Excellent, excellent blog and how correct to note the deteriorated level of discourse here in America, something I take as flowing from contradictions between what became an exceptionalist ethos and the realities of hegemonic decline on the other.

Now, so far as the Anne Siber quote, is it not correct that the Fed’s discount window, contrary to other operations, assigns collateral value to unmarketable securities, i.e. does not require that these have an actual market reference price?

If the Fed believes that the discount rate is correct, it should supply “unlimited” credit, SO LONG AS IT IS CREATED at that discount rate, and so long as the cash is exchange for sufficiently secure collateral.

Fundamentally, money is a claim to real capital and, saved in the bank, it must also be loaned to someone on the other end. If I move money from CDs (no reserve requirement) to checking (reserve requirement), the additional “liquidity” should not change the amount of loans in the marketplace. Consequently, a bank should be allowed to sell bonds for cash and restore this reserve requirement without Fed interference.

On the capital side of the equation: Houses need to be sold to willing buyers so credit must be avialable (independent of the possible need for prices to fall further). These houses are already built and the transaction is net zero to a bank. Buyer borrowers, pays creditor, creditor deposits. That a lack of “liquidity” is breaking this natural exchange of capital for IOU is fundamnetally stupid.

Now we see how the two pieces fit together. Liquidity good… but this is completely independent of the various Fed Rates.

That being said, rates shouldn’t necessarily go anywhere and I have essentially zero respect for Cramer except insofar as he understands that his ratings depend on bull markets (even if it’s just due to inflation). The interest rate reflects the marginal return on capital. If the global productivity of capital increases, interest rates *need* to increase else inflation will rear its head. If global capital is flowing to other parts of the world where it is more productive, then investment in the US will slow, productivity growth in the US will slow, wage growth in the US will slow, and the economy will settle at a lower level.

Nothing in that statement implies that the interest rate is wrong or that there is something fundamentally illogical about the slowdown. But people who don’t understand that capital markets reflect the global productivity of *real physical capital* are going to assume that a slowdown implies the need to cut rates.

Inflation is the key indicator because it tells us when slowdows are rational (inflation remains at the high end of comfort zones) or irrational (inflation falls to the low end or below the range).

So long as we’re at the high end of the comfort zone, a cut will only generate inflation (and bigger problems in the next cycle). Any policy that doesn’t recognize this fundamental truth is just “special interests” advocating their own best interests.

Thanks for the compliment of the implicit comparison to Taleb, as well as the general vote of confidence. However, I do differ with him on this issue (and forgive me if I am taking this all too seriously, I know your comment was largely humorous).

I find feedback, including confirming/positive feedback, useful (and not just for the ego massage, although I like that too). It gives me insight into what struck people about what I wrote, which sometimes differs from what I thought was the main thread. If you are a deconstructivist, it tells me about their reading vs. my reading.

And readers often provide me with useful data, some of which is new to me. I can absorb only so much in a day, so pointers are helpful, even if I don’t always acknowledge them (and they are certainly useful to other readers).

I also believe in encouragind civilized debate. That is one skill I believe we have lost in America. I spent more time in Australian pubs that I probably should admit to, and it was noteworthy how people could have sharply different views and discuss them pointedly without getting emotional.

By contrast, if you go to a dinner party in New York and bring up, say, Iraq, unless everyone is on the same side of the fence, things get very tense very fast. How can you have a democracy without public discourse?

And per Anon of 9:19 AM, it’s very common for people here to go straight to an ad hominem attack rather than deal with the substance of the argument.

Pretty neat summarizing the participants of opposing viewpoints.

PS: You’re too nice for Katz and the likes. See how Taleb responses to “admirers” on this debacle

“Too many emails as if I didn’t know that I was right

I always got a kick out of these from Taleb.

Posted At : August 16, 2007 1:53 PM | Posted By : Nassim Nicholas Taleb
Related Categories: General
I am at the Edinburgh literary festival and the last thing I care about is you finance people.

I’ve been swamped by emails telling me that I was right (forwarding stories about “25 sigmas” by the Goldman Sachs CEO –who needs to be replaced or banned from speaking to the press — or the Rothman guy in the wsj on 1 in 10,000 year events).

I don’t understand these emails. It is as if I didn’t know that I was right. Tell me what I don’t know.”

Agreed. I like Roubini quite a lot, and you have to respect someone who takes a stand in these wishy-washy times. But it is unfortunate that his tone sometimes undermines his very sound observations.

It’s too easy to dismiss bears (who are now being proven to have been realists) as extreme, or even kooks. Americans in particular have a hard time with downbeat information and many will look for any excuse to dismiss it.

Anon of 1:14 PM,

Thanks for your kind words. I need to get a thicker skin, but I am sensitive to people impugning my integrity (as opposed to differing with my views).

If you followed this blog, you’d see I am very much in the Roubini/Faber/Panzner/Faber camp in terms of agreeing with them and quoting them often on how disastrously bad this situation is, and how the underlying situation is not easily remedied. My only point of contention with them is that as much as the Fed’s actions are unlikely to help, and probably will hurt, it is politically impossible for the Fed to do nothing when the money market is seizing up.

I elaborated on what Roubini said and called his take sophisticated. Someone who wanted to trash him would instead focus on his tone, which frankly often is a bit histrionic.

Perhaps tongue in cheek humor is harder to pull off in print than I realized.

And I take offense at being labeled a shill. I put considerable time and effort into this blog for no pay, and I do not have a newsletter or money management business on the side that might benefit from this effort. These are my views, yet you dare imply someone is paying for them.

It’s telling that you chose to ridicule one set of people here. And insinuate that they are righteous nuts with sophisticated arguments. You stand to lose much in this case, perhaps?

Your shilling is so transparent.