The Binary Circumstance

The New York Times, like many other papers, has an article about Bush’s plan to turn the Federal Reserve in the “market stability regulator.”

There were many writers writing of the pending meltdown (including me) while the Fed and the Bush administration and real estate interests continued to maintain that there was no problem at all.

How can the Fed prevent a problem when 1) they are the problem, and 2) they can’t see a problem before it’s a crisis?

But the Fed would not be able to act simply because one bank or brokerage house was taking excessive risk. Instead, the Fed’s “authority to require correction actions should be limited to instances where overall financial market stability was threatened,” the proposal states.

The Fed has long had great prestige in Washington, but in the current crisis it has seen its decisions challenged from both the left and the right.

“The Fed oversaw this meltdown,” said Michael Greenberger, a law professor at the University of Maryland who was a senior official of the Commodity Futures Trading Commission during the Clinton administration. “This is the equivalent of the builders of the Maginot line giving lessons on defense.”

Anybody who takes a little time to read the history of the Federal Reserve and understand how our banking system operates can see how this happened. The Fed has been creating boom and bust cycles for close to 100 years. This is just the latest. Is it wise to put the fox in charge of the hen house?

I hate to break the news to the weather gods but winter was over last week.

Today it was snowing in Seattle with temperature in the mid-30’s and an icy cold wind. The snow didn’t stick but it was much more than flurries and quite heavy at times. It’s totally inappropriate weather for spring, even by Seattle standards, which are extremely low when it comes to nice weather.

As junk bond losses top $35 billion, and home prices drop by record amounts, recent actions of the Federal Reserve under Chairman Ben Bernanke show that the government, which already has an enormous amount of control over the economy, is expanding its role.

March 25 (Bloomberg) — The Federal Reserve further expanded its role as a backstop to Wall Street dealers, setting up a new company to manage and sell $30 billion of Bear Stearns Cos. assets.

In disclosing terms of a financing arrangement to speed JPMorgan Chase & Co.’s purchase of Bear Stearns, the Fed said yesterday it hired BlackRock Inc. to oversee and sell the assets, which will be placed in a new company created by the central bank.

Usually the Federal Reserve announces any interest rate changes at 11:15 (Pacific Time) on the day of their FOMC meeting.

Last night I heard on the news that they were going to lower the rate by 1% and saw several articles in print saying the same thing. Some even suggested a rate cut of more than 1%. I predicted at least 1% yesterday before I saw any of the articles.

It appears that the Fed has leaked their intentions early so they would impact the stock market opening this morning to build upon yesterday’s market action where the market opened sharply lower but then closed higher on the day. (The DOW closed higher, other indexes closed a lower but well off their lows.)

This is all about sentiment. The Fed is making these very dramatic moves to impact investor psychology as much as anything else.

Remember that just six months ago they were saying that they didn’t see the housing and mortgage mess spilling over into the rest of the economy. But denying the problem didn’t do anything to stop it from happening.

The Feds recent moves has caused the dollar to plunge to record lows and commodities to go to record highs. Another problem they face is that every decrease in interest rates leaves less room to lower them in the future.

UPDATE: The Fed lowered the fed funds rate by 3/4 point. The immediate reaction of the market was one of disappointment. The market had been up over 300 points in anticipation of a bigger cut. I guess those early reports were more speculation than leaks. The market later recovered to new highs.