bizzXceleration: Performance, Value and Profit

To the best of my understanding whinging is the British (English) term for whiners and complainers but it sounds more subtle and sophisticated to say it with an English accent :). BTW - please consider singing Schadenfreude to the tune of Oh Tannenbaum to get a flavor of our perspecive here !

It strikes me as greatly ironic that the Fed (Greenspan) has been blamed for letting rates remain low for too long and the role and impacts of the financial community in substituting credit and leverage on bad...bad diligence - think adult supervision - gets short shrift from the players. So short that as soon as things got a little tight a couple of weeks ago certain parties, as in all of them, where whinging about needing an immediate cut in the policy federal funds target. Fortunately good sense, experience, education and insight led to some short-term functional and operational fixes when the gearbox seized up (and make NO mistake it really seized up and we were all staring into the abyss). The accompanying chart shows target funds rate vs actual and up until that seize it was the normal minor fluctuations. The intervention by Ben & Co. strikes me as brilliant and courageous. If you won't mind me quoting myself let me borrow from an e-mail exchange on the topic that was also a posted comment on another blog. Before that let me mention that what we're seeing in the markets, in discussions of Fed policy and in discussions of the outlook for the economy (see this earlier post ) is a pretty complete lack of reality or the first stage in denial. We'll dig into the Markets and Fed Policy to get a better handle in follow-on posts but let's put it all in context. First, the brief dissection of Fed tactics and strategy:

Let's put ourselves in the Fed's shoes for a minute & recall their jobs are to 1) manage the economy around the speed limit - which gets most of the attention. But also 2) to make sure financial markets are orderly and don't seize up and 3) oversee the regulatory mechanisms that are required to keep the Jay Goulds of the world from taking the rest of us to the cleaners. The last statement indicated really that they're perfectly comfortable with what is essentially a neutral stance while recognizing a widening housing problem AND a liquidity squeeze (not a credit crunch which is when non-price restrictions keep any money from flowing [recall Reg Q and disintermediation ?]). It's funny that not too long ago everybody was complaining that they left rates too low for too long and not everybody's whining :). The Fed can't control the fundamental speed limit of the economy but can try to keep it as close to that potential as possible which means dampening down inflation on one side and demand shortfalls on the other. They're doing a fantastic job in the face of uncertainty. At the same time notice that the $ is very weak AND China is beginning to export inflation. Econ policy targeted rates need to stay up. Meanwhile we have an asset bubble based on bad diligence plus leverage & more bad diligence and discipline. That all needs to work out (recall Moral Hazard).
As it happens though the mechanism for actually managing rates is the same one for ensuring the system doesn't seize - and the discount window is always open but only used when Fed funds rates are lower than inter-bank loans. Given the shortfalls in ready liquidity in this last week the central banks are doing exactly what they're supposed to do and releasing funds into the system to maintain the target rate. The two are separate but highly inter-linked decisions. But don't read - as best I can tell - the injection of liquidity to keep the wheels greased as any change in policy. Which, as BR noted earlier, shouldn't be done or we'll get the buyout, buyback and over-leveraged asset boom driven by bad credit that's been needing to be cleaned out for a while now.

 The key here is whether or not there is adult supervision of financial decision making by all the players. Below is Minyanville's take-off on Jim Cramer's well-known tantrum from several weeks ago. That may have faded from your memory by this time but it shouldn't. The deeper question is, was this a black swan or was it anticipatable. Given that some very smart money, e.g. Wilbur Ross, have positioned themselves to take advantage of the still-to-be-worked-out implosion of the credit markets probably not. One could also point to excellent discussions by Paul McCulley and Bill Gross of PIMCO or a string of Jim Jubak columns (all referenced in various Weekly Readers) to confirm that. So to put it in context we offer up three different video takes. First, from Minyanville and then from WSJ's interview with Mr. Ross, finally concluding with Cramer's (admittedly rather brave) apperance on the Colbert Show where he sorta does and sorta doesn't take credit for the Fed fix.

Here's Hoofy and Boo to put it into perspective: