Tuesday, December 16, 2008

Zero Hour

The Fed has cut the chief lending rate to zero.
The Federal Reserve cut the main U.S. interest rate to “a target range” of between zero and 0.25 percent and said it will do whatever is needed to end the longest recession in a quarter-century and revive credit.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Treasury notes rallied in anticipation the Fed will buy the securities to force borrowing costs for consumers and companies lower. Nine rate cuts in the prior 14 months and $1.4 trillion in emergency lending have failed to reverse the economic downturn.

“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.

The statement noted that the Fed has already announced it will purchase agency debt and mortgage-backed securities, and said the Fed is ready to expand the program. The central bank said it continues to weigh the potential benefits of buying longer-term Treasury securities.

And the liquidity trap closes with a ghastly, echoing crunch, like something out of an Edgar Allen Poe story. We're in uncharted territory here. The other half of the Fed policy, just as expected, is to magically invent a crapload of money. Officially, the Fed has today signaled that the Japan Scenario is on.
The Bank of Japan has been the only major central bank in modern times to mix a policy of steep rate reductions with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target interest rate at zero.

Japan’s central bank kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation. The abundant funds failed to prompt lending by commercial banks, which expanded their reserves at the central bank almost nine times by early 2004.

So there we are. And much like Japan, the cure will be far worse than the disease. The Fed is turning on the faucet full blast in a desperate effort to stave off a deflationary depression spiral. But Japan's already high personal savings rate and low personal debt contributed mightily to their eventual freedom, it just took a decade to do it.

We have no such reserves to fall back on. Everything the Fed has tried so far has failed. We're down to the last card in the deck now, zero rate and unlimited fiat money. When this too fails to turn around the economy, what then?

We're now officially a third world economy.

Just Another Bit Of Good Housing News

...or not.
New U.S. housing starts and permits plunged to record lows in November, as long-standing problems in the housing market continued to weigh on the U.S. economy, a Commerce Department report showed on Tuesday.

Housing starts fell 18.9 percent to a seasonally adjusted annual rate of 625,000 units from 771,000 units in October.

That was much less than the 740,000 starts Wall Street analysts expected to see for November.

New building permits, which give a sense of future home construction, plummeted 15.6 percent to 616,000 units from 730,000 units in October.

That was also much below Wall Street analyst estimates of 700,000.

That's a massive drop in numbers even from just October. The bad part is if housing starts pick up faster than housing prices do...it will depress prices even further. I don't see how that could happen other than housing companies jumping the gun and building early 2009 in order to "get in on the ground floor of the new housing recovery".

It doesn't make any logical sense. Then again, the US economy has been operating on that whole "lack of logical sense" thing for the last several years, especially in housing. If people see these record low new housing starts and permits as the bottom of the market rather than a price-based bottom (which is still nowhere in sight), things could get even worse in the housing market.

American consumers aren't that dumb, are they?

Dear America:

"Obama is clearly Jimmy Carter, and four years from now another multi-decade run of Reaganism will bury liberals for another generation. Suckers!"

--Philip Jenkins, American Conservative


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