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August 31, 2007
Bush addresses subprime lending
Via Reuters:
The FHA will soon launch a new program called "FHA Secure" to allow homeowners with good credit history, but who cannot afford their current payments, to refinance into FHA-insured mortgages, Bush said.
"This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes," he said.
For the cynical take, see The Big Picture. Tanta at Calculated Risk is "underwhelmed". Looks like sound and fury to me...not sure it signifies very much.
Posted by William Polley at 12:31 PM | Comments (0) | TrackBack
Bernanke at Jackson Hole
Here is a link to the much anticipated speech by Fed Chairman Ben Bernanke today at Jackson Hole. And here's the money quote that everyone will be reporting...
Well-functioning financial markets are essential for a prosperous economy. As the nation's central bank, the Federal Reserve seeks to promote general financial stability and to help to ensure that financial markets function in an orderly manner. In response to the developments in the financial markets in the period following the FOMC meeting, the Federal Reserve provided reserves to address unusual strains in money markets. On August 17, the Federal Reserve Board announced a cut in the discount rate of 50 basis points and adjustments in the Reserve Banks' usual discount window practices to facilitate the provision of term financing for as long as thirty days, renewable by the borrower. The Federal Reserve also took a number of supplemental actions, such as cutting the fee charged for lending Treasury securities. The purpose of the discount window actions was to assure depositories of the ready availability of a backstop source of liquidity. Even if banks find that borrowing from the discount window is not immediately necessary, the knowledge that liquidity is available should help alleviate concerns about funding that might otherwise constrain depositories from extending credit or making markets. The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets.
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy. In a statement issued simultaneously with the discount window announcement, the FOMC indicated that the deterioration in financial market conditions and the tightening of credit since its August 7 meeting had appreciably increased the downside risks to growth. In particular, the further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally.
The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country. Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.
The rest of the speech is mostly a history of the housing and mortgage markets from the turn of the 20th century onward. It is really quite interesting, and I would recommend that anyone who teaches money and banking put it on their reading list.
Toward the end, this caught my attention:
The dramatic changes in mortgage finance that I have described appear to have significantly affected the role of housing in the monetary transmission mechanism. Importantly, the easing of some traditional institutional and regulatory frictions seems to have reduced the sensitivity of residential construction to monetary policy, so that housing is no longer so central to monetary transmission as it was. In particular, in the absence of Reg Q ceilings on deposit rates and with a much-reduced role for deposits as a source of housing finance, the availability of mortgage credit today is generally less dependent on conditions in short-term money markets, where the central bank operates most directly.
Most estimates suggest that, because of the reduced sensitivity of housing to short-term interest rates, the response of the economy to a given change in the federal funds rate is modestly smaller and more balanced across sectors than in the past. These results are embodied in the Federal Reserve's large econometric model of the economy, which implies that only about 14 percent of the overall response of output to monetary policy is now attributable to movements in residential investment, in contrast to the model's estimate of 25 percent or so under what I have called the New Deal system.
This struck me as a very subtle way to communicate two important ideas. First, the real estate market is less synchronized with the business cycle than it used to be, and second, the fed funds rate is not the best tool for addressing problems in the real estate market. I agree with both, and if that is the operational view of the FOMC, then that anticipated rate cut on the 18th becomes a little bit less of a sure thing.
Bernanke concludes by acknowledging Edward (Ned) Gramlich, whose illness prevented him from attending the Jackson Hole symposium. You can buy Gramlich's book on the subprime debacle on Amazon. Watch it on BookTV this weekend. Keep the Gramlich family in your thoughts and prayers.
Posted by William Polley at 11:55 AM | Comments (1) | TrackBack
August 29, 2007
Fed funds market is looking more normal
After a rather wild few days discussed here, the fed funds market appears to be settling down. The standard deviation of fed funds trades is a small fraction of what it was during the height of the liquidity crisis, and the weighted average (effective) fed funds rate is pretty close to the target (data). Calculated Risk has some charts.
There was no "stealth cut". What we saw was a function of a few very low trades when the Fed injected large amounts of liquidity. The injections were large enough so that at the margin its value was zero--and it was priced accordingly. (Micro level data on this would probably be quite illuminating, but I don't believe it is publicly available.) That's not a bad thing to do when people are in the state that they were in. But now that portfolios have adjusted and cooler heads are prevailing, they've removed the slack. Back to, mostly, business as usual.
And there were no real surprises in the minutes from the last FOMC meeting, nicely summarized by the Wall St. Journal. Yes, they acknowledged the possibility that policy action might be necessary if the worsening financial conditions threaten economic growth. Yesterday's consumer confidence numbers notwithstanding, it is not yet clear that we are at that stage. The possibility of a rate cut before the end of the year is not out of the question. But a cut on September 18 is not a foregone conclusion. CBOT Binary Fed Options are saying it's about 2 to 1 odds that they will ease.
But with the meeting three weeks away, you can be sure that a number of events will cause those odds to fluctuate a bit before (maybe) converging toward something we can (almost) count on. Stay tuned.
Posted by William Polley at 12:56 PM | Comments (0) | TrackBack
August 27, 2007
We'll miss ya, Max
Max Sawicky is relinquishing the microphone.
I have a tremendous amount of respect for Max. We certainly have differing views on a number of things, but he has always conducted himself as a gentleman. We've linked to each other's posts a number of times, and it has made for great conversation. I will miss that.
He says that his "new professional responsibilities will preclude any public pontificating." That's too bad. I imagine that it will be difficult for him to control himself! But in all seriousness, I hope that he finds his new position to be fulfilling and rewarding.
Best wishes, Max!
Posted by William Polley at 03:02 PM | Comments (2) | TrackBack
August 22, 2007
David Wessel has a first-rate column in the Wall Street Journal today
Tomorrow, actually, as I write this... but in any case...
It seems these days that economists and pundits (myself included) are full of analogies. Here's a good one from David Wessel in the Wall Street Journal.
Think of the nation's economy as an automobile that requires gasoline for power (loans to businesses and consumers) and oil for lubrication (short-term credit among financial players.)
The immediate problem isn't gasoline: Banks are strong, and corporate coffers are full of cash to invest. The problem is lubrication. Countrywide Financial makes mortgages and then sells most of them to investors within weeks, but it needs short-term financing for that interval. It relied on short-term IOUs known as commercial paper but is having trouble selling that paper now.
It's worth your time to read the whole thing. He sums up in one column a lot of things that have been said in a lot of places over the last few weeks about how the financial system has changed since the crises of years past.
Posted by William Polley at 11:30 PM | Comments (2) | TrackBack
Why did the four large banks borrow from the Fed?
The NY Times reports:
With the four largest U.S. banks and a major international bank having borrowed from the Fed through the central bank's discount window, others may be more willing to follow, analysts said.
"The psychology is, if a bank needs to borrow from the discount window, and they think there's a stigma attached to it, they can say, 'Citi has done it, too,"' said Robert Albertson, chief strategist at Sandler O'Neill in New York.
Tyler Cowen cleverly responds:
Imagine that you, as a smart person, went around saying stupid things, in an attempt to limit discrimination against the stupid. You can come up with other analogies of your own.
