Roubini: Fed Fiddles While Rome Burns

We noted earlier today that neither the signing of the much-touted bailout bill, nor the dramatic increase in size of the already bulked-up Term Auction Facility (it has been enlarged six-fold in a mere two weeks) has had any impact on conditions the money markets, which are barely functioning. We noted earlier and reiterated that the Fed’s latest liquidity moves have in fact been counterproductive, reinforcing the propensity of banks to rely on central banks rather than each other. We also affirmed a notion voiced by John Jansen, that the Fed and other central banks need to guarantee commercial paper and interbank loans, rather than continue to engage in indirect measures that have proven useless.

The general mood is reflected in the stock markets, where the Dow took a dive to 700 points down, although (as of this wriiting) it had rebounded to a mere just shy of 500 points in negative territory, but has resumed its downward path, now 551 points down. One spur for the depth of the move was normally relentless bull Jim Cramer’s advice pre-opening, on the Today Show, that, “Whatever money you may need for the next five years, please take it out of the stock market right now, this week.” The yen has rallied nearly 4% in a mere week, another sign of an accelerated retreat from risk. Brent crude is below $85 and gold has rise $36 per ounce so far today. (Update: reader Dwight pinged that the stock market staged a monster recovery immediately before the close, from a low of just over 9500 to 10,000. What gives? The trigger may have been the request by France for an emergency G8 meeting, but no one has even agreed!]

Nouriel Roubini has weighed in even more forcefully on these issues in “The Fed keeps on wasting time while the mother of all bank runs is underway” (hat tip reader Dwight).

Last Friday I pointed out in my “Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs” that we were at the point of a risk of a systemic financial meltdown with the beginning of the mother of all bank runs: stock markets gave a vote of no confidence to the Senate passage of the TARP legislation (equities down 4% on Thursday) and to the House passage of the legislation on Friday (equities down 3% after the passage of the bill in the House). At the same time last week money markets, interbank markets, credit markets were all imploding with all interbank spread at new all time highs, credit spreads going up through the roof and the roll-off of the financing – via commercial paper – of the corporate system. As I put it last week we were facing:

– a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

– a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds restrained only by a blanket government guarantee; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

– a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

– a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely….

I then suggested that only radical and urgent action could stop this mother of all runs such as the following ones:

– blanket guarantees of all deposits followed by triage between solvent and insolvent banks; and if a guarantee requires delayed legislative action the Fed could announce that it will provide unlimited and unconditional liquidity support to any bank that experiences a run on its uninsured deposits;

– drect extension of the Fed’s PDCF liquidity support to other member of the shadow banking system as the small number of broker dealers accessing the PDCF are not relending the liquidity to the rest of the shadow banking system; finance companies, leasing companies and other non-bank financial institutions lending to the corporate sector and real economy should have access to the PDCF and TSLF;

– drect Fed lending to the corporate sector via Fed buying the commercial paper that corporates are not able to roll over; and possibly even lending to state and local governments that are a now also facing a roll-off of their maturing short-term liabilities.

– a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks;

Since the crisis of confidence and liquidity was becoming more virulent over the last few days and during the weekend in Europe one would have expected a radical response over the weekend…

Instead the Fed did nothing over the weekend (before the crucial opening of markets in Asia and Europe) and then announced steps this morning that don’t even start to address the liquidity problems of the financial system: paying interest on reserves of banks only allows the Fed to provide more liquidity to banks (and only banks) while automatically sterilizing the effects of that liquidity support on base money; while doubling the size of the TAF (that only banks have access to) does nothing to address the run on the liquid liabilities of non-bank and the corporate sector. Also the liquidity support of banks (short of a formal guarantee of deposits and/or a commitment to unconditionally support any bank subject to a run) is not enough to stop the concerns by uninsured depositors of banks….

Given the risk of insolvency of even the most safe counterparties in the financial and corporate system reducing policy rates will not affect interbank and credit spreads. The only way to stop this liquidity panic is a blanket guarantee of financial sector liabilities and direct public provision of liquidity to the parts of the financial system and the corporate system that are now at risk of a meltdown driven by a liquidity run on their short term liabilities. So it is time for the Fed to stop wasting time and start the actions that will make a difference. We are now at risk of a systemic financial meltdown of the financial system and the corporate sector too.

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  1. ubetchaiam

    Watching the gyrations of the stock market and being aware that the ‘short selling ban’ exempts market makers like Goldman, I have to wonder whether this is all manipulated for the benefit of ‘large investors’ to the detriment of ‘small investors’. Just who was selling and who was buying?

