Cyrillic Partners

No surprise here in the Fed’s action. We talked about it here two weeks ago. Was it the right move? The economy isn’t doing badly. Recent numbers show a slight up-tick: GDP is growing at 3.9% for example. Some pundits opine that the move is a concession to Wall Street megafirms rocked by the subprime meltdown.

My take is simple: the Fed is going to have to seriously start thinking about what inflation is doing to the economy. The New York Times has a good chart that shows the linkage between rates and inflation. We may get a slight downturn during the third quarter, and the rate cuts will look smart. The problem comes in 2008, when the economy will likely shake the subprime problem, jolt back into productivity and resume a trajectory of stable growth. That’s when the weakness of our dollar is going to really start hurting.

Southern California burned for the third day, forcing the evacuation of 300,000 and burning 400 square miles, according to the New York Times. It’s too early for journalists to start ball parking the total cost of the disaster, but you can bet they will soon.

It’s an important question for policy makers. The science of cost-benefit-analysis occasionally wends its way into debate, often with mixed interpretations. Aggrieved parties will call out at the injustice of reducing a complex issue such as public health and safety to pure numbers.

Coming up with an approximation for the value of lost property, the loss of life, the time and overtime of first responders and the time cost and anxiety of having to relocate hundreds of thousands of Californians is a complex, but achievable task. The real tricky part is determining WHO bears the cost of these fires and if the payers, likely ALL Californians, should be responsible for paying for better fire protection in the future. It’s a variation of the math behind building levies to protect farmers who decide to live in a flood plain. Why should everyone subsidize protection that will only be enjoyed by those that live by the river, or in this case, the hills outside San Diego? This is the real sticky wicket when it comes to cost benefit analysis and public policy.

I don’t understand why the press cannot understand that the Fed only changes the discount rate, nothing else. The Fed Funds Rate is determined by supply and demand, not dictated by the Fed itself, as this story in the Wall Street Journal suggests. It’s frustrating to me as a teacher. No wonder our students are confused!

Will the Fed cut rates on Halloween? That’s what it’s signaling now and Bernanke has made a point of being predictable. Wall Street seems to be salivating for the cut after the housing crunch and a slow summer, but the futures markets have dropped the expectation of a rate cut from 90% down to about 33% according to BusinessWeek.

How is the economy REALLY doing? Not even the Fed seems to know. Bernanke recently told reporters that assessing the economy was a “formidable challenge.” No news to students of economics in that.