That's true up to a point. But there's also the fact that no single one of those banks would have wanted to do it alone. No one wanted to be the first to the buffet table with the whole room watching, so the host gently nudged some good friends to go up together. Plus, the banks' motivation is not as altruistic as Tyler's analogy would suggest.
In other news today, Bank of America announced that it was buying a $2 billion equity stake in Countrywide. (NY Times)
Under terms of the deal, Bank of America, based in Charlotte, N.C., acquired $2 billion in the form of nonvoting, convertible preferred stock yielding 7.25 percent annually, Countrywide said.
Let's be clear. Bank of America isn't financing this deal (or even part of it) with borrowed reserves that need to be paid back in 30 days. This is more of a long term decision. However it is interesting that these events happened on the same day. Interesting in the sense that it reaffirms my belief that these four banks, of which Bank of America is one, are not borrowing from the Fed because they are in trouble. King Banaian (SCSU Scholars) agrees and writes
I'm reminded of the Knickerbocker crisis of 1907, when NYC banks did act as a lender of last resort before there was a Fed.
They are trying to show their confidence in the system. How far that will go remains to be seen. Whether others will follow also remains to be seen. But let's remember too that J.P. Morgan didn't organize the 1907 rescue of the banks out of charity. And in the movie It's a Wonderful Life, Potter wasn't selling, Potter was buying. We need to remember that the four banks that borrowed aren't doing something for nothing. They simply didn't want to do it alone. Perhaps today there are no Morgans and no Potters who can do it alone, and perhaps that's a good thing. There's liquidity out there. It just needs to keep circulating. Both of today's tangentially related events show that it is possible.
And that is a good thing.
Posted by William Polley at 09:52 PM | Comments (1) | TrackBack
AMS Notices: Interview with Stephen Smale
The Notices of the American Mathematical Society are now freely available online. One item in the most recent issue that may interest my readers is an interview with Stephen Smale.
Posted by William Polley at 04:26 PM | Comments (0) | TrackBack
The jawboning appears to be working
From today's NY Times:
Fed officials and top Treasury officials continued on Tuesday to talk by telephone with major banks, encouraging them to borrow from the discount window and repeating that there was no stigma associated with such loans. Traditionally, banks have only resorted to the Fed’s discount window when they had no other place to borrow money.
And Reuters now reports (ticker symbols and links removed)
NEW YORK (Reuters) - The four largest U.S. banks, led by Citigroup and Bank of America Corp. took the unusual step of borrowing $2 billion directly from the Federal Reserve on Wednesday, as the Fed tries to stabilize tempestuous financial markets by adding money to the banking system.
U.S. shares rose after the move, but financial stocks declined slightly.
Borrowing money directly from the Fed is usually seen as a sign of weakness, but JPMorgan Chase & Co., Bank of America and Wachovia Corp., said they have ample access to funds and made the move for the sake of the financial system. Citigroup, meanwhile, said it borrowed funds for customers; but the bank has issued at least $2.5 billion of corporate bonds this month.
The Wall Street Journal also carries a story and adds that the borrowing was $500 million by each bank.
It is important to point out that the stigma associated with discount window borrowing is largely a holdover from the days when it really was a discount. And so even today, there is still a reluctance among banks to go to the discount window that goes beyond the fact that now it is above the fed funds target. An excerpt from this Reuters story shows that people haven't totally figured out how to handle this. Again, the reference is to the four major banks stepping up to the window in what was obviously a coordinated move.
Analysts said the move could be encouraging for the market after the Fed said that using its discount window would be considered a sign of strength.
"I'm not sure if it's positive or negative. (But) if there are no problems, then they wouldn't have to borrow, so that could raise a flag," said Steve Goldman, market strategist, Weeden & Co. in Greenwich, Connecticut.
I think it's positive, and here's why. The coordinated nature of the move is meant to inspire confidence. They are not doing this because they had to do it today--and this is why it is important that the term of the discount window loans has been extended to 30 days as well. These four banks just took out a total of $2 billion in reserves over and above what they need. They will now be able to extend short term credit to their clients at nearly the same rate. There is still likely to be some small cost to the banks, so this isn't something that one of them would do themselves unless they had been on the receiving end of those phone calls from the Fed and the Treasury.
But this is going to allow some additional liquidity to circulate privately for a few weeks to help arrange for a more orderly workout of the situation. The four banks benefit from that just as everyone else does. Everyone needs to take a step back and see that this is exactly the sort of thing we've been hoping for.
It looks as if a lot of market participants are in a position where they are not yet ready to go to the lender of last resort, but they are feeling squeezed nonetheless. And this is throwing sand in the gears of the system. The Fed is the lender of last resort, but what can they do if troubled institutions are not yet at the panic stage where they need the Fed's emergency help.
They do exactly what they have done. They extend credit to institutions at the top of the private credit structure and encourage (jawboning or moral suasion) them to act as the "lender of next-to-last resort". In so doing they reaffirm that this is not an interest rate problem but a liquidity problem. This looks like a very encouraging development, and I wouldn't be surprised to see more of it in the coming weeks. Though some see this as a precursor to a cut in the funds rate, I do not. I see it as been an attempt to stave off a rate cut unless these problems affect the broader economy. If this plan works as they want it to, it is more likely to be contained and thus the need for a rate cut is decreased.
Posted by William Polley at 01:05 PM | Comments (1) | TrackBack
August 21, 2007
Beloit College's Annual Mindset List
Here we go again. The Mindset List is out. It looks like the are recycling some old material. From this year's list for students born in 1989:
61. They never saw Johnny Carson live on television.
And from the very first one back in 1998, for students born in 1980:
28. "The Tonight Show" has always been with Jay Leno.
Carson was on "The Tonight Show" until 1992. So it's not even correct to say that the students entering college today were not yet born when Jay Leno came on board. Save that one for three years from now. Yes, the last decade worth of students were really young when Carson retired. We get it.
Not sure about this one either...
32. They grew up in Wayne’s World.
Only if their parents let them watch SNL before kindergarten. Mike Myers had moved on to Austin Powers fame before the time today's incoming freshmen hit junior high.
There are, as always, some good ones, but I think it's getting harder to come up with a new list every year. Check out the list and judge for yourself. I'll be sure to run it by my students today.
UPDATE: I did run it by my students. My line about Mike Myers/Austin Powers elicited a few smiles. They were familiar with Wayne's World from reruns. Of course, I'm familiar with The Brady Bunch (which was canceled when I was two years old), but it wasn't a touchstone for me. Family Ties, on the other hand....
But I digress. The real purpose of this update is to link in this MSNBC article with a quote from a Beloit student. The setup is that the Berlin Wall came down the same year that most of today's freshmen were born.
“I actually visited the Berlin Wall with my parents when I was in fifth grade,” said Jacob Williams, 18, of Louisville Ky., who is going through freshmen orientation at Beloit this week. “I didn’t know a lot about the history, but I think it was a great piece of architecture.”
Yes, it appears that Mr. Williams is identifying the Brandenburg Gate with the Berlin Wall. The Brandenburg Gate is, of course, a magnificent piece of architecture which was completed in 1791. It was incorporated into the Berlin Wall, and in fact, in photos from the time you can see that the Berlin Wall actually obscured the Brandenburg Gate as seen from the West. The fact that Mr. Williams could visit the site as a fifth grader and appreciate its architectural beauty is due to the fact that the wall itself is gone.