  2. Michael

    Cramer’s comments are the ultimate bullish indicator. I have been a bear for some time, thanks mostly to Ms. Smith and some other wise folks. But I’m buying now. The closed end fund world is just way too cheap.

  3. Economic Computer Games

    Solutions to the economic cycle

    What do the subprime financial crisis, anti-virus software, the board game Go and the coming singularity have in common?

    Heuristics! In academia this is the study of natural patterns in any given knowledge domain. For example: say you want to organize your pictures but you have too many pictures and you can’t really decide how to organize them to begin with. What do you do?

    Simple, create a program that can look at how the different pixels in a photograph are arranged and look for patterns. The way you do that is to have a pre-existing database of patterns with human understandable names such as: person, flower, building etc. You can even organize information within each category so that the program first looks for a pattern that fits a category then looks for a particular pattern within the category that would represent, say, the Eiffel Tower or the Chrysler Building. Thus, auto-organizing your photo album for you. Say you wanted to look up “when you were in europe?” in your virtual album then you could type in things from your europe like the Eiffel Tower or Big Ben and find pictures accordingly. You can even search for particular people within your photographs and within your web albums. That way all those pictures of Nana can easily be recalled or accessed from your various albums.

    Obviously there are AI implications as well as model building implications within this idea. The coolest of which are its applications to economics or AI(singularity). In economics this is causing a massive struggle between classical economic theorists and new behavioral model theorists. According to the classical theory of economics the simple idea of supply and demand creates the invisible hand of the market which then can be used to predict the outcome of various economic scenarios. Of course this model is good during the middle periods but towards the end of each boom and bust cycle, the model falls apart except to say that capitalism is a process of creative destruction. Of course there are many casualties along the way which have real world consequences. Behavioral economics wants to turn the traditional wisdom upside down by using heuristic or pattern searching to create complicated models of the market. Then use these models to create databases of common patterns that can be used to detect a coming crisis and help prevent it. Sort of like what your antivirus software tries to do.

    One idea that has emerged from the recent crisis is that regulations for banks in regards to their leverage and capital requirements should be counter-cyclical and that maybe the Fed should go beyond just setting interest rates to actually looking for problems down the road so that it can take specific measures to thwart bubbles in different areas of the economy:(stocks, bonds, securities, commodities). Of course this would represent a huge challenge for the Fed and is a step away from dire theories of anti-capitalism such as socialism or even worse communism. But proponents argue that this is the only way of preventing the large booms and busts that have occurred in the past decades as well as the current one. The Fed has been skeptical about the entire idea because it thinks that classical economic theory forbids the government from intervening in the markets actively to burst bubbles. The end result as predicted by classical economic theory is that the problem would be made much worse. Further research has now indicated that this is usually true throughout history precisely because government agencies are bad at predicting what the market is doing or even going to do in the years to come.

    Behavioral Economics turns this idea upside down by challenging the classical understanding of economic theory. They think that classical economics only models human behavior in the most general terms such as supply/demand or monetary theory. This, they argue, ,is not enough. They think that new modeling techniques using heuristics can help create models that are so detailed that they can then be compared to actual economic data and be used then to make specific predictions of future market events. The idea here is that while most market cycles have a predictable pattern of booms and busts this idea is too simple and doesn’t really do anything because it cannot be used to accurately predict future behavior. For example take the current crisis: While a lot of people where warning about various issues with the market since 2002-03 up until 2007-08 when the sub-prime crisis finally struck, nobody seemed to know exactly what would happen and when. Moreover, nobody predicted the depth and breadth of the crisis despite the number of people issuing warnings and now stepping in to do retrospective analysis. This is the pattern that behavioral economists have noticed for each crisis, a clear lack of specific predictions. One way to look at it would be to follow the money, most of those predicting the crisis could happen also do not take mitigating actions to protect their investments, something that would be a rational decision if anyone really predicted that something would happen.

    Their idea is to look for patterns that would explain how individual market actors behave and then create models that would predict different scenarios. Then use these scenarios to look for patterns in real economic data to make specific sets of predictions each taking into account different events or series of events and thus determine places where the Government could step in and take effective action in order to avert market turmoil. For example imagine that the Fed had used this technique and had special powers at its disposal to take action. It could have used heruistics to determine in 2005-6 that bad lending was going on because the prices of securitised debt instruments did not accurately reflect the risk being taken as their models would predict. That would have led them to look for an underlying cause of the irrational behavior and come up with a set of prescriptions to cure that behavior and fix the system before the crash. In this case stepping in during the 05-06 years to intervene with rating agencies that were not doing a good job of rating the debt instruments or looking for a way to reduce the inflow of excess cash by raising capital requirements for banks and thus reduce the amount of risk the banks could take.

