False Justification for Fed Rate Cut: August Jobs Revised, Government Causes Market Turmoil

It must be difficult for the government to predict the future when it cannot even report the past accurately.

The Bureau of Labor Statistics (BLS) revised the August jobs figures from a 4,000 loss to an 89,000 gain.

The "loss" (and its implication of a slowing economy and reduced inflation pressure) was part of the justification for the Federal Reserve's September 50 basis points (bps) slash to the benchmark Fed funds interest rate.

Now we have a statistics revision as I warned.

Government Causes Market Turmoil

The government has the markets bouncing like a yo-yo. The jobs revision caused the Chicago Board of Trade's Fed futures market to plummet the chance of an October 25bps rate cut from 72% to 48% since yesterday.

Meanwhile, some analysts assert that Wall Street already has "priced-in" an expected October rate cut from Fed Chairman "Helicopter Ben" Bernanke, which means that a Halloween hold (no cut) might kill the stock rally and put the stock market right back where it was in its August decline.

Will the Fed admit its blunder of injecting adrenaline into an already warm economy?

If the Fed can keep its stories straight for a moment, it might remember that the alleged jobs loss was a reason that allegedly allowed the drastic rate cut without an inflation fear. Since apparently there was no jobs loss after all, the deflationary estimate was wrong, and the Fed did not have room to cut rates without inflation, so the Fed did create unecessary inflation pressure.

August '07 was only the squall before the 2008 hurricane.

Meanwhile, the unemployment rate edged up to 4.7% despite the absolute job gains, and the housing crash continues unabated with more adjustable-rate resets due in early 2008.

Do you think that Bernanke will counteract his mistaken 50bps cut to 4.75% with a 100bps rise to 5.75% (50bps over the August rate of 5.25% to counter the mistaken 50bps reduction from the August rate)?

Alternatively, will he dream up a new reason to cut rates again at the October 30/31 Federal Open Market Committee (FOMC) meeting?

Federal Reserve Nonsense Monetary Policy: Shifting Standards of Convenience

Did Ben Bernanke play croquet with Alice in Wonderland?

• When food and energy and real estate prices rose, the Federal Reserve ignored those price hikes, asserted that those inflations did not count as "inflation," donned its food/energy/asset blinders, looked only at “core” PCE inflation, and declared "low inflation."
• When food and energy prices eased briefly and real estate prices began to deflate, suddenly the Fed decided that those prices do count and again declared low inflation (allegedly caused by those same food/energy/asset prices that allegedy did not matter when they were rising), so it could launch an inflationary interest-rate cut of 50 basis points (bps) to the benchmark Fed funds rate.

Fed statements might artfully evade a direct contradiction but the Fed seems happy to let the media trumpet "lower" food/energy/asset prices as the reason the Fed rate cut.

Do not be surprised if the figures used to justify the rate cuts are later quietly revised.

Everything means low inflation?

So Fed logic is that food/energy/asset price hikes mean low inflation, and food/energy/asset price drops also mean low inflation.

If people disagree, off with their heads.

Bernanke's Zimbabwe Plan for the US Economy

Fed Raids Your Paycheck and Bank Account To Bailout Banks, Wall Steet, and Mortgage Delinquents

Note: A lower dollar is not necessarily bad per se but the current dollar dive is a symptom of bad policy (such as structural savings, budget, trade, and current-accounts deficits) and the Fed's September 18 rate cut looks misguided for many reasons: 10 Reasons against a Federal Reserve Rate Cut.

The United States Federal Reserve yesterday chose an inflationary plan by lowering the Fed funds benchmark interest rate 50 Basis Points (bps) to 4.75%. The US dollar immediately reacted to the news by falling against major world currencies and commodities:

• The dollar fell to a record low against the Euro.
• The dollar fell to less than half the value of the British Pound Sterling.
• The dollar fell to a record low against a barrel of oil (i.e., oil hit a record high over $82 per barrel).

Debasing your currency and reducing your buying power as an alleged road to prosperity is an old trick to attempt to hide financial problems and to attempt to avoid paying debts (e.g. paying you back in devalued money worth less than what was borrowed--so the government can pay you your Social Security with "Monopoly money").

"Social Security is a cash program and the government can always print more cash" (Alan Greenspan, 9/20 interview).

Sometimes, the policy is "successful" insofar as it fleeces the average consumer without the consumer being aware of the pickpocketing "inflation tax." Other times, the policy runs so far out of control that the scam becomes obvious even to the most inattentive. The German Weimer Republic tried it and the social unrest led to Hitler. Zimbabwe tried it recently and its economy collapsed:

• The International Money Fund (IMF) warns that Zimbabwe inflation might reach a 100,000% annual rate.
• The Zimbabwe government "solution" includes printing a Z$200,000 bill to make it easier to carry baskets of cash to buy everyday items.
• 2006 Zimbabwe prices included Z$50,000 for 2 eggs and Z$110,000 for a loaf of bread.

By the way, the destruction of Zimbabwe's economy began with the Robert Mugabe government's real estate policies for "fair" widespread ownership (initially subsidized by the United States).