The Berlin Wall itself was not a great piece of architecture, as we have freeway sound barriers in this country that look nicer. Sure, there was some stunning graffiti on the wall, but it could only be appreciated from one side.
The Brandenburg Gate is today a symbol of the reunified Germany. If Mr. Williams is under the impression that the Brandenburg Gate was built as part of the Berlin Wall (which is what it sounds like), then he indeed doesn't know much about the history.
If he thinks that the Berlin Wall (aside from the Brandenburg Gate) was a great piece of architecture then he doesn't know much about architecture.
Posted by William Polley at 11:10 AM | Comments (1) | TrackBack
China raises interest rates again
Seems like just a month ago. Oh, right, it was just a month ago. Via China Daily:
China's central bank raised the benchmark interest rates on Tuesday for the fourth time this year in an effort to prevent the economy from overheating and curb accelerating inflation.
The one-year deposit rate will increase 27 basis points to 3.60 percent, while one-year lending rate will rise by 18 basis points to 7.02 percent, effective on Wednesday, the People's Bank of China said in a statement on its website.
And it won't be the last, either. Real interest rates are still negative.
The inflation rate is also higher than the deposit rate, indicating a loss of purchasing power if people put their money into banks.
The low interest rate policy has somewhat encouraged an exodus of bank savings to the country's skyrocketing stock market, which has soared more than 80 percent so far this year on top of a 130 percent rally in 2006.
Somewhat? Make no mistake. Policymakers are concerned about this, and rightly so.
Posted by William Polley at 10:42 AM | Comments (0) | TrackBack
August 20, 2007
A good set of articles
The Wall Street Journal has a fine set of articles on the Fed and the recent problems in the financial markets.
Start with this one and then check out these two.
Posted by William Polley at 10:30 AM | Comments (0) | TrackBack
August 17, 2007
Fed cuts discount rate
Note: Earlier today my web host had a DNS meltdown. Since I was able to telnet to the site, I typed a makeshift "post" directly into the main blog page, knowing that I might not get a chance to log in until tonight. Now that the DNS issue has been fixed, I am putting the content of that "post" into a proper post. I have also added links to the Fed statements.
If you are reading this, then the DNS issue has resolved. However, I will need to be away from the computer for a few hours this afternoon, so I wanted to get a message up for when things are back to normal.
The irony is that even with all the shake up today, there isn't a whole lot to say that hasn't already been said. The Fed lowered the discount rate (something that I suggested a while back), but did not act to lower the fed funds target. They did, however, issue a statement which announced the new assessment of risk being more tilted towards lower growth than higher inflation. This does pave the way for a change in the target down the road if the need arises. I think it's fairly obvious that they want to hold off on that. If they didn't want to hold off, they would have just gone ahead and done it today. But I think that they correctly realize that we're moving into a period where the decisions are going to be made on a day-to-day basis. This statement, which is rare in announcing a shift in the bias between meetings without a change in the target, is simply an acknowledgment of that fact.
Remember, since the discount rate is a misnomer (it's really a premium rate now), the action today simply lowers the penalty that banks pay to borrow from the Fed directly. As Bagehot famously said, the appropriate thing to do here is to lend freely at a penalty rate. They're still doing that. It's just that in this circumstance a lower penalty is warranted so that if a larger liquidity squeeze develops banks might be encouraged to go to the discount window sooner. I wasn't sure they would do it--thinking that it could cause more panic. That didn't seem to happen, and I think the reason is that in the last few days more market participants have come to the realization that the Fed was going to do "something" and so it wasn't really all that unexpected, even though what they did was a bit unusual.
One final comment about the many commentators who have mentioned the lower effective fed funds rate. I covered this in my previous post, but here's one other thing to consider. I think in this case, it would be more useful to know what the median fed funds rate is. The effective rate is a weighted average and is being pulled down by trades at close to zero, which I think are due to the last trades of the day being excess reserves and have a lower reservation price. I don't think the median rate is computed, but if it was it would be more illuminating.
I still haven't come over to the camp that says that a rate cut in September is a sure thing. Everything I see is telling me that the Fed is doing whatever it can to avoid it. It may not be possible, but they will see how this cut in the discount rate plays out and take it from there.
There will be a rate cut if it looks as if the present situation is spilling over into overall gross domestic private investment (e.g. if commercial real estate, which has been stronger, begins to show signs of failing). That's when a cut in the target fed funds rate (which would lower the effective rate, as well as the high end of the range and the median) would be called for. The discount rate action today was not aimed at stimulating the economy, but rather to provide a marginally more attractive liquidity cushion.
I'm sure there will be lots of good commentary over the weekend and a highly anticipated opening of the markets on Monday.
UPDATE: James Hamilton offers the following excellent observations with which I completely agree.
I think that the Fed would prefer to rely on the automatic functioning of the discount window, rather than the multiple aggressive open market operations that we saw on August 10, to respond to the kind of challenges that have arisen in markets over the last few weeks. If the Fed really wants banks to go to the discount window rather than bid the fed funds rate up to 6% in response to these kinds of pressures, it makes sense to offer to lend through the discount window at the new lower rate of 5.75%, as well as extend the terms of these loans to 30 days, as the Fed did this Friday.
I believe that the Fed adjusted the discount rate rather than the target fed funds rate not because it's a back-door way to lower interest rates, but instead in order to address the specific policy objective of making sure the discount window gets used as part of the automatic response to the kinds of liquidity pressures that have been bobbing up these last two weeks.
Posted by William Polley at 06:09 PM | Comments (3) | TrackBack
August 15, 2007
Strange things in the fed funds market
Felix Salmon shows that the effective fed funds rate has dipped below 4.75%. Of course, given Friday's events, one would have expected the effective rate to have been low. Even Monday I can understand. But this seems to be lingering more than many would have expected. What's up?
First, let's do a graph showing not just the effective rate, which is a weighted average, but also the range. (Data)
And now we see the larger picture. The reason for that the effective rate has dropped a bit is because there are a few trades at very low (zero for Friday and Monday) interest rates. The high end of the range is right where you would expect it to be--consistent with the last month or so. But why the trades at or close to zero?
Remember, the Federal Reserve does not control this rate precisely. Also, even under normal conditions, the funds trade in a range. Creditworthiness of the borrower matters for a few basis points. So what the Fed does under normal circumstances is to try to get the weighted average... the preponderance of the trades, if you will... as close to the target as possible. It is quite normal to miss by a couple of basis points, but it's a testament to the institutional knowledge of the trading desk in New York that they can get it that close day in and day out.
Remember also that this infusion of liquidity represents reserves, or base money. It doesn't get multiplied through the deposit process unless banks lend those reserves to create new deposits. Something tells me that's not going to be an enormous risk in this case. Intermediaries are more likely to be carrying some excess reserves at this point. And they earn zero interest on those reserves. Hence, it's not entirely out of whack that at a time like this the market rate on those marginal excess reserves is significantly lower than the target. But zero?
Here's what Reuters had to say:
DOWN TO ZERO: According to data from The Federal Reserve Bank of New York, federal funds low trade of the session on both Friday and Monday was zero percent. On Friday, the highest traded intraday level was 6.05 percent, while Monday's intraday high was 5.5 percent.
