Sing to Me, O Muse

The Murder of Agamemnon, Pierre Narcisse Guerin (1774-1883), The Louvre

At the start of The Odyssey, the gods are gathered in the house of Zeus, who says:

See now, how men lay blame upon us gods for what is after all nothing but their own folly.

This refers to the folly of Aegisthus, who brought about his own death at the hands of Orestes, avenging adultery with Orestes' mother Klytemnestra and the murder of his father Agamemnon.

The Father of Gods and Men might well have the same reaction to the Federal Open Market Committee's recent meeting statement, which included these goodies:

• ... a target range for the federal funds rate of 0 to 1/4 percent
• ... the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets
• Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.
• The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

This is the same policy of easy money and too-low interest rates that contributed to the crisis in the first place. In no way does this policy solve the present crisis. It doesn't provide more transparency to asset values, reduce universal risk aversion, or lower the burden of debt on consumers, businesses, and state and local governments. The only contribution to liquifying markets is to punish the individual saver with low rates. Current policies are perpetuating bubbles in real estate valuations, high levels of public and private indebtedness, and misallocation of our economic resources.

Unless this country stops pointing the finger and faces up to the blame, our economic system will be ruined, just as America's reputation has already been ruined around the world. Liar loans, lax SEC supervision, nonexistent risk management in the banks, and other follies have exposed just how far America has fallen from being the paragon on which the rest of the world was supposed to model its own economic and financial systems.

All of these financial follies were well known before the bubbles burst. Everyone knew that mortages for unaffordable homes were being given to unqualified buyers with falsified incomes. The long line at the feeding trough looked the other way and included buyers, developers, realtors, assessors, loan officers, mortgage bundlers, security underwriters, and rating agencies. Regulators looked the other way, and politicians at local, state, and national levels pandered to pet ideologies and special interests.

Consumers, financial executives, and legislators alike all seek bailouts and a quick fix, but ignore the basic fact that the roots of the crisis lie in their own folly. Where there is wanton disregard of risk, there should be blame.

Don't perpetuate failed policies, and don't bail out poor risk managers. Listen to the Son of Kronos.

Interest Rates and the Dollar

There is a good article at Naked Capitalism on interest rates and the dollar. Two of the anomalies noted there:

1. Long dated Treasuries rising (a deflation signal) as stocks stage a dramatic rally

2. Dollar weakening while long dated Treasuries rise (the dollar and bonds usually go together)

The first item is actually consistent with many periods of market history when rates fall and stock prices rise. We have, after all, just been through a long period of falling rates and rising stock prices beginning in the early 1980s and continuing until either the dot-com crash of 2000, or perhaps until the present crisis. When long-term rates fall, the present value of corporate earnings streams rises.

The second item occurs in the context of a great variety of contending and fluctuating forces, making currency and Treasury directions very, very hard to call. But this is not inconsistent with some periods of history. If there is some expectation of a collapse under all this debt, there should well be ambivalence about Treasury debt and the dollar.

Others have already commented that long rates will continue to stay low until added money is not consumed in the deleveraging, perhaps not until there is a real economic expansion, which could be a long time off. Or perhaps continued stimulation will make it occur sooner.

Reference: http://www.nakedcapitalism.com/2008/11/some-anomalies.html