Does trying to socially engineer widespread real estate ownership sound familiar?

Thank the Fed for reducing your purchasing power.

Bernanke's double-cut of 50bps has planted both feet firmly on the Zimbabwe side of the fence.

Welcome to Zimbabwe?

Federal Reserve Bailouts Create Crisis after Crisis, Government "Fixes" Keep Driving Americans into More Debt

Government Doublespeak: 5.25% is too low. No, too high. No, too low. No, too high. . . .

The Fed already, instead of solving a problem, has created an additional problem. The Fed’s August bailouts and promises have led the markets to (1) believe that the current rate is "too high" and (2) expect a September cut to the benchmark Fed funds rate of 25-50 basis points (bp, 0.25-0.50%), according to the Chicago Board of Trade’s Fed-funds futures market.

The Fed created this "reality" and now has to live with it.

Wall Street might throw a tantrum if it does not get its “fix” of easy money through a nominal rate cut. Wall Street might ignore that a rate hold (no cut, no increase) could be a relative cut (in global context). Wall Street might display Delirium Tremens if the Fed raises the rate 25bp.

The potential September market “crisis” (if the Fed does not cut rates today) is an unnecessary crisis that the Fed has manufactured for itself.

Did the Fed deliberately paint itself into a corner to give itself a “systemic” excuse to bailout speculators, or is the Fed incompetent at managing expectations?

If the Fed does ambush the markets with a rate hold (no cut), remember that the turmoil will include anger and confusion over the Fed’s policy deception, not only the interest rate per se.

Do not blame a “crisis” on “high” interest rates which are not high at all.

Government pro-debt doublespeak sings the opposite song to consumers.

Indeed, meanwhile, recent National Association of Realtor (NAR) advertising and government pro-debt propaganda have argued to consumers that 5.25% is already dirt cheap, to get Americans to keep spending money they do not have by ignoring the past rate rises that increased the Fed funds benchmark rate from 1% to 5.25%:

"[T]ake advantage of historically low mortgage rates" (Today's Colorado Federal Savings Bank, based on 5.25% Fed funds benchmark rate, before today's FOMC meeting results. Actually, Fed rate cuts have limited impact on mortgage rates but they are a favorite sales pitch for home sellers).

US interest rates should be higher than the current 5.25% based on fundamentals such as the US savings rate, current accounts balance, and foreign currency exchange rates, so the current 5.25% is already an anti-recessionary, stimulating, low rate.

Swiss RAISE Interest Rates 25 Basis Points, Mr. Bernanke

The Swiss National Bank increased its benchmark interest rate 25 basis points (bps) from 2.50% to 2.75%

European Central Banks Differ Amid Crunch (Wall Street Journal)

See Reason #10 for the implications: 10 Reasons Against Federal Reserve Rate Cut

10 Reasons against Federal Reserve Rate Cut

Previous: Federal Reserve Pushing on a String

Cutting interest rates to bailout markets will have 1 of 2 possible results: bad or horrible. Either the Federal Reserve will fail to prop up inflated asset prices but throw a wrench into the works while trying, or the Fed will succeed for a time and cause years of more bad decisions based on faulty pricing.

1. Rate cuts to increase the credit supply are misguided when the current economic condition is a healthy credit-demand crunch.
   
2. Rate cuts, and the Fed’s acceptance of mortgage securities as collateral alongside Treasury debt, perpetuate the information crunch about what a good investment is, not solve it.
   
3. Rate cuts to increase credit/debt worsen rather than help the savings crunch.
   
4. Rate cuts caused the inflated prices and bad debt problems, and more rate cuts prevent the market solution (temporary credit-demand crunch during re-pricing) from working.
   
5. Rate cuts are not good for the economy as a whole, they are “good” for imperiously picking winners and losers by changing the rules in the middle of the game, so slick traders caught with the hot potato can unload junk on the next greater fool (maybe you). The Fed also burned smart investors who "shorted" the market (bet on a downturn) when the Fed changed the rules overnight with liquidity bailouts that favored one interest group at the expense of others.
   
6. Rate cuts now are a panicky, profligate overreaction when the housing bubble bust has scarcely begun and at least a year (up to 5 years) of foreclosure-causing adjustable-rate mortgage (ARM) resets of interest rates remain on the horizon.
   
7. Rate cuts are too late to stop the ongoing foreclosure meltdown and will do little or nothing to help the cherry-picked "poster-children" dragged in front of the TV cameras to justify a bailout--but the cuts will benefit people that you might not want to help. First, a Fed rate cut might subsidize healthy, wealthy prime borrowers who do not need help yet fail to save subprime borrowers during resets with increasing risk premiums (the rate gap between good and bad borrowers). Second, troubled borrowers are more likely to have ARMs, and most ARMs are based not on Fed funds but on the London Inter-Bank Offered Rate (LIBOR), and LIBOR has been diverging up and away from the effective Fed-funds rate, so Fed cuts are quite useless against all the adjustable LIBOR-indexed mortgages. Third, prime fixed mortgage rates are related to 10-year Treasury notes which are set by market trades, not the Fed, and are based on market expectations of long-term inflation rates, not short-term Fed-fund rates, and today's markets might be less likely to believe Greenspan's Goldilocks fairytale of non-inflationary cuts, so an inflationary rate cut might cause the standard 30-year fixed-rate mortgage rate to increase, not decrease. Fourth, Fed-fund rate cuts might have little direct downward effect on mortgage rates in today's conditions (mostly only on prime, non-LIBOR ARMs) but rate cuts will bailout the biggest fans of lower short-term US interest rates, Wall Street and financial-sector stocks.
   