Market analysts said the low trades showed that the Fed's liquidity infusions had been enough to bring down the cost of overnight money steeply as volume thinned in late afternoon trade. Data for federal funds on the New York Fed Web site goes back to January 2000 and shows that federal funds have not traded at zero before then, although they have come close.
In the aftermath of the Sept. 11, 2001 attacks, fed funds traded at 0.06 percent according to Federal Reserve data. In August 2004, fed funds traded at 0.03 percent.
A zero intraday trade for federal funds may be an even rarer event, analysts say.
"I find no evidence of federal funds trading at zero at any time since at least 1988," said Tony Crescenzi, chief bond market strategist, Miller, Tabak & Co. in New York.
So while I don't have a full and definitive explanation, it would seem that borrower risk is a factor, and the fact that these are excess reserves (which earn no interest) is also a factor. In that case, the low end of the range could stay low until the reserve picture gets back to normal. Soon we should get some data on excess reserves, which may shed some light on this situation.
In other words, I don't see this small fraction of trades at such a low level as being inflationary. Quite the contrary, if intermediaries want to hold more excess reserves as a risk management measure then the Fed is doing the right thing by offering those reserves. It only becomes a problem if those intermediaries run out and make more questionable loans with the money. I don't see that happening, and if it does, then (a) we'll call them on it, and (b) the Fed will likely pull back those reserves. Wouldn't you want intermediaries to respond to the recent turmoil by holding excess reserves? If so, then I wouldn't get worked up by some fed funds trading on the low side, even significantly on the low side.
I would suspect that it will creep slowly away from zero over the next few days (barring any other events), but the standard deviation is likely to remain higher than it was just a couple weeks ago.
Back the Reuters piece referenced above, this should also help:
SUPPLY: Issuance of Treasury bonds and notes can put upward pressure on federal funds, bond analysts say. For example, the settlement of last week's 10-year Treasury note and and 30-year Treasury bond auctions this week could put upward pressure on federal funds, said Josh Stiles, bond strategist and managing director with IDEAglobal in New York.
And of course, the Fed knows that and would have taken it into account when it made the 14 day repo last Thursday.
So don't get the impression that the funds rate has gone down in any meaningful sense until we see what the excess reserve picture looks like.
UPDATE: Tim Duy has some comments on this and on St. Louis Fed President William Poole's interview with Bloomberg. For the record, I agree with Tim that the temporary nature of most of the injection is the main reason that this is not inflationary. But I think the main reason we're seeing a few fed funds trades near zero interest is that those are the marginal trades of excess reserves. That intermediaries appear to be holding excess reserves even after much of last week's injection has been reversed is significant. This also puts some downward pressure on inflation if that practice continues.
UPDATE 2: The Fed injected another $12 billion in a 1 day repo and $5 billion in a 14 day repo this morning. The 14 day repo will correspond with the 14 day maintenance period for reserves which begins today. The Fed also announced that with the new maintenance period starting, they may need to inject more reserves but that should not be interpreted as a sign of a problem. For more, see this Wall Street Journal piece.
Posted by William Polley at 08:17 PM | Comments (0) | TrackBack
August 13, 2007
Excellent primer on what the Fed did and why they did it
Stephen Cecchetti: Subprime 'crisis' (voxeu.org)
Posted by William Polley at 05:32 PM | Comments (0) | TrackBack
Fed wins battle, war not over
Compared to Friday the news is that there isn't much news on the liquidity front. The Fed today injected only $2 billion. That effectively takes out nearly all of what they put in on Friday. There still is an extra $12 billion or so from a 14 day repo that took place last Thursday. But the upshot of all of this is that according to CNBC the fed funds rate is trading at or just a little higher than the target.
In other words, nothing too out of the ordinary, and the Fed might just be content to let the funds rate sit a little bit higher today. It's as if they are telling the market not to count their chickens before they are hatched when it comes to that rate cut the street has been calling for. Everybody and their brother is talking about moral hazard, and rightfully so. It is still my opinion that a rate cut is not desirable and would only be used if something like what happened on Friday turned into something close to a true global meltdown.
But it didn't. Mr. Bernanke won this one. He stared down the analysts calling for a rate cut and didn't blink. He did exactly what was required of him and the Fed. Simply put, the funds rate started trading above the target on Friday. So the Fed injected the liquidity to get it back down to the target. Full stop. Nice job.
As I watched CNBC this morning, I also began to get a fuller sense, as did anyone else who was listening carefully, of what was really happening. I heard one of the analysts say that the leverage in the hedge funds had dropped dramatically and that a significant amount of cash had been injected into those funds. That, of course, is exactly what needed to be done, and when you step back and think about it, everything that happened on Friday starts to make sense. A lot of people were in some pretty risky positions and got out of those positions and onto firmer ground. Of course, on Thursday and Friday, without knowing what was really going on it looked like more of a panic. If it is true that the leverage has decreased, then there should be less of a chance of something like that happening again, or worse.
Are the hedge funds and the other big financial firms hunkered down to weather any more fallout from subprime delinquencies? We can hope so. And if it is so, it is largely because of the Fed's injection of liquidity on Friday that made that process take place in a more orderly fashion. When the final story is written, that action may look pretty heroic. But like all good heroes, the Fed would say they were just doing what needed to be done.
Of course, hearing that July retail sales were up more than expected also helped everyone get off to a good start today. But I want to call your attention to some other news, which I think will be the most under-reported story of today.
China's inflation rate now stands at 5.6% with food prices rising around 15%. Why mention that in the context of what the Fed is doing? Because just as the Fed has to be on guard for deflationary pressures being transmitted internationally, they need to be on guard from inflationary risks overseas. Higher prices from China are already showing up on our shores. The Fed needs to make sure that we don't end up importing inflation from China.
Of course that was far from our minds on Friday, and rightfully so. However, with that danger passed, at least for now, we need to keep an eye on the other risks out there.
Posted by William Polley at 10:23 AM | Comments (1) | TrackBack
August 11, 2007
Robert Frank's Economic View: Back to school edition
Robert Frank brings up a problem he wrote about two years ago and goes on to compare learning economics to learning a foreign language. Here's part of the article. Read the whole thing.
In a recent paper, Paul J. Ferraro and Laura O. Taylor, economists at Georgia State University, suggest a more troubling possibility — that introductory economics instructors may not have mastered some of the basic concepts themselves. When the researchers described an activity and asked a sample of 199 professional economists to identify its opportunity cost, only one in five answered correctly.
The good news is that an approach that has revolutionized the teaching of foreign languages promises similar gains in economics and other disciplines. I took four years of Spanish in high school, only to have difficulty making myself understood when traveling in Spain. In those days, most language courses focused on arcane grammatical details, the functional equivalent of the technical material that often bedevils introductory economics students. Today, the best language programs try to mimic the organic process by which children learn their native language.
My first exposure to the new approach came during my Peace Corps training for teaching math and science in rural Nepal. All the things we learned to say were grammatically correct, but we were never taught any formal grammatical rules. Starting from scratch, we had to be able to teach, in Nepali, just 13 weeks later. Our linguistic skills were fairly basic, but virtually all of us made it.