    Classical economists counter-argue that instead of using complex models that depend upon untested science and in the end the competency of government agencies, the better idea would be to create a set of rules that would be set into motion according to preset limits in the markets. This would, they argue, encourage predictability and thus ensure that the Fed wouldn’t seem to act arbitrarily, increasing market volatility instead of decreasing it. An example of this would be to force the Fed to have counter cyclical capital requirements for banks tied to GDP growth or tied to spikes in the volume of lending. Behavioral economists think that this would be a blunt instrument that would step in to lower economic growth and thus economic potential. They prefer to give the Fed agility so that it would not be forced to do anything. They say that it would be hard to figure out when to set the pre-set limits and that each economic growth cycle might require different pre-set limits which would complicate the predictability that is so highly prized by the Classical economists.

    One interesting way to grasp the different arguments of Classical vs. Behavioral economists is to look at the betting that goes on in futures markets, such as the one for volatility that Classical Economists love but which the Behavioral economists view with disdain because they suggest that these index’s only tell you contemporary information about what the market thinks the future will be like. They suggest that this is simply a filter of information rather than an actual prediction engine. Something that they say can only be created using behavioral economics and its model market simulations.

    In the end the winner of this debate will most likely lay down the rules for the rest of us. You will hear about this again, I guarantee it!

  4. CTMM

    woah. if computer models of the market ever get so good as to be reliably predictive, then the purpose of “the market” dries up and blows away. Technocratic dictatorship would be more efficient. It’s not like there’s a market in “3-day weather forecast futures” (I’ll amend that by giving a nod to flood insurance et all, but even that is a break even proposition [if the actuaries are accurate and the issuers are honest]).

    The dirty truth is people like volatility, because that’s where the easy money is to be made.

  5. JGU

    What will be the consequence down the road (say 2 years) after so much liquidity is injected into the system? Hyperinflation?

  6. Anonymous

    The big R solutions are just temporary and the TARP bailout is only for the higher echelons foreign or domestic. Striking market-to-market just makes for further mistrust. And what funds can be hoarded are being hoarded.

    Rolling over debt for the umpteenth time is a very short term fix but you have to pay fees/interest which nobody can seem to afford doing right now.

    If guaranteeing deposits was to prevent runs on the bank, you better hope it works or depression here we are.

  7. albert

    It’s no good promising loans to the banks, what they have to do is ship in banknotes, so they can hand them out to the customers.

  8. Matt Dubuque

    Matt Dubuque

    I don’t think there is any point in ignoring Mr. Rogoff’s warnings of a few weeks ago, posted prominently at this site, against central banks bankrupting themselves by assuming all the world’s dodgy paper.

    If people thought the “unintended consequences” of allowing Lehman to fail were bad, they might contemplate the consequences of failure of several major central banks if they pursue reckless courses of conduct without careful considertion of the consequences.

    I suggest that readers revisit Mr. Rogoff’s warning posted at this site just a few short weeks ago.

    Matt Dubuque

  9. Terminal


    I apologize for straying from topic, but did you notice that capital flight from Russia in the past 24 hours was approximately the same as total capital inflow for the year to date 2008 ?

  10. Anonymous

    Off topic here but I didn’t know where else to post.

    RE: AIG

    Last week (? we’re living in a time warp, I’m sure it was last week) it was discussed how if AIG went under, it would have jeopardised many Euro banks regulatory capital requirements as AIG wrote cds to the tune of E300bn (again, from memory) for euro banks to enable them to “circumvent” regulatory capital requirements by substituting (higher cost) capital for (lower cost) “credit insurance” from a AAA rated entity.

    Q: What happens to AIG if/when some Euro banks fail? Is nationalisation a trigger for these instruments?

    … What a tangled web we weave….

    It’s a tome of a book and gets worse by the page.

  11. Anonymous

    You supposedly sophisticated people seem not to have figured out that someone must always lose in the market. It is a rigged system intended to do the most damage to the least informed. In general the consumer has always been the biggest fool in the market.

    I say destroy all stocks. They reward a ludicrous system that promotes inflated returns to executives(to the detriment of the consumer ).

