T.S. Eliot wrote that April is the cruelest month. In the academic year, November shares some similarities with April in that it's when we start to come to grips with the fact that this semester will end... and soon. For me, blogging seems to take a hit in November. I'd tell you what's been keeping me busy, but it really is academic minutiae. You'd be bored to tears.
November has been a cruel month for the markets as well, especially the last couple days. Some days I turn on CNBC and literally see things that I never thought I'd see. Watching the 30 year Treasury yield take a dive like it did yesterday would be one of those things. Seeing Citi at less than $4 would be another. Hearing perfectly reasonable people fret about the possibility of deflation would be still another.
How do you title a blog post these days without sounding like a doom-and-gloomer? I feel like I want to choose my words very carefully to avoid making things seem worse than they are. (
I know how you feel, King!) But when you hear speculations of a pretty sizeable drop in GDP in the 4th quarter and graphs showing this to be the
worst stock market decline since the Great Depression, it's easy to get caught up in it.
So as I work my way back into the swing of things over this Thanksgiving break, let's just set the stage.
The auto bailout: Not a good idea, but probably going to happen in some way, shape, or form. At the rate that they're burning cash, I don't see what a bailout would reasonably hope to accomplish. A fast track to a government assisted bankruptcy would probably be better in the long run. I would support proposals to protect the pensions of workers, especially those near retirement because that represents a past promise that people took into account when making decisions. That's probably a good topic for a future post. But this decline has been a long time coming, and trying to stop it is just going to add to the problems later.
Paulson's reversal: I, for one, found that episode at least somewhat refreshing. Some say that he realized that $700 billion would not be nearly enough. Perhaps. But if that's the case, I'd rather he stopped at the brink of the canyon like he did rather than jumping in and then telling us. Yes, we could use some more transparency in seeing where the money has gone so far. But most importantly, the fact that they're
holding back some of that money means that at least one agency is doing something to keep its powder dry. Which brings us to...
What will the Fed do in December? That's what my macro classes are working on figuring out. After Thanksgiving, I'll be discussing Poole's 1970 QJE paper with my grad students. I guess that will be as good a time as any to bring up
this development: (Bloomberg)
``There has been a policy shift, but the Fed is not transparently announcing what it is doing and why,'' said former St. Louis Fed President William Poole, now a senior fellow at Cato. ``Monetary policy works best when the markets understand what the central bank is doing.''
Some analysts point to the surplus cash that banks keep on deposit at the Fed as a key gauge of the Fed's monetary-policy stance. The so-called excess reserves have ballooned to $363.6 billion from $2 billion in August as the Fed added to its emergency lending programs.
``It is a move to quantitative easing, to force lots and lots of reserves into the banking system with the expectation that banks will start to trade them for a higher-yielding asset,'' said Poole, a Bloomberg contributor, said yesterday in a Bloomberg Television interview.
Hat tip to Calculated Risk.
Indeed, when you see things like this, it makes you wonder what is going on. I'm going to be thinking about that a lot this week during the break from classes.
So what about deflation? I'm not in the camp that thinks it's a big problem yet. It becomes a real problem if wage declines make it even more difficult for people to make their mortgage payments or if price declines are so widespread and expected that people hold off spending now as they expect prices to go down further. I don't see us getting there yet, but I stand ready to revise my expectations as new data arrives.
And finally stock market: I'm just as caught up in it as you are. My explanations are no better than anyone else's. It does appear that we're on the verge of something with Citi, and people are getting worried about commercial real estate. Those make for some strong headwinds.
As I go around town I hear comments both positive and negative. Everyone complains about their 401(k)s, but local businesses are hiring. I do think that we're in a recession as we would define one nationally. However, the impact is going to be very different for various regions and economic sectors. It's difficult to fight recessions like this because it becomes more tempting to try to target policies at one area or another, and that's not always good or successful.
But it does give us things to talk about.