Of course, it’s not easy taking this approach consistently in an economics textbook. Ben S. Bernanke and I have tried in our own textbook, but given what the marketplace is willing to accept, we have not yet gotten all the way there.
Just as a few simple sentence patterns enable small children to express an amazing variety of thoughts, a few basic principles do much of the lifting in economics. If someone focuses on only these principles and applies them repeatedly in examples drawn from familiar contexts, they can be mastered easily in a single semester.
The form in which ideas are conveyed is important. Perhaps because our species evolved as storytellers, the human brain is innately receptive to information in narrative form. Years ago, I stumbled upon an assignment that plays directly to this strength.
Twice during the semester, I ask students to pose an interesting question based on something they have personally observed or experienced. In no more than 500 words, they must then use basic economic principles to answer it. I call it the “economic naturalist” assignment, in the spirit of field biologists who use Darwinian principles to interpret the traits and behavior of living things.
Here's his column from two years ago and my response. Economic naturalism is harder to do for macro (current conditions excepted), but macro principles could use a fresh approach as well. Something for the "to do" list.
Posted by William Polley at 04:35 PM | Comments (0) | TrackBack
August 10, 2007
Media appearance
I received an e-mail from King Banaian (SCSU Scholars) inviting me onto his radio program on AM1280 "The Patriot" WWTC in Minneapolis-St. Paul. The show is "The Final Word", part of the Northern Alliance Radio Network, and airs Saturday from 3-5pm Central. Tune in if you're in the Twin Cities. If not, the show streams here.
UPDATE: I was on for the 3:30 to 4:00 segment. Had a great time! Welcome to any listeners who found their way here.
Posted by William Polley at 10:58 PM | Comments (0) | TrackBack
Quite a day
The markets had a roller coaster day, but ended the week on the positive side. It's important to remember that the Fed's action today was not to save the market or prevent a crash or bail out the bankers. None of the above. This was much simpler. A lot of entities holding mortgage backed securities needed liquidity. They were willing to borrow at a higher overnight rate to get that liquidity as evidenced by the spike in the funds rate early in the morning. The Fed, quite understandably, did not want the funds rate to spike, and so they loaned these banks reserves accepting mortgage backed securities of the highest quality as collateral (the Fed was NOT bailing them out by buying distressed subprime loans). This kept anyone from unloading good quality assets at fire sale prices just to get liquidity. That would have been disastrous. The agreement is that on Monday the banks get their securities back and the Fed takes back the reserves.
Of course, on Monday they might have to do it again if there is still a need. And even after this immediate episode quiets down, there may be a need to do it later. As Felix Salmon points out (hat tip to King Banaian), the inability to roll over commercial paper can be the event that leads to problems of systemic risk. And that is very hard to predict whether and when it will happen again. All we can say is that it might happen.
Speculation has raged all day about whether the Fed will need to raise interest rates. Early on I was hearing on CNBC that the market was pricing in a 100% chance of a cut by, I believe, October. That seems to have died down a bit, at least on the binary options market. Now it's basically 50-50 by the September meeting (that includes the possibility of an intermeeting cut. October and December probabilities were 70 and 76 percent--little changed from yesterday. Obviously the Fed is trying to avoid lowering rates. They want to keep this a liquidity issue where the important thing is quantity not price. Price becomes more important if it is felt that this will contribute to the slowing of the economy in aggregate.
It was quite a day. But at the end of the day there was, I think, a feeling that in the aggregate we dodged one for now. High volatility is just something we'll have to get used to for a while.
UPDATE: MSNBC makes it seem worse than it was.
On Friday, as Bernanke faced the first big crisis of his 18-month tenure, the central bank was forced into action, buying up billions of dollars worth of crumbling bonds in an effort to stabilize financial markets that appeared to be coming unglued.
As Calculated Risk says, "Nope." They only accept high quality mortgage backed securities not "crumbling bonds."
Posted by William Polley at 06:51 PM | Comments (2) | TrackBack
Fed issues statement: "The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets"
This just in from the Fed...
The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.
The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.
Posted by William Polley at 08:19 AM | Comments (5) | TrackBack
Read this while you watch to see if more liquidity is needed this morning
Joellen Perry, Monica Houston-Waesch and Greg Ip have an excellent article in this morning's Wall St. Journal.
I had CNBC on in the kitchen as I was doing some other things so I didn't see who said this, but someone they interviewed reminded the viewers that this is a credit issue not an interest rate issue (or words to that effect). That is spot on. If liquidity is necessary to maintain the target, then so be it. But this is not a time for central bankers to overreact.
UPDATE: CNBC is reporting that the Fed put in $19 billion this morning.
UPDATE: Another $16 billion at 10:55 (EDT). Here is a link to the NY Fed page for temporary open market operations.
UPDATE: Another $3 billion at 1:50 (EDT).
Posted by William Polley at 07:07 AM | Comments (0) | TrackBack
August 09, 2007
Fed pumps liquidity into market
It started in Europe when French bank BNP froze $2.2 billion in funds. (Reuters)
"The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating," it said in a statement.
The European Central Bank immediately injected almost 95 billion euros into the market. This morning, the concerns had spread to the U.S. Fed funds were trading at between 5.375 and 5.5% early in the day according to this Wall Street Journal article. In order to keep the funds rate at its target, the Fed injected $24 billion in a two week repo and $12 billion in an overnight repo. The Journal article states:
The average rate at which the money was lent was also marginally higher than normal, an indication of the strength of demand for cash. "What has happened so far is interesting but not extraordinary," said Ray Stone of Stone & McCarthy Associates, an economics and markets research firm. The Fed, he said, is probably having trouble estimating demand for excess reserves because of the "strain in the credit market" which is adding to the pressure on reserves.
That's probably understating it a bit. What spilled over across the Atlantic was not anticipated today. At best, you might expect that something like this could have happened sometime. It happens that today was the day, and thus was a bit of a surprise.
Are we out of the woods? Not really. Again, from the WSJ:
One risk the Fed faces is that if it injects too much cash, the Fed funds rate would plummet later on to below its target. However, unlike in previous eras, that is unlikely to be interpreted as a deliberate easing of monetary policy. Since 1994, the Fed has announced when it is changing its target for fed funds. After the Sept. 11, 2001, terrorist attacks disrupted markets and sent demand for cash soaring in 2001, the Fed poured money into the system and warned this could send the fed funds rate below its target.
Correct. The same is true here, but on (for now at least) a much smaller scale. This is not an emergency, and indeed the Fed's injection is much smaller than the ECB's injection. Furthermore, the Fed's injection was not aimed at calming a panic, but rather at maintaining the target.
The Fed did the right thing in maintaining the target. If there are no other incidents of banks freezing funds, then this may be enough. But the real question is now, what next?
That's a tough question to answer. It is certainly possible that another bank or hedge fund will find itself in trouble before the mortgage mess straightens itself out. In fact, it's probably pretty likely. It's just that no one knows who, when, or how big. So what is the Fed's role? I keep going back to one of my favorite papers by my fellow Iowa alum Chris Neely. Neely chronicles the use of various methods of providing liquidity: repos, discount window lending, and float, in response to various crises.
