Page 3 of
3 A rate cut with a shoeshine and a
smile By Julian Delasantellis
Hansen has gone from minor
market-news hack to well-compensated network-news
superstar doing exactly the same thing with
Internet child predators.
So the US media
machine would see a 1,000-point or more
stock-market drop, and they'd start looking to
point fingers, to assign blame. This would be a
particularly grim and vigorous modern public
inquisition. Unlike a mine collapsing or New
Orleans
flooding, here the victims
would be upper-middle-class and white, so the TV
news organizations would hang with this story for
a long time to bring in the big numbers for their
advertisers that covet this audience. One of the
central facets of contemporaneous American public
life is that news expands to fill the time
allotted to it, not the other way around.
There'd be stories
spotlighting clean-and-proper-looking white American
suburban couples, maybe with a picture of a son now
serving in Iraq on the mantel to demonstrate
their manifest virtue, looking worriedly over their
declining portfolios as they open their brokerage
statements. Other stories would show poor Gramps
and Granny, now forever tethered, like ancient
Roman galley slaves, to the brutal fiery inferno
of the french-fries cooker at McDonald's, their
dreams of a well-financed comfortable retirement
now cruelly dashed by Bernanke's capriciousness.
Add even more thousands of well-paid
workers in the financial sector getting laid off
as stock and mortgage trading volumes evaporate,
and Bernanke will soon find he has very little in
common with heroic Roark or Galt; the situation
will more closely resemble that of Victor Hugo's
Quasimodo, the hunchback of Notre Dame, imperiled
by throngs of rampaging upper-middle-class
Americans seeking to beat him to death using their
cable-TV remote controls as truncheons.
So
what will happen on Tuesday?
Knowing that
former Fed chairman Alan Greenspan once advised
those wishing to prosper in the prognostication
profession to predict often, so as that maybe the
simple law of averages will reward you with some
good calls, here's my call for the Fed meeting,
the results of which will be announced at 2:15pm
Eastern Time, Tuesday.
Previously, the Fed
has already fired off two of its big guns, open
market operations and, on August 17, a
discount-rate cut, to little avail. The next step
is a cut in the Federal Funds target rate, the
benchmark overnight interest rate used by big
banks to lend one another money.
I've
pretty well exhausted my no-cut argument above.
That leaves two other realistic possibilities, a
0.25-percentage-point cut, to 5%, or a
0.50-percentage-point cut, to 4.75%. I'm looking
for the former, the 0.25-percentage-point cut or,
in debt-market lingo, a 25-basis-points cut. This
is now the standard practice for Federal Funds
rate target changes; there has not been a move of
greater than 25 basis points since just after
September 11, 2001.
This could also act as
a sop to the William Poole crowd that is going to
be humiliated with the cut; it also better
preserves the image of the US central bank as
prudent, cautious and conservative, not some sort
of monetary manic depressive roller-coasting
wildly between alternating manias of rapid
tightening and loopy ease.
But perhaps
more important than the actual cut is the Federal
Reserve statement that will accompany it.
In recent years, the US Federal Reserve
has developed a new tool of monetary-policy
management. At the conclusion of its meetings, it
releases a written statement to "explain" its
actions. The technical term for when the Fed
injects money into the system is "open market
operations"; some wags call this process, with the
Fed injecting verbiage into the system, "open
mouth operations".
It might seem that this
process vaguely resembles the gods on Olympus
using their booming supernatural voices to command
the poor, terrified mortals on Earth into
submission, but it's nowhere near that simple. For
one thing, the statements are so full of obtuse
and recondite economic jargon that they make the
turgid articulations on late-stage Marxism put out
by the late Soviet leader Leonid Brezhnev's
Politburo look like primary-school reading
textbooks in comparison.
Even though the
statements are, by law, public documents, they are
written in such a way that the Fed's intentions
are kept secret from the public - the statements
are for "the trade".
What we in "the
trade" will look for on Tuesday is some sort of
divination as to what the Bernanke Fed will do at
subsequent meetings, beginning with the next
fateful one on Halloween, October 31. How "the
trade" reacts to the statement will determine how
the markets react, so this is far from just an
academic or parlor-game exercise.
The Fed
has three possible statement-theme choices - no
more cuts, lots more cuts, or something in
between.
The stock market would react to a
25-basis-point combined with a statement interpreted to
mean that no more cuts were likely in much the
same way it would to no cut: a big, hurting,
house-of-pain selloff. A 25-point cut with the
implication that a lot more were soon upcoming
would probably not be well received either; that
would probably sink the already floundering US
dollar, now at record lows against the euro and
15-year lows against the British pound.
Most likely imbued in the DNA of every
feckless bureaucrat such as Bernanke is the course
they will take with this upcoming statement: slow
and steady, the middle path, they might cut again;
then again, they might not. Stay tuned.
In
the meantime, perhaps a few thoughts of sympathy
are warranted for poor Bernanke. If the subprime
mess gets very grim, if the markets or economy or
both spiral down and out of control, he will
receive the lion's share of the blame, even though
it was probably his predecessor Greenspan's
abnormally low interest rates from 2002-04 that
played the key role in the stoking of today's
crisis.
Greenspan reveled in the
planet's adoration for his 18-year stewardship of the US Fed; in
1999 he, along with Bill Clinton-era Treasury secretaries
Robert Rubin and Lawrence Summers, were named - as
if the three were the successors
to the Roman imperial ruling triumvirate of Julius Caesar,
Pompey and Crassus - "the committee
to save the world" by Time magazine.
No such accolade will await Bernanke if
things go bad here. Instead, he will learn the
eternal salesman's lament, the never-ending
uncertainty and insecurity of forever having to go
through life relying on, to paraphrase Arthur
Miller, "a shoeshine and a smile", along with, in
his case, an economics PhD from the Massachusetts
Institute of Technology.
Julian
Delasantellis is a management consultant,
private investor and educator in international
business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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