By Rodger Rafter

I’d like to offer a few counterpoints and comments on your article about the Fed:

I don’t think the Fed panics. They make cool, calculated moves to maximize gain and minimize pain for their biggest member banks. Yes, they know they’re screwed on both the inflation and economic fronts, but they’ve known that for a long time. For awhile foreign investors have bailed them out by boosting the dollar and flooding the economy with investment capital, but that’s changing. Recently the Fed has shifted into “minimize pain” mode as global imbalances have started to reverse themselves.

Rate hikes have had more to do with protecting the value of the dollar against a sharp decline as foreign central banks are losing interest in US treasuries.

The full argument is here:
http://rebalancing.blogspot.com/2006/07/inflation-accelerating-and-interest.html

Briefly, rate hikes aren’t checking money supply growth because loose lending continues via securitizations, hedge fund borrowing and the private equity boom.

The treasury needs money supply growth because it pays the bills and Wall Street needs credit expansion because it is their life’s blood. Inflationary pressures keep mounting in spite of government’s efforts to lie about their size.

I agree that a recession can’t be avoided at this point. I don’t think the Fed cares about the greater economy, though.

I agree that housing is big. It’s bigger than the stock market, but not as big as consumer spending. Tapped out consumers are bringing the economy down, and housing is tumbling with it, as an obviously bloated, vulnerable and early victim. Housing’s crash adds significantly to the snowball effect, but consumer debt burdens, combined with inflation, combined with the declining power of labor are what is toppling the economy.

You mention the GDP numbers for housing, and it is interesting to note the revisions:
Q4 ‘05 housing growth was revised from +2.8% down to -0.9%
Q1 ‘06 housing growth was revised from +3.3% down to -0.3%

Government statisticians normally assume a continuation of a trend in their early estimates. When they start having to make big revisions, it usually indicates the trend has changed and they’ve been missing it.

Q2 ‘06 is -6.5% for now, and will likely get revised down fron here.
It should get much worse than that before housing bottoms, but it probably won’t take away much more than 1% from GDP at its worst point. Consumer spending, could wipe out as much as 4 or 5% if things get ugly.

Housing and the economy turned the corner in Q4 2005. Most people didn’t notice, though. Here’s the full argument:
http://rebalancing.blogspot.com/2006/07/turning-point-in-1976-us-came-out-of_24.html

You say the Fed has limited control of global liquidity, but I think that is exactly what they are trying to control, via the foreign exchange market with interest rates, and via the money supply with relaxed reserve requirements and banking regulation.

1994 is a nice comparison to the current situation, but I really prefer 1987 for a number of reasons:
http://rebalancing.blogspot.com/2006/08/housing-vacancies-americans-arent-just.html
http://rebalancing.blogspot.com/2006/07/great-american-ponzi-scheme-in-ponzi.html

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