Let us not forget the discount window, which really is a misnomer these days. The term refers to the fact that it used to be typically a bit lower than the funds rate. A few years ago, the discount window policy changed. Today, there are actually two discount rates, primary and secondary credit rates. Primary credit is available at a rate of 6.25% and secondary credit at 6.75%. You can read about the specifics here.
Today's intervention was just a ripple in an ocean, but in the event that something more is on the horizon, the Fed needs to remind banks that the discount window is always there to meet their emergency liquidity needs. If anything, the Fed might consider lowering the discount rate to marginally encourage borrowing from that source rather than putting strain on the fed funds market. Lowering the fed funds rate should not be the first reaction to this situation despite the fact that many people will call for it. Lower the fed funds target only if it looks like this is not going to be contained by the financial markets.
This is not (yet) a crisis on the scale of others we have seen. Whether more injections from the Fed will be required to prevent counterparty risk and systemic risk remains to be seen, though I am confident that they will supply the liquidity if required. As for the funds rate, the carnage at the CBOT suggests that either others are not as confident that this will be contained, or they believe that the Fed is on the verge of giving in. The first is a possibility that cannot be ruled out. The second is, I hope, a misguided notion.
Still, it was quite a significant event that took place today.
UPDATE: Mark Thoma must have sneaked a peak at the lecture I plan on giving my intermediate macro class on day one this fall. Very nice exposition.
UPDATE 2: Felix Salmon notes this Wall Street Journal piece that says the subprime mess may have extended its reach into the money market. That would certainly raise the risk that this will cause problems in the wider world. That is not something that you like to see.
Posted by William Polley at 02:47 PM | Comments (0) | TrackBack
August 08, 2007
NY Times science question corrected... sort of
Recently I poked fun at the NY Times science section for asking:
Is it true that airport runways are lined with blue lights because blue light can be seen from the longest distance?
Of course, the runways are not lined with blue lights, the taxiways are.
So after receiving an e-mail from me and doubtless many other pilots (or even observant passengers) pointing out the error in the question, they changed it on the web page. The question now reads:
Is it true that airport taxiways are lined with blue lights because blue light can be seen from the longest distance?
Their first attempt was wrong. The correction now just sounds silly. Here's my answer...
No. Being able to see a taxiway from a distance is of minor importance compared to being able to see the runway from a distance. That explains why runways are lined with much brighter white lights that can pierce through low visibility conditions. The dimmer blue lights of the taxiway produce less glare for the pilots during ground operations when they need to focus on the path immediately ahead at slow speeds.
The fact that blue-green light is fairly easy to see is interesting, but not an answer to the question.
A side note that might have led them to a more interesting version of the question: My Volkswagen has blue backlit dashboard lights (with red pointers for the guages). When I bought the car, I was told that many European cars are like that, and that it makes the dashboard easier to read. I don't dispute it at all. Compared to my American made car with the conventional green lighting, the VW dashboard lights are very easy on the eyes. For what it's worth.
Posted by William Polley at 08:49 PM | Comments (2) | TrackBack
Fed funds options continue to return to something approaching normalcy
As I did yesterday, I focus on CBOT binary call options at a strike price of 94750. As of 3pm:
Sept07 down 9, currently at 13
Oct07 down 7, currently at 25
Dec07 up 3, currently at 35
As an aside, a put option with a strike of 94750 last traded at 3 points, up 2 from yesterday. That's a contract that pays if the target fed funds rate is higher than the current 5.25% after the December meeting.
I call the last couple weeks, "Denial."
Posted by William Polley at 03:29 PM | Comments (0) | TrackBack
August 07, 2007
Fed funds options reflect changed outlook
I just checked the Fed Funds Binary Options on the Chicago Board of Trade. Here is a link, but I do not know how stable it is. When trading opens tomorrow, the quotes will be different anyway.
Note to self: WIU economics faculty and students usually make a trip up to Chicago to see the Board of Trade every year. I am one of the faculty who works on scheduling and arranging the trip. I must do what I can to see if we can get up there on an FOMC day this fall.
From the closing quotes, it looks like it was an exciting afternoon. In fact, I was watching CNBC when the announcement came and at the moment the reporter started reading the statement the trading pit in Chicago erupted. That's the only word that comes to mind. The quotes tell the story of what they were yelling about.
Rather than detail them all, I will focus on just the call options with a strike price of 94750 (pays 100 if the target funds rate is less than 5.25% on the expiration date).
Sept07 down 7 to close at 22.
Oct07 down 6 to close at 32.
Dec07 down 18 to close at 32.
I think these pretty much speak for themselves. Roughly speaking, the market is saying that if they do cut, they cut by October. But it's only a 1 in 3 chance that they do it at all (this year).
UPDATE: The NY Times editors are in denial.
Despite the Federal Reserve’s stay-the-course message yesterday, investors are betting on at least one interest-rate cut by January, intended to quell turmoil in the markets and to juice the slow economy.
A couple days ago the market was saying it was 50-50. Now the market is saying it's (roughly) 2:1 against (or 1 in 3 that they will, if you prefer). Looks to me like some of them switched their bets.
They would have done well to listen to Cassandra.
Posted by William Polley at 10:24 PM | Comments (4) | TrackBack
MnDOT camera misses bridge collapse, captures aftermath
Several days ago, I speculated on whether the MnDOT cameras recorded the 35W bridge collapse. Well, now we know. They were recording, but the closest camera was facing the other direction at the time. What you see is one last car make it across and all the opposing traffic stops. The camera operator, realizing something is wrong, pans the camera over to see that the bridge is gone.
But there is at least one other camera that could have potentially had a view of the bridge. The camera at 4th St. was not operating the morning after. It is back up now. Unless it was zoomed in, it would have a rather poor view because of the distance. Due to its orientation, it might be able to show which sections of road gave way first. In the event that it was recording and did see anything of value, I would guess that the NTSB is looking at it.
Posted by William Polley at 07:21 PM | Comments (0) | TrackBack
FOMC statement
FOMC statement for August 7, 2007:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh.
The paragraph on inflation is unchanged. In the live coverage on CNBC after the announcement, this part had Jim Cramer a little riled up. Perhaps someone will have that on YouTube. (Aside: Someone made a comment to Cramer during the coverage about his YouTube fame. Priceless.) In keeping with the Chairman's statements a couple weeks ago, I'm really not surprised about this. After all, last months inflation figures just barely took 12 month core inflation into the comfort zone. It is understandable that they would not declare victory yet.
The real meat of the statement is in the additional wording in the other paragraphs. They say, "Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses,..." As many suggested they should, the Fed acknowledged the fact that there is a bit of a liquidity squeeze. This is significant. I don't recall anything quite this forthcoming in past statement. The closest thing in recent memory are the minutes to the August 18, 1998 meeting which included statements about increased volatility and widening risk spreads.
Finally, they say:
Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.
You'd still have to call it an asymmetric bias, but it does reflect a little bit of a changing sentiment. The downside risks should not increase appreciably further unless the unwinding of the mortgage market affects credit conditions more broadly. After all, they mentioned the "solid growth in employment and incomes and a robust global economy" in the first part of the statement. But the bottom line remains that the Fed is going to not jump to rescue the mortgage banks unless they would risk a systemic failure of the system through their inaction. It is not the Fed's job to be an enabler.
