Fed up with the Fed
The Federal Reserve May Be Hurting Us More Than They Think

Yesterday--Halloween--the Federal Reserve Board of Governors decided to lower the prime rate by an additional 1/4 point--bringing the total reductions to 3/4 point in merely six weeks time. This is a pretty dramatic and scary action in the realms of monetary management. Similar reductions have occurred in the Fed Discount Rate and the Fed governors have also seen fit to pump literally hundreds of billions of dollars into the money supply over the last few months. All the while, bankers, hedge fund managers, and traders clamor for more.

All of this gives Huckleberry some pause... and a little additional clarity is, I believe, in order (see previous post).

The Fed is not being encouraged to lower interest rates because they are too high. Rather, rates are being lowered because the spread between the cost of funds paid by financial institutions and the interest rates that they are charging their customers is too small.

This applies to Subprime Mortgages, Credit Cards, and all riskier loans. The subprime mess--arguably at the root of all this consternation--has been caused by banks, brokers, and hedge funds not charging enough to cover the amount of risk already incumbent upon the borrowers that they have courted--proving once again that denial of risk does not mitigate it. Since (in most cases) contracts prevent the unilateral and/or unscheduled raising of interest rates, the only way the Fed can bail out these select financial institutions and companies is by lowering the cost of funds to provide some room for them to absorb the losses that should have reasonably been expected in the first place. The Fed is the only available source for this bailout because those loans--once touted as the belle of the ball--now have their blemishes on full display and the private equity markets no longer think that they are very pretty at all. Again, this should have been fully expected with a little math and due diligence evidently missing from their efforts to date.

Credit cards are in the same boat, but are even riskier. As the economy worsens/slows credit cards are usually the first to feel the default pinch. Prime credit cards are likely to remain in the same interest rate range and the lower credit (riskier) credit cards are likely to push up a bit to protect the banks from losses (the only thing worse than less profit at a bank are more losses).

But Won't My Payments Go Down Now That Rates Are Lower?
Not likely. This current round of rate cuts is designed to protect financial institutions--not consumers--and therefore consumers should not anticipate interest rate relief will be felt in their monthly loan payments. In fact, consumers will likely suffer higher costs overall as the dollar concurrently weakens and inflation bares its teeth. Statistically the argument can be made that mortgage and credit card payments were not high enough to cover the inherent risks. The current reductions show every indication (to this author) of being earmarked to stem the flow of blood on Wall Street.

This little insidious protection racket shifts the costs back onto the consumer-at-large in the form of lost buying power (inflation) and economic turmoil. The prevailing thought seems to be that it is better to squeeze a few drops of blood from each of us rather than take the heads (and robust profits) from the subset of us who wear pin-striped three-piece suits. The Fed obviously believes that they are choosing the lesser of two evils. I think that they are incorrect and that a greater evil is being done on many fronts.

Certainly more to come....

Be well,
Huckleberry

Alan Greenspan Dissected – What his New Book “The Age of Turbulence” Tells Us

Get ready for the coming week as former Federal Reserve Chairman Alan Greenspan’s new book “The Age of Turbulence: Adventures in a New World” hits the shelves. Personally, I will watch with amusement as the pundits of finance and politics jump breathlessly to glean sage-like comments and observations from its pages. An advance copy of the book was leaked out (imagine that!) and selected tidbits are making the rounds already. Perhaps not surprisingly the leaked passages are on the order of criticism toward Republicans. One wonders if a leak would have happened at all had the reverse been so.

Never the less, Republicans do deserve a bit of criticism here and there and Mr. Greenspan is always good for an interesting comment or two. So even though an advance copy of the book has not been made available to this author, let’s take a quick peak at some the salacity flying about in Bob Woodward’s piece in the (Washington Post).

