Does the Federal Reserve Seek Higher Unemployment?

Does the Federal Reserve Seek Higher Unemployment?

Wed, 08/29/2007 - 13:16 — moneysage

Regretfully, we have a sneaking suspicion that the answer to this question is affirmative.

Let us look at the relevant Fedspeak. Fed minutes and transcripts refer repeatedly to the current and prospective level of "resource utilization." In plain English, this means EMPLOYMENT. (Yes folks, we are all, save for their Noble Mightinesses at the FED, merely "resources.") "Resource utilization" is very high, and this is dangerous. FED policy needs to reduce resource utilization --i.e., create more unemployment. This in quest of the famous "SLACK" that the FED eternally seeks. And why, you will ask, do they seek such "SLACK"? Because a high level of "resource utilization" (a full employment economy) means MORE INFLATION. In order to avoid feeding this TERRIFYING BUGABOO we need MORE UNEMPLOYMENT. Oil prices too high? Put more folks out of work. Food prices too high? Same solution. Productivity declining (inflationary warning sign), fire some workers. This is what they are after, we think.

The Phillips Curve, which raised the "strategy" of increasing unemployment to counter inflation to the level of theological precept, is long discredited. Even here, in the good old US of A we have seen that we can have a heatlhy, vigorous, non-inflationary economy in conjunction with full employment. Still the FED does NOT believe.

There is, we suspect, some atavistic "morality" at work here. Take the lad to the woodshed whenver he is showing too much spirit, just to keep him in line and to quell his animal spirits.

We would respectfully submit that it is animal spirits which have made our economy the envy of the world. We doubt the utility of injecting Calvinist morality into the equation.

Bernanke Vs. Greenspan

Bernanke Vs. Greenspan

Tue, 08/28/2007 - 18:23 — moneysage

According to one recent news report, former Fed Chairman Alan Greenspan remarked privately that he would have cut the FED FUNDS rate by now, had he been in Bernanke's shoes। Greenspan denied making the remark. Be that as it may, there has been a lot of interest in the differences between the two, especially in light of the current credit crisis.

What seems clear to us is that Greenspan's policymaking -- especially at crucial moments -- was substantially, if not decisively, influenced by pragmatic, seat-of-the-pants judgments। The role of computer models was NOT decisive for Greenspan. Bernanke, in contrast, seems to accord the computer models decisive importance.

Greenspan's approach, while inevitably "subjective," was superior to Bernanke's। It is not merely that the FED must live in the real world, not in an academic ivory tower. The key point is that computer models typically fail at critical moments because they are INHERENTLY INCAPABLE OF EITHER IMAGING reality at crucial moments, or predicting the course of events during a financial crisis. Consequently, they give bad advice.

Why is this? The problem is that in the real world, human emotion, and particularly mass emotion, play a vital role। In financial crises they can have decisive impact। Models only measure what is measurable: since mass emotion and the range of possible consequences cannot be quantified, it cannot be imparted to a computerized model। Hence the fatal flaw in models.

In the final analysis, all judgmeNts about non-physics matters cannot be made without a significant subjective component। Economics is not merely mathematics or statistics or models: it is raw emotion, the emotion of the herd.

When his seat gets too hot, Bernanke WILL make subjectively-influenced, and even subjectively determined decisions. He will learn, the hard way, that he is no longer in academe. What the cost to the economy will be, and what the quality of his judgment will be, remain important unknowns.

Where Are All the Buyers?

Where Are All the Buyers?

Tue, 08/28/2007 - 16:37 — moneysage

They are watching, waiting, and buying selectively. GREED, finding expression in waiting in the hope of buying desired stocks cheaper, still has the upper hand over FEAR of missing the move up. This balance could change at any time, we think. Once some event, or some major buying, ignites a strong move up, a substantial number of patient buyers will jump on board, and the bandwagon will get rolling.
That, in any event, is how we see things unfolding in coming weeks.