    You bankers have lost all your credibility.

  12. S

    hot off the press: Treasury saying direct injections are on the table. This as BAC the crown jewel blows its number, cuts div and seeks $10 billion. Ok moving in the right direction. Why it has taken so long for this to be tabled is shocking and should remian a stain on all those shills like pimco who pumped this moronic garbage barge plan. I jhave to belive Paulson has feltn this all along was the anwser he just didn’t want to say it.

    Pick the winners, deflate the markets and hosuing and begin the rebuild. The governement has got to let assets prices clear. PERIOD. Forget pumping the assets, plug the fire hose into the equity account.

  13. Midwest Product

    This as BAC the crown jewel blows its number, cuts div and seeks $10 billion.

    Forget cutting the dividend, why is Bank of America paying a dividend at all?

  14. Richard Kline

    This isn’t a crisis of confidence, it’s a crisis of solvency, and that isn’t addressed at all by bloating liquidity. The Fed keeps stacking bricks o’ bills on the Liquidity Wall, while the Solvency Wall has collapsed and the zombies are inside the City. Turn around and face the issue boys; and headshots, gotta take ’em out.

    Forget the crapulous TARP, take that funding authority to back the real economy. Make sure MM stays lending, and yes keep those leasing and supplier firms in funded CP. And please, fer Gawdsakes START CLOSING INSOLVENT BANKS AND BANK-A-LIKES. BTW you can use the staff at seized failed banks to build a channel to lend CP out to the real economy so Ben Bernanke doesn’t have to do this from a cardboard desk on the loading dock of the NY Fed.

    We have to get Paulson and Ben past the idea that they can simply save their friends at the top of the food chain and everything will be alright. Most of their friends were max geared and are dead; it’s just the wired corpses talking. Gotta start _lending_ money rather than gaming the system boys. A new concept for you two, I know, but buckle down to OJT and _get on with it_.

  15. S


    Totally agree. Bernanke is fighting yesterday’s battle. he should be removed ASAP. If Bushg had a braincell left he would ask for the reignation. keep Paulson on as he is or appears to be far more pragmatic. Bernanke is not up to the task. A collection of bloggers would do a better job here which is really the most damning commentary of all. The problem is the Fedhead still thinks he is solving problems.

  16. Richard Kline

    What we are seeing in the equities markets is the long crosscut sawdown like in the Spring of 30 when the reality of the illusory price levels starts to cut through speculative bone. We may never see a 10% down _day_, just lots of 3.5% down days to accomplish the same thing. And really, it’s inevitable. These prices are as puffed as were home ‘valuations.’

    Any bank or bank a like using government repo windows should be immediately prohibited from paying _ANY_ dividends while they do so; the Danes got that one right. And any bonuses they pay staff down to the last cent have clawbacks if the firms receive government equity or fail. C’mon Hankie, use some of that dictatorial power yah glommed onta, and promulgate a regulation or two. (Nitwit, and that’s being kind.)

  17. ScottH

    “Pick the winners, deflate the markets and hosuing and begin the rebuild. The governement has got to let assets prices clear. PERIOD. Forget pumping the assets, plug the fire hose into the equity account.”

    – I believe the problem is that the price at which the assets will clear is below the solvency threshold. That is why Paulson and friends propose to buy them at above market prices. However, I’m with Yves as to where the capital SHOULD be directed … immediate support to the ST lending markets. The banks just have to fail if they can’t float – in which event, they are taken over and Treasury steps into the direct lending business. We can’t assume that banks receiving TARP money will direct any of it at frozen credit markets. It’s not rational that they would do so, and they have an obligation to shareholders to do more or less rational things. Survival is rational – they can reliably be expected to retain any capital they receive against further losses.

    Why the heck Congress couldn’t figure this out, or chose to ignore it, will be one for the history books … which will hopefully not be recorded on stone tablets.

  18. Richard Kline

    And s., to me it isn’t the individuals, really: it’s the system. Replace Ben and Hank, and you get two more who think the same way, more or less. Nobody in the Admin gets this, and as we see three-quarters of the Congress at a minimum are bought into the busted gestalt. In four months, we’ll be looking at Rubin II in Paulson’s chain, and it’s hard to imagine a more compromised individual. Name me two individuals with senior public financial experience who aren’t scared to death of Big Money, and maybe we’ve got something. Really, there may be such folks, but the names don’t come to mind.