The Current Batch of Republican Leaders
With regard to President Bush, Greenspan writes, "My biggest frustration remained the president's unwillingness to wield his veto against out-of-control spending. Not exercising the veto power became a hallmark of the Bush presidency. . . . To my mind, Bush's collaborate-don't-confront approach was a major mistake." Later on Greenspan capitalized that thought by suggesting that the Republicans deserved to loose their legislative majorities last year, “The Republicans in Congress lost their way," Greenspan writes. "They swapped principle for power. They ended up with neither."

The Maestro Greenspan was not done with his Republican colleagues yet. He went on to write, "House Speaker Hastert and House majority leader Tom DeLay seemed readily inclined to loosen the federal purse strings any time it might help add a few more seats to the Republican majority." In a later passage he continued that line of thinking, "I don't think the Democrats won. It was the Republicans who lost. The Democrats came to power in the Congress because they were the only party left standing."

Fair enough. The Conservative landscape is jam-packed with right-leaning pundits who have been criticizing the current administration in this regard for years (including yours truly)—so there is little new here that we know of yet. It will be interesting to hear how this is played out in the media, however. Read correctly, Mr. Greenspan’s criticisms seem to be that the Republicans were not Conservative enough in their approach and deeds and that this is his cause for concern. It is certainly not a ringing endorsement of the Democrat platform. I suspect that the tone of reporting will not reflect this important distinction.

What About Bill Clinton?
Evidently the book also reveals Greenspan’s fascination with Bill Clinton. There are a few telling passages we have available to us. In the first, Greenspan appears quite smitten with our most recent recalcitrant president, “Here was a fellow information hound. . . . We both read books and were curious and thoughtful about the world.” OK then, we all know that Bill Clinton is bright and can be very charming. But, like the rest of the nation, Alan Greenspan felt personally let down by that same charming façade.

Upon hearing about Clinton’s trysts with Monica Lewinsky (etc.), he could not believe it, writing, "I was incredulous. ‘There is no way these stories could be correct,’ I told my friends. 'No way.' " After learning that the reports were indeed accurate, he wrote, "I wondered how the president could take such a risk. It seemed so alien to the Bill Clinton I knew, and made me feel disappointed and sad."

Sorry Alan, we all had to live through that nightmare together.

The Iraq War
Alan Greenspan also makes a seemingly cryptic comment regarding the current Iraq conflict. Again according to the Post, Mr. Greenspan writes, "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil." We are told that Mr. Greenspan does not elaborate. If true, his lack of elaboration is disappointing because of its apparent pop-liberal sensibility. One would expect such a comment from the ignorant left—the Cindy Sheehans and Daily Kos’ of the world, et al.

The comment is too trite to be well thought out and would betray a naiveté one would find surprising in a man of Alan Greenspan’s education and credentials. Economics always makes up a large part of why any country goes to war. Getting caught up in an individually labeled commodity or a particular activity is far too easy. Historically speaking one could argue that our entry into World War Two was also about oil due to our embargo of Japan; that our Civil War was about labor costs in agricultural production; that all of the Greco-Persian conflicts revolved around the taxation of trade routs; or even that our own Revolutionary War was about the restriction of tea imports: but to do so is to miss literally everything about a country’s sovereignty, freedom, security, and economic prosperity. (Can’t you just hear the Revolutionary War critics of the day—“No more blood for tea!”)

It is perfectly valid that Mr. Greenspan might be for or against the current Iraq conflict for any number of reasons. It will be disappointing if the quotation we have been provided is solely a politically correct malapropism tossed in as media fodder to aid book sales. It would be even worse if the complexities and economic consequences of the Iraq War were, to Alan Greenspan, a literary afterthought not worthy of serious consideration and dissertation. For now I will grant him the benefit of the doubt.

The Man Himself
The book makes us privy to other passages regarding economic principles and summations of the world economy (I’ll give away the ending—according to Mr. Greenspan the United States does quite well). In these comments and revelations, he has been given mostly positive reviews by those who have read the actual text. The book also contains his personal memoirs and the telling of his life with his spouse, television correspondent Andrea Mitchell.

