis that involved large-scale purchasing of mortgage-backed securities and government debt.

The aggressive action has the potential to spur growth by driving down interest rates even more, but it comes with considerable risk. It could rattle investors about the health of the economy and lead to a sell-off on Wall Street. Panicked financial markets could prompt businesses and consumers to retreat further. That could push the country back into recession.

This is a jumbled mess. The key point is that low rates have accomplished nothing tangible in the real economy and even lower rates will not do anything either. Why bother then? You would have to ask the FED. Going on:
"Such a move is unconventional, and no one knows if it will work," said Chris Rupkey, economist at the Bank of Tokyo-Mitsubishi. If Fed policymakers' take such action, "they risk their credibility," he said.

Um, this guy works for a big Japan bank and he is not sure IF QE will work? Here's a hint buddy, look around Japan and get back to me. Final snippet:
That means rates on certain credit cards, home equity loans, some adjustable rate mortgages and other consumer loans will stay low. Commercial banks' prime lending rate would stay at about 3.25 percent, the lowest point in decades.

The Fed also could bolster its policy statement, echoing Bernanke's promise to lawmakers last month that the Fed is "prepared to take further policy actions as needed," said Michael Feroli, economist at JPMorgan Chase Bank.

We have had almost 2 years of free money and no one is running over their mother to grab any of it. The law of diminishing returns comes into play here. If you could borrow at 5% instead of 10% that is something. Borrowing at 3.2% instead of 3.5% is really not going to get anybody too excited. How's that ultra low rates being a structural part of the US economy working for you? I told you this would happen.

When I go fishing at the Quabbin Reservoir there is a point in the day when I cross over to the other side of the lake. To do that I pass between two large islands (Mount Zion and Mount L). This section of the reservoir is the deepest part that I go through. The depth finder will read up to 140 feet deep at this point. Now there is no real difference between driving a boat over 20 feet of water or 140, but I have to tell you I always feel a bit scared knowing I am passing over water that deep in a little aluminum boat! Is there a point to this story? I think so.

For all the cracking I do on the FED, they are not dumb people. They know full well that these little games with rates are not going to do jack crap. The only benefit to such a thing is more liquidity for banks to continue to hunker down with and trade crap back and forth to each other. The FED has chosen to have a stock market assets "recovery" rather than no recovery at all. This of course will further make the financial sector the biggest engine of the US economy, which stinks because it benefits very few. Instead of reigning in the banking sector which blew itself and the country up, the policy has been to make sure they get even bigger. Puzzling I know.

My above boat analogy fits here because the FED is going over deep water right now and they are doing it by their own accord. They got in bed with the banks and now will have to answer Wall Street calls for more easing, programs, bailouts, etc. If they do not, the only recovery anyone can point to will be gone in about 1 weeks trading time (well maybe 2, due to the new limit down rules). It must be an uneasy feeling.

Have a good night.


Jeff said...



That's funny. Couldn't agree more.

Tomorrow should be interesting to say the least.

I hope the bond market shoves it up their behind if they try and pull the QE lever tomorrow.

I think you are right though. They will probably wait.

getyourselfconnected said...

like I said at your spot, why telegraph tomorrow when a surprise later is worth so many S&P handles more!

This is where we are, the FED trying to convince all is well with Apple worth more than Exxon-Mobil.

No one has yet to explain the PragCap item that the bond market does not fund anything at all as yet. I am still puzzled by that one.

scharfy said...

For all the cracking I do on the FED, they are not dumb people.

This is very true. Its very easy for bloggers (Denninger, Mish come to mind) to reel off Bernanke is an idiot!! post 10,000 different ways.

I assure you he is not, as you noted.

You have just touched on the fact that there are political realities involved in policy making. Trying to actually assess what constraints our central bankers have, and actual vs stated policy goals, helps one understand the architecture and the engineering of the system we are trying to amend.

So here's MY analogy. Policy makers are like Chess Players. When they take the seat at the game, the board is already locked up - and there really are only a couple viable moves for the player to make. Anything other than textbook moves aren't considered.

He can't just yell "This game is fucked! - Surrender!" or sacrifice his Queen in the name of morality, and righting the wrongs of the previous players who screwed up the board. He's got to play out how the board is set. Occasionally a Grand Master can come along with a surprise gambit, when the timing is right, and shift the tone of the game.

It would seem right now we are attempting to stall out the game and play for a draw. Its the only logical move really.

That's my 6 cents...

getyourselfconnected said...

interesting take.