    The folks who save yer ass in a crisis are often those you’ve never heard of: look down and sideways to see who’s performing—they’re the ones. But it usually takes time to get them recognized and promoted, in this case about two years more like. So in the interim, we need to pressure the mooks in authority to do the right thing even if they don’t want to ’cause, y’know, they’re _mooks_. “Fund, damn you!”

  19. Anonymous

    Bernanke should resign, but Paulson is OK?

    Bernanke seems to be doing a whole lot more than anyone else by not doing anything. What does lowering rates accomplish? He can’t keep them where they are supposed to be. This is not his fault, the treasury prints the money…

    Paulson reminds me of a commerical where the guy is running around the office pretending he is busy, all the while not really doing anything but creating the illusion of work, and more importantly in this instance, panic. Hire asset managers? The same guys who put this crap together in the first place? Yeah, he is really on ‘our’ side?

    Agreed on the dividends. If a company is not making money how is it paying it out? By borrowing? Makes as much sense as some of the loans these guys made.

  20. Jojo

    These guys say that dividends are the real problem as to why the market crashed today:

    "If today's worldwide stock market declines were driven by that event, it had adequate time to happen last Friday. Instead, what happened is that corporate dividends were slashed well below anticipated levels. That change is reflected in Standard & Poor's Estimates and Earnings spreadsheet, which was updated late last Friday with the third quarter dividend per share data for the companies of the S&P 500.

    Instead of coming in at a trailing year level of $29.51 per share (or $7.69 per share for 2008Q3), the trailing year dividend for the quarter came in at $28.85 per share (or $7.04 for the quarter). That's just $0.14 per share more than the trailing year dividend per share recorded in the previous quarter, and also means that there's really no chance in hell that the S&P is going to hit anywhere near the target $30.30 dividends per share announced by S&P back in December 2007.

    That's the principal reason why stocks are dropping everywhere today. Even though this news has not yet been confirmed by S&P, the world's biggest financial firms are aware of the change in outlook and are acting accordingly, reducing the values of stocks."

    COmplete article


  21. DailyVus

    …these guys spent their whole adult lives breaking locks and taking everything off the shelves -now ya give them the keys when they don’t know how to run a business? or an economy?

  22. Anonymous

    This is a very simplified BAC quarter, and you wonder why the banks are in trouble.

    Dividend .34
    EPS .15

    It simply does not make sense.

    Raising 10 billion? How about you keep what you make. It used to be called saving, and it was done in a bank, are there any of those left?

    Savings….Don’t spend more than you make.

  23. Anonymous

    Saving. It’s starting to happen among the common people. It’s good and right. And it could well be the reason that depression is unavoidable now.

    The reason is not the market excitement that we see these days. The real reason is that the old way was unsustainable. We have to retrench to something more moderate and stable, and a depression is probably the only way from here to there.

    Well, it could be cushioned by socialistic policies, if we were so lucky in who we have in government. But I fear we are not so lucky and will not be no matter who is elected next month. Remember Obama is Wall Street’s candidate.

  24. Abbott_Of_Iona

    There is only one way out.


    But that won't happen because everybody is palying poker with Credit Default Swaps.

    And not only Bernanke but every Western bank has decided to provide the chips to keep playing.

    This is pure insanity.

    As RK has said previously.

    Fail'em don't bail'em.

    It's time to turn off the Central Bank spigot.

    Use the strength of Governments to recapitalize what is left to provide a system that provides transaction ability and credit to enterprise.

    Then arrest and imprison the police & thieves.

    Expect ugliness. Drug dealers never go quietly.

  25. Anonymous

    It is not possible to put every credit-issuing organization onto the Fed liferaft. Who gets voted off the island? That organization has lobbyists and Congressmen and Senators.

    We’re not a planned economy (yet.)

    The moment the Fed and Treasury start to pick favorites, the market will distort heavily. Isn’t there a chance that those left outside the Fed and Treasury credit injections will be instantly devoured by the markets?

    Who receives the credit? Who does not? Who decides?

  26. Abbott_Of_Iona

    Anonymous said…

    October 6, 2008 8:14 PM

    “Who receives the credit? Who does not? Who decides?”

    That has already been decided. It is Herr Hank.

    That is why the bailout bill was dangerous to democracy from the beginning.

    1. It does not solve anything.

    2. It leaves the provision of credit in the hands of one man.

    I will leave it up to you to put a word on such government. I have one in mind.

  27. K Ackermann

    Economic Computer Games – Computationally, problems arise in the greedy/lazy tradeoff.