UPDATE: For a while the Dow was down, now it's up close to 100 points. As usual, the Wall Street Journal's coverage is excellent with an article, a comment on the Real Time Economics blog about how past statements have reflected new risks, and of course the "Economists React" page, which is as colorful as ever and mostly on target.
The Real Time blog references the 1998 situation as I did above. However, they were looking at the statements, which had a much different character then. I looked at the minutes which provide more detail, and at that time, the August minutes and the September statement would have come out roughly simultaneously. The minutes to todays meeting should prove just as interesting.
Posted by William Polley at 01:57 PM | Comments (2) | TrackBack
All eyes on the Fed
Later today, the FOMC meets to do what they do every six weeks or so...determine the target federal funds rate going forward. What will they do? What will the press release say? And what does it all mean? Those are going to be the questions on people's minds. Here's what a NY Times article, which quotes Jared Bernstein of the Economic Policy Institute says:
By taking a firm line in the current credit crunch, Mr. Bernanke can show investors that they cannot count on the Fed to save them from market swings, Mr. Bernstein said.
“This would be a good time for the Fed to impose some discipline on financial markets that we haven’t seen in a while,” he said.
But, in an illustration of the fine line that Mr. Bernanke must walk, Mr. Bernstein said he hopes the Fed considers lowering interest rates this fall, not to help Wall Street and hedge funds, but to lower the risk of an economic slowdown that would hurt middle-income Americans. With core inflation, excluding food and energy, running under 2 percent annually, the Fed has room to lower rates, Mr. Bernstein said.
By contrast, Jim Cramer wants Bernanke to save Wall Street. Check out the videos on Ritholtz's page too.
Fed funds options across the board are showing that the market is increasingly expecting the Fed to ease before the end of the year. The binary call option for December closed at 50 points today. Why it seems like just a few days ago it opened at 41. How I wish I had the sort of deep pockets to play in that market. Judging by the spread in the contract prices it looks like September...the next meeting after today... is where the market is increasingly putting its money. There was even some activity on the August contract as some traders are apparently hedging their position...just in case.
But any movement tomorrow is still a very long shot. The key will be the statement. Will they keep this language?
The economy seems likely to continue to expand at a moderate pace over coming quarters.
As the discussion of the latest GDP numbers showed, a lot of people believe that the economy will expand at a slower pace. The problem for the Fed is that if they change the language, it will cause a surge in the market as everyone re-evaluates their positions in light of the higher probability that the Fed will ease in September. It becomes a dangerous game of chicken if the Fed changes its language but doesn't follow through at the next meeting. How good is Mr. Bernanke's poker face? A shift in language now might as well be a rate cut now because it will be priced in by close of business.
Or, the Fed could retain the existing language. At the very least, this would be likely to provoke another tirade from Cramer. But seriously, this would lead to the market trying to guess whether Bernanke is playing chicken with them. We might see some disconnect in the bond market like we saw earlier this year. Ultimately, any rate cut, if and when it comes, will be more of a surprise, perhaps even an unscheduled one like in 2001. I wouldn't discount that as a mechanism that the Fed could use if they wanted to avoid the scenario of the previous paragraph.
Then there is this sentence from the last press release:
However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated.
But the latest inflation numbers were encouraging. At the moment, core inflation over the last 12 months has been under 2%, barely in the "comfort zone". Perhaps a modification of this sentence is in order, moderating the language just a bit. Truly, this is where a real target or a policy rule would be handy.
Finally, the sentence everyone will be looking at is this:
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.
This would have reflected the Chairman's outlook as recently as a couple of weeks ago when he visited Capitol Hill. Last week's numbers aside, there is likely to be a significant contingent in the FOMC who continue to see inflation as the larger risk. For them, even if growth slows to 1 or 2% in the remainder of this year, the potential to rekindle the inflation expectations is too great to risk on a rate cut now, or even the suggestion of one next month. Stay the course and continue to hope that the subprime mess doesn't totally unwind.
And it is that subprime mess that presents the critical test for the Fed. It is not their job to take away the risk of failure of these loans. However, their job is to ensure that it does not cascade into a problem of systemic risk. Willem Buiter has a point. Remind the firms that the discount window is open if they need liquidity to meet their obligations, perhaps even at a penalty rate (though that's pretty unlikely to be adopted in practice by this Fed). Be the lender of last resort, not the enabler of first resort. Wall Street won't like it, but it will be better than the alternatives.
As a student of the Great Depression, Mr. Bernanke certainly understands these issues well... better than most commentators gave him credit for a couple years ago. And for that reason, I think it is safe to say that the Fed will keep rates the same tomorrow and any change in language is going to be very subtle.
Predictably the market will overreact. Bonds might do some weird things for a while. That would not be new. And the Fed will continue to hope that it can pull it off again next month. In the meantime, we'll keep watching and waiting.
Posted by William Polley at 12:15 AM | Comments (1) | TrackBack
August 06, 2007
The research department was asleep on this one
The science section of the NY Times asked this question:
Is it true that airport runways are lined with blue lights because blue light can be seen from the longest distance?"
They go on to answer that in fact yes, the human eye is particularly well adapted to seeing blue-green lights at night. One might infer that is why airports are marked the way they are.
Of course, airport runways are NOT lined with blue lights. Runways are lined with very bright white lights most of its length and yellow for the last 2000 feet. (If the runway is less than 4000 feet long, the last half is lined with yellow.)
Taxiways are lined with blue lights with green down the center line. They are typically dimmer than the runway lights as well.
Of course, taxiways are not the part of the airport that is critical to see from the air. But the dim soft blue color is easy on the eyes when you are making the long taxi out to the end of the runway at night.
So the human eye may be well adapted to seeing blue-green light at night, but if a pilot thought those blue and green lights marked a runway he or she would be in for a surprise. The Times needs better quality control on the science questions.
Posted by William Polley at 08:41 PM | Comments (0) | TrackBack
River traffic on the Mississippi
The US Army Corps of Engineers has a searchable database of vessel locations. Among other things, you can use it to see where a vessel has most recently locked. Aside from boats used for recreation or excursions, the only registered vessel that has most recently locked at Upper St. Anthony Falls prior to the I-35 bridge collapse was the Patrick Gannaway. That vessel was pushing 2 barges. As far as I can tell, this is the only tow that is "stranded".
Lock traffic at Lock and Dam #1 appears to have slowed. A couple tows have departed downstream, but at this time I do not find any tows above L/D #1. Three large tows have moved upstream from L/D #2 in the last day, which is encouraging.
All of this would suggest that there has been some impact, but the wider world probably won't feel it. One stranded tow and a few miles of impassible waterway is the extent of it. I'll update this periodically, every few days, until the channel opens.
Posted by William Polley at 02:45 PM | Comments (1) | TrackBack
Still more on "food miles"
From the NY Times, this op-ed is by James E. McWilliams, author of “A Revolution in Eating: How the Quest for Food Shaped America”. I will highlight a few key points.