8. Rate cuts might be ineffective or dangerously extreme: If a 1% Fed funds rate was "needed" in the blissfully ignorant days of the bubble's birth with no excess housing supply and low unemployment, how low a rate is needed now that the much demanded tighter lending standards have obliterated swaths of buyers, remaining potential buyers (solvent investors, including dollar-rich foreigners) are gun-shy of junk assets, and there is a housing glut?
   
9. Rate cuts now might cause a "liquidity trap" by plunging interest rates to near 0% interest to avoid the bubble correction and thereby leaving no room to stimulate the overall economy when the recession arrives.
   
10. Rate cuts might cause a further plunge in the dollar’s exchange rate. The Bank of England and (despite continuing liquidity infusions) the European Central Bank (ECB) each announced an upward policy bias with an eye toward raising interest rates, which in itself can act like a relative Fed cut to weaken the dollar (investors expect European returns to be higher relative to US returns, so they need fewer dollars but need more Pounds or Euros to buy European investments). The Fed would have to raise rates to match the European increases simply to maintain the existing rate spread to keep the dollar competitive. A Fed rate-hold while Europe increases is like a relative Fed cut. A Fed rate cut while Europe raises rates could double the run on the dollar.

Next:
*Swiss RAISE Interest Rates 25 Basis Points, Mr. Bernanke
*Federal Reserve Bailouts Create Crisis after Crisis, Government "Fixes" Keep Driving Americans into More Debt
*Bernanke's Zimbabwe Plan for the US Economy

Greenspan Needs YOU to Bail HIM Out?

Brother, Can You Spare a Trillion?

Greenspan's Financial Conflict of Interest

• Former Federal Reserve Chairman Alan Greenspan, at a Washington meeting of Brookings Papers on Economic Activity, implied that non-bubbles are worse than financial bubbles by asserting, "Fear as a driver, which is going on today, is far more potent than euphoria."
• He also claimed that today's market behavior is "identical" to 1987's behavior (when a rookie Greenspan slashed the benchmark Fed funds interest rate by more the double the usual 25-basis-point cut and began to earn his reputation for the "Greenspan put" to prop up the stock market).
• Both of Greenspan's arguments suggest that today's Federal Reserve should bailout the banks and Wall Street with more inflationary debt by cutting the benchmark Fed funds interest rate.
• Deutsche Bank would benefit significantly from a Fed bailout: "Deutsche Bank May Be Worst Hit by Rout, JPMorgan Says (Update3)" (Bloomberg).
• Greenspan works for Deutsche Bank: "Greenspan Hired as Consultant for Deutsche Bank" (MoneyNews).
• Greenspan owned assets of at least $4.2 million as of 2005.

Can you find it in your heart to accept more inflation eating away your paycheck before poor Alan is down to a measly $4 million?

$31billion Federal Reserve Bailout Today

Previous: $57billion European Central Bank Bailout Today

The ECB leads the Fed by the nose again:

UPDATE 2-Fed pumps in sizable funds after ECB (Reuters)

Fed Panics Again

The effective Fed funds rate trended up to 5.31%, above the 5.25% target rate, but the Fed did not have to intervene (the effective rate neared 6% in August) yet the Fed overreacted again to stop any hint of a market correction to interest rates. As Not One Cent predicted, Fed open-market actions (and small reductions to interest rates) appease only temporarily because they do almost nothing to remove the fundamental information, collateral, and insolvency problems:

Federal Reserve Pushing on a String

Should Ben Bernanke Resign? Who Should Be the New Federal Reserve Chair?

$57billion European Central Bank Bailout Today

The European Central Bank (ECB) offers 42.2 billion Euros to bailout speculators and prop up inflated global asset bubble:

ECB Offers $57 Billion One-Day FundsIn Bid to Boost Banks' Liquidity (Wall Street Journal)

Australia joined the bailout bandwagon with a liquidity injection and a loosening of security-repurchase standards.

Next: $31billion Federal Reserve Bailout Today

Bush Home Mortgage Bailout Rewards Delinquents with Write-Offs and Tax Deductions

Bush will announce his bailout plan today:

Get a tax deduction for NOT paying your mortgage.

"A suspension of the debt-forgiveness tax could help people who are hoping to work out a reduction in their loan balance -- and payments -- as a way of avoiding foreclosure" (Los Angeles Times, via Bush aims to ease US mortgage woes - report (Forbes)).

Have you been doing things the hard way by paying your mortgage to get a tax deduction?

Update 3/29/08: "Bush Readies Mortgage Aid Plan: At-Risk Owners Could Get Cheaper Loans"