    The greedy heuristic does not address optimality or efficiency, while the lazy heuristic might not complete in a reasonable time.

    Like you say, once you get to the fringe cases of a model, things get very difficult. The heuristics become unwieldy right when they are needed the most.

  28. Anonymous

    Wait, Jim Cramer says to get out of stocks? Isn’t that a strong buy signal? My friends, I think we may have just hit bottom.

  29. Anonymous

    Roubini is not god

    The world is probably not ending, but if it is, there is nothing you can do about it

    Most posters here are less competent than Bernanke and Paulson, not more

    You will feel better if you exit the echo chamber in which everyone amplifies your own fears

    Calm down, buy some stock with your long term money, and don’t look at the market’s moves every day.

    Welcome to a faint taste of the uncertain life lived by the vast majority of the people who now live or have ever lived on this planet.

  30. Matt Dubuque


    Richard, what do you think of the idea floated a few days ago that the Fed would sell covered calls on some of its Treasury holdings?

    The more I think about it, the more intruiging it becomes.

    Premiums are rich and the premiums would help the Fed’s balance sheet. As I’m sure you know, covered call writing is a very conservative strategy.

    If they sold them on the 3-month T-Bills and the Treasuries were called away at a small loss, that would be consistent with the Fed trying to RAISE interest rates at the very short end and LOWER them on the longer end to get the time horizons shifted to the longer term.

    Basically they would be shorting near the moneys.

    I’d be interested in your views on that idea Richard.


    Matt Dubuque

  31. doc holiday

    Re: “the stock market staged a monster recovery immediately before the close”

    Yes, that was very exciting and fun, but that added-synthetic volatility did nothing to add value or gain confidence, i.e, it would have ben better to see the market stay down versus having people think there is going to be more fun casino action on a day-to-day basis. When I look at future value, I sure don’t look at this type of lotto noise — and as they say, a day does not make a trend; trends take months to establish, and that is how old fashioned confidence is built, not minute by minute by minute in an environment of panic. Call it the PPT or wall street, but what ever happened — it took away another level of trust and added more risk!

  32. FairEconomist

    i mostly agree with Roubini; but I think he’s making the wrong proposal for interest rates. Generally, if suppliers refuse to sell to purchasers, it means the price is too low. People are used to the government providing extra credit for a credit supply shortfall, but if the government has reached its limit (and it seems it has) then holding the price artificially low will create profound shortages – just as we’re seeing. In the current situation we have to raise, not lower, interest rates, just like governments had to when they were constrained by gold pegs. I have a blog post on this and I’d appreciate thoughts on the idea, and spreading it around if it’s a good idea.

  33. Juan

    Economic Computer Games,

    Perhaps a quibble but Classical Economics was replaced by Neoclassical Economics during the later part of the 19th century.

    This was also the replacing of labor theories of value with need and scarcity based value theories, or a definite reorientation from the more objective to the more subjective as well as greater emphasis on markets as opposed to production.

  34. Matt Dubuque


    Not necessarily. With all the volatility, premiums are at an all time high and so the thetas are amazing.

    Also, they could engage in calendar spreading to indicate their preference for the markets to broaden their time horizon.


  35. Richard Kline

    So Matt re: your question at 9:37, I would happily answer if I had a relevant opinion, but I don’t. I do history not finance, and to be blunt I don’t know enough about that particular proposal in context to hazard a competent opinion. I do have a larger opinion, though: KISS. We are in very difficult systemic conditions. Policies need to be as simple, transparent, and focused as possible. Clever financial schema may work well, and may even have upside, but they strike me as largely beside the point. Fundamental issues such as banks with more liabilities than assets being closed and money issuance by the Fed mapping to a strategy to pay it off are more central. If you want to expand on that particular issue in a comment elsewhere relevant to a subsequent issue I’ll keep my ears open. But I think you catch my drift.

    FairEconomist, I would love to read your post but I’m hurting for time at the moment. However, i am of very similar mind to your regarding policy rates in the US: We should raise them slightly and certainly shouldn’t lower them. No bank can make money lending at neg real rates, which is where we are now, a problem which would be compounded by pushing policy rates down. I would love to see this issue receive more detailed discussion, and I realize that it is both contentious without a clear option. But dirt cheap bad money will not heal the banking system. We could pull crap like that when we had the reserve currency, but Bretton Woods 2 is deader than pharoah and the new day will _not_ look like the last good night.

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