Cyrillic Partners

There’s a neat article in the April 14 Fortune by Elizabeth Spires that lays out a case for the government consistently under-estimating inflation by focusing on “core” inflation instead of increases in the overall Consumer Price Index (CPI) as a means of screwing Social security recipients.

It’s a fun column, that tackles the complexities of inflation measurement with aplomb and wit, while explaining the great importance of knowing exactly how much more we pay for various goods and services. Spires compares the use of the core inflation rate–which she says ignores increases in food and energy prices–to the government saying that aside from the casualties, fighting and troops deployed in Iraq, there really is no war.

We wrote about government inflation reports some months ago. 

Bernanke and Paulsen went before the Senate Banking Committee today to say that the economy is slowing down but a full-blown recession is unlikely. Big Ben also said he’s not afraid to push the rate-cut button if the economy starts to free-fall.

Perhaps more interesting was what the senators had to say during the meeting, from CNN:

Sen. Charles Schumer, D-N.Y., suggested the problems in credit and financial markets pose a greater threat to the economy than a slowdown in consumer spending.

“Aren’t you underestimating, not giving enough attention to, the severity of the problem in the credit markets?” asked Schumer. He said Wall Street executives he’s talked to “seem much more worried” about credit woes than Paulson and Bernanke.

No question who butters Schumer’s bread. It’s not the first time he’s said nasty things to Bernanke either. He did a chicken little dance back in November (read our coverage). But as Bernanke has pointed out before, the current downturn is hitting financial institutions a lot harder than the rest of the economy. Fed Governor Mishkin already said that Wall Street’s losses weren’t going to be Fed priority numero uno back in November (read our coverage).

Dean Calbreath has a neat editorial comparing the current “credit crisis” to that of the great depression.

When FDR took office, the nation was seeing an average of 1,000 foreclosures a day.

During his first year in office, Roosevelt created the Home Owners Loan Corp., or HOLC, to help debt-laden borrowers pay off their mortgages. The HOLC took borrowers out of their high-interest loans and put them into 15-year loans – financed through federal bonds – with rates fixed at about 5 percent. Unlike many government bureaucracies, this was specifically designed to be a short-term program, intended to extend loans for three years and then oversee those loans for an additional 15 years.

With the HOLC and the Federal Housing Administration, the Roosevelt administration virtually created the long-term loan, which soon evolved into the 30-year, fixed-rate mortgage.

It’s unlikely such a plan could pass today’s government–but no matter how dire times seem, they’re not as bad as the great depression days. At least not yet…

[Image from AMNY.com]

Federal Reserve Chairman Ben Bernanke told Congress today that he was in favor of President Bush’s Economic stimulus package.

From the NYT Story: Mr. Bernanke said that whatever action Congress takes should be designed as a quick jolt to revive a languishing economy, and that measures like spending on infrastructure or long-term tax relief, which might take months or years to be felt, would be counterproductive.

Sound familiar? It’s the Iraq “surge” plan in action again! Many were skeptical that a short, sharp shock would do any good in Iraq, or that a “temporary” troop increase would be that. The plan seems to have been borne out though after a year. Perhaps the fiscal stimulus package will be effective too. Continue Reading »

The New York Times has an interesting profile of Ben Bernanke. It details how he learned economics, how he rose to power and the problems he faces. Pretty critical actually. Definitely worth a read: NYT STORY. Got to love the NYT photography too.

The Story compares Big Ben to former chairman Arthur Burns, who served under Nixon: Perhaps the last Fed chief to face such a difficult one-two punch of inflation and slowing growth was Arthur Burns, who was also the last academic to hold the job. President Richard Nixon, concerned that high unemployment could cost him re-election in 1972, told Burns to concentrate on revving up the economy. “No one ever lost an election on account of inflation,” Nixon confidently told him. Burns did as he was directed. An eventual result was runaway inflation and, for Burns, a legacy of failure.

Not particularly complimentary of academics! 

[Image from NYT]

Economists from investment bank Goldman Sachs say the housing slump and recent credit market turmoil will spill over into the broader economy this year and push the economy into recession if it isn’t there already.

“The latest data suggest that recession has now arrived, or will shortly,” said Goldman economists Jan Hatzius, Ed McKelvy, Andrew Tilton, and Seamus Smyth said. “The unemployment rate has now risen by more that 1/3 percentage point from the cycle trough. Historically, this has invariably been associated with recession, typically starting immediately and almost always within three months.”

Their prediction is that the Fed will cut rates to 2.50 percent from its current 4.25 percent. More at Forbes.com and Businessweek.