But is reducing food miles necessarily good for the environment? Researchers at Lincoln University in New Zealand, no doubt responding to Europe’s push for “food miles labeling,” recently published a study challenging the premise that more food miles automatically mean greater fossil fuel consumption. Other scientific studies have undertaken similar investigations. According to this peer-reviewed research, compelling evidence suggests that there is more — or less — to food miles than meets the eye.
It all depends on how you wield the carbon calculator. Instead of measuring a product’s carbon footprint through food miles alone, the Lincoln University scientists expanded their equations to include other energy-consuming aspects of production — what economists call “factor inputs and externalities” — like water use, harvesting techniques, fertilizer outlays, renewable energy applications, means of transportation (and the kind of fuel used), the amount of carbon dioxide absorbed during photosynthesis, disposal of packaging, storage procedures and dozens of other cultivation inputs.
Incorporating these measurements into their assessments, scientists reached surprising conclusions. Most notably, they found that lamb raised on New Zealand’s clover-choked pastures and shipped 11,000 miles by boat to Britain produced 1,520 pounds of carbon dioxide emissions per ton while British lamb produced 6,280 pounds of carbon dioxide per ton, in part because poorer British pastures force farmers to use feed. In other words, it is four times more energy-efficient for Londoners to buy lamb imported from the other side of the world than to buy it from a producer in their backyard. Similar figures were found for dairy products and fruit.
...
“Eat local” advocates — a passionate cohort of which I am one — are bound to interpret these findings as a threat. We shouldn’t. Not only do life cycle analyses offer genuine opportunities for environmentally efficient food production, but they also address several problems inherent in the eat-local philosophy.
Consider the most conspicuous ones: it is impossible for most of the world to feed itself a diverse and healthy diet through exclusively local food production — food will always have to travel; asking people to move to more fertile regions is sensible but alienating and unrealistic; consumers living in developed nations will, for better or worse, always demand choices beyond what the season has to offer.
Given these problems, wouldn’t it make more sense to stop obsessing over food miles and work to strengthen comparative geographical advantages? And what if we did this while streamlining transportation services according to fuel-efficient standards? Shouldn’t we create development incentives for regional nodes of food production that can provide sustainable produce for the less sustainable parts of the nation and the world as a whole? Might it be more logical to conceptualize a hub-and-spoke system of food production and distribution, with the hubs in a food system’s naturally fertile hot spots and the spokes, which travel through the arid zones, connecting them while using hybrid engines and alternative sources of energy?
Please do read the whole thing. I would just offer that it is probably unnecessary to conceptualize a hub-and-spoke system as if that is something that planners need to create. We do a pretty good job of that with the various distribution networks used by processors and supermarkets. Aside from that, McWilliams seems to be pretty much in agreement with the way I view the situation.
Posted by William Polley at 12:51 AM | Comments (2) | TrackBack
August 05, 2007
More fun with carbon footprints
This earlier post generated some comments. Let's see what happens this time. I tip my hat to Marginal Revolution for the link. (TimesOnline UK)
Walking does more than driving to cause global warming, a leading environmentalist has calculated.
Food production is now so energy-intensive that more carbon is emitted providing a person with enough calories to walk to the shops than a car would emit over the same distance. The climate could benefit if people avoided exercise, ate less and became couch potatoes. Provided, of course, they remembered to switch off the TV rather than leaving it on standby.
The sums were done by Chris Goodall, campaigning author of How to Live a Low-Carbon Life, based on the greenhouse gases created by intensive beef production. “Driving a typical UK car for 3 miles [4.8km] adds about 0.9 kg [2lb] of CO2 to the atmosphere,” he said, a calculation based on the Government’s official fuel emission figures. “If you walked instead, it would use about 180 calories. You’d need about 100g of beef to replace those calories, resulting in 3.6kg of emissions, or four times as much as driving.
...
Catching a diesel train is now twice as polluting as travelling by car for an average family, the Rail Safety and Standards Board admitted recently. Paper bags are worse for the environment than plastic because of the extra energy needed to manufacture and transport them, the Government says.
Fresh research published in New Scientist last month suggested that 1kg of meat cost the Earth 36kg in global warming gases. The figure was based on Japanese methods of industrial beef production but Mr Goodall says that farming techniques are similar throughout the West.
What if, instead of beef, the walker drank a glass of milk? The average person would need to drink 420ml – three quarters of a pint – to recover the calories used in the walk. Modern dairy farming emits the equivalent of 1.2kg of CO2 to produce the milk, still more pollution than the car journey.
So I guess we are supposed to sit really still and not eat meat or drink milk.
Isn't this just an extension of my previous post? Rail is more fuel efficient than automobile. Automobiles are apparently more fuel efficient than cellular respiration.
Oops, but did he say that "catching a diesel train is now twice as polluting as travelling by car for an average family"? Does that shoot a hole in my theory? Read to the end of the article...
Diesel trains in rural Britain are more polluting than 4x4 vehicles. Douglas Alexander, when Transport Secretary, said: “If ten or fewer people travel in a Sprinter [train], it would be less environmentally damaging to give them each a Land Rover Freelander and tell them to drive”
Nope. It sounds like my theory is still ok as long as more than 10 people are on the train. Yes, volume matters. You want to be able to spread those carbon emissions over as many people as possible to minimize the average carbon footprint. For what it's worth, I live in a rural area and occasionally take the train. I would estimate that the number of riders on every trip that I've taken probably peaked at around 100 (sometimes quite a bit more). I don't know how our trains compare with Britain's for fuel efficiency, but I like to think that I'm helping the environment.
Mr. Goodall continues:
“We have industrialised our food production. We use an enormous amount of processed food, like ready meals, compared to most countries. Three quarters of supermarkets’ energy is to refrigerate and freeze food prepared elsewhere.
...
The ideal diet would consist of cereals and pulses. “This is a route which virtually nobody, apart from a vegan, is going to follow,” Mr Goodall said. But there are other ways to reduce the carbon footprint. “Don’t buy anything from the supermarket,” Mr Goodall said, “or anything that’s travelled too far.”
I think there is something very important to remember here, and it applies to my previous post on the subject as well. Taxing carbon is not the same as taxing the food or the mechanism that transports the food. If the point is to reduce carbon usage, then tax carbon. Let the market adjust to the new energy prices and continue to bring the food to market in the least costly way. If it's still cheaper to bring large volumes of food long distances than small volumes short distances, then a carbon tax does not equate to a "buy locally" campaign. A carbon tax probably isn't going to mean the end of supermarkets either. In fact, if Mr. Goodall is right, it's probably better for the planet to load up the minivan at the supermarket than to carry the same amount of food (which might take you several trips if you're walking) from the corner grocer.
If you're going to tax carbon, then tax carbon. Don't make judgments about which uses of carbon are better. Tax carbon and let the market sort out which uses have the most social value. Don't let carbon be a back door for protectionist or other agendas. If foreign fruit from the supermarket is still a good buy for the consumer (relative to the alternatives) even with a carbon tax, then so be it.
UPDATE: On a similar note, here's a New York Times article on recycling plastic bags.
“It was illustrated vividly at a hearing where a stack of 500 paper bags was two feet high and heavy and 500 plastic bags was two inches high,” Mr. Christman said. “It requires seven times as many trucks to move an equivalent number of paper bags. The environmental profile of plastic is better than alternatives. It is an environmentally responsible choice to reuse them and