All in all I do not believe that the electorate will be unduly influenced by the release of Alan Greenspan’s long-awaited book—nor will the pillars of capitalism be shaken. Hopefully, we will all get a little bit more insight into the mind of who was arguably one of the ten most powerful men in the world for a very long time.

Be well,
Huckleberry

Mac Magruder Supersizes Ignorance in the Illegal Immigration Debate

Mac Magruder, prominent Arizona businessman and owner of several MacDonald’s franchises, appeared on NPR radio on July 6th, 2007, in an attempt to support his position against Arizona’s new law that toughens employer penalties for knowingly hiring illegal workers.

It is painful to hear Mac Magruder fumble and flail has he tries to make his points (listen for yourself- http://www.npr.org/templates/story/story.php?storyId=11784006 ) If I may summarize, Mac says that this law is bad because

• The verification pilot program mentioned in the law is flawed—because Mac says so.


• If the dictates of the law are followed to the letter and even-handedly applied to every applicant, that’s profiling. (This comment does not make sense in any language.)


• It is un-Constitutional now because if we change the law, it will then be unfair. (Um…excuse me?)


• The Governor knew the law was un-Constitutional when she signed it because it usurps Federal jurisdiction. (State Business licensing usurps Federal Law?)


• No business is knowingly hiring Illegal workers. (He actually said that.)


• Businesses that are hiring illegal worker deserve to be punished. (But, didn’t he just say that…Oh, never mind.)


• People and jobs will flee the state. (Perhaps only the illegal ones will flee.)


• We have entrapped all of the illegal workers by offering them jobs. (If they are entrapped, how can they flee?)


• It’s really a racial issue—because Mac says so. (Forget all that “rule of law” mumbo jumbo.)


• “Most of the people we are talking about are brothers and sisters down South; that are hard-working, wonderful people…they came here to build a better life….” (Since no one is hiring an illegal worker, who do you think Mac is talking about?)


• The economic benefits of illegal workers far outweigh some of costs people are associating with our “friends coming from Mexico.” (Where do I begin? Outweigh some of the costs?


• The economic benefits of who, exactly…since there are no businesses hiring illegal workers? Mac thinks all the illegal workers come from Mexico?)

It seems that Mr. Magruder cannot decide which argument to use, so he is trying them all on for size—supporting none of them effectively—and contradicting himself most of the time in the process. Mac has followed up his performance on NPR with several additional interviews on radio and in print that have added only consistency to his comments—but not quality. His thoughts are ill-informed and poorly presented, and so they remain unsatisfying on every level.

It is fitting and a touch ironic that Mac Magruder is in the business of fast-food—because, like the products he sells, his thoughts are over-cooked and quickly thrown together in a way that is not really good for any of us. How can one man, ostensibly a successful and savvy business leader, twist so much double-speak, ad hominem, and non-sequitur into a four-minute interview? Doesn’t he know that this is what we have Senators for? On the plus side, if this burger restaurant deal doesn’t pan out in the long run, he appears to be honing his skills for a career in liberal race-baiting. But I digress.

Big Mac is serving up a super-sized helping of self-serving sophistry with a side order of unpleasantness that will carry a price for Arizona far beyond the limits of any Value Menu. He is harming our wonderful state and its citizens of every configuration by degrading the valid arguments of his opposition and dragging honest dissenters through the grease-trap so that we all come out sticky and smelling bad. This technique failed when the Senate tried it, it failed again when President Bush tried it—it will fail now as well.

If the quality of one’s position is truly to be judged by the quality of one’s argument, then Business leaders like Mac Magruder and pro-illegal politicians have very weak positions indeed. I challenge “Wake Up Arizona” to stand legitimately on the field of ideas and present their case without the quick-fried fluff. I await their reply. Mr. Magruder, I suggest to you that Arizona has already “woken up” and that is precisely what is causing you so much angst.

Be well,
Huckleberry