The Federal Reserve fell short on Wall Street’s expectations Tuesday, dropping rates a mere quarter point instead of the half-point businesspeople were clamoring for.

It highlights a problem of expectations. When the market expects the Fed to make a certain move and it makes that move, there’s a disappointment that it didn’t go further. It’s almost as if the more the market knows about the Fed is going to do, the less it actually responds to the stimulus.

So why then does the Fed pushing to publish even more information on its actions? We called it “a subtle way to take power away from the various would-be prognosticators by publishing even more information. It makes the black box of the economy look a little less opaque,” when we wrote about the Fed plan to increase the number of times it publishes its projections (read the story).

But there’s something else going on here too. Continue Reading »

“Agflation,” or the inflating price of agricultural commodities, is hitting the transitional economies of Eastern Europe and the Baltics like a punch in the chest.

It’s not something we think of too much in the western world. Food makes up only a small part of our consumption basket. But when the price of butter goes up 65% in three months in Bosnia and Herzegovina it can lead to serious unrest.

The central bankers of the countries most affected often see their hands tied. They’ve pegged to the Euro (a prerequisite for joining the EU) and can do little if anything to fight the inflation.

The Transitions Online site has an interesting story about the problem.

[Image from IAState.edu]

The Bank of England’s monetary policy committee voted to cut interest rates by 25 basis points on Thursday, to 5.5% from 5.75 percent.  It cited a decline in consumer spending, tighter credit and trouble in financial markets.

It’s the country’s first rate cut since 2005.

The European Central Bank kept its interest rates at 4%, ostensibly to fight inflation.

“The recent flurry of markedly softer data and survey evidence relating to the services sector, consumer confidence and the housing market has clearly raised fears within the monetary policy committee that there is an increased risk that growth could slow sharply over the coming months,” Howard Archer, chief UK and European economist with Global Insight–who correctly predicted the rate cut–told Forbes.com. Archer went on to tell Forbes.com that he expected the Bank of England to cut rates twice in the first half of 2008, taking them down to 5.0% by the middle of next year.

It’s a good example of why some European countries do not necessarily benefit from adopting the Euro and the dictates of the ECB. The organization tends to worry more about inflation and takes an economic strategy that favors the largest EU nations.

We recently wrote about Denmark and its renewed interest in dropping the Krone for the Euro.

The Federal Reserve’s Beige Book, a collection of anecdotal reports from the 12 Fed Bank districts, tells of a cooling economy in advance of the FOMC meeting on December 11.

Seven of the 12 districts reported slower growth, according to MarketWatch’s read of it. Forbes.com talked to John Lonski, the chief economist at Moody’s Investors Services, who said: “It’s consistent the markets view of slower economic growth that provides the Fed with more than enough room to cut interest rates in order to assure an adequate supply of financial capital.”

“Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amidst the ongoing slowdown,” the Beige Book says, and Reuters reports.

The report shouldn’t be much of a surprise. Bernanke said the economy was slowing earlier this month (read our story on what he said).

The data in the Beige Book is current as of November 16. You can download the Book yourself here.

[Image from the Fed]

Minutes from Federal Reserve Directors meetings in October reveal that the area banks were split on whether to cut rates. The WSJ reports that Richmond, Atlanta, Chicago, St. Louis and San Francisco and  New York Fed banks all voted to cut rates. The banks voting against a rate change were the Philadelphia, Minneapolis, Boston, Cleveland, Kansas City and Dallas Federal Reserve banks.

The FOMC voted 9-1 in favor of the October cut with Kansas City Fed President Thomas Hoenig the lone holdout for no change.

We reported on the FOMC minutes release earlier this month, which also showed a split decision on whether to cut rates.

You’d expect that to have some impact on the futures market, but nope–the market still expects another cut in December.

The Federal Reserve injected $8 billion into the economy Monday. The New York Times has the story:

The $8 billion — essentially a low-interest loan to the nation’s banks — will be issued Wednesday and repaid Jan. 10. The 43-day loan period is the longest in three years for this type of year-end injection. While it is not an unusual step for the Fed, the injection usually takes place later in the fourth quarter and involves a smaller amount. In 2005, the last time the Fed issued year-end funds, it issued 28-day repurchase agreements for $5 billion, starting Dec. 8.

Wall Street’s reluctance to lend can be intensified during the holiday season, as consumers demand more money for spending and banks look to close out their yearly balance sheets with a generous amount of capital and investments in safe-haven securities like Treasuries.

This year, anxiety about the ailing credit market has made banks more hesitant to provide their peer institutions with overnight loans, a crucial component of the nation’s economic bloodstream.

Some economists are interpreting this as a signal from the Fed that the economy is doing okay. We’re less optimistic…