Have a Looksy: the Fed Rate.

A head scratcher at the time, but ponder this:

"While there are many policy considerations that arise as a consequence of the rapidly expanding global financial system, the most important is the necessity of maintaining stability in the prices of goods and services and confidence in domestic financial markets," he said. "Failure to do so is apt to exact far greater consequences as a result of cross-border capital movements than those which might have prevailed a generation ago."(1995-Doubts Voiced By Greenspan On a Rate Cut)

While you stare at this (click to enlarge):

See that blip between 1985 and 1990 that's the S&L crisis, which caused 700 of those shops to close. But you can see the point I'm trying to make here, starting in 1995 the slope of the Down Jones industrial average starts accelerating. That is the change between 2 points on that graph is less than the next 2 points, until about 2005, but then the slope starts accelerating again.

That's what a bubble looks like, but how does Greenspan factor in here? First a word about what his job was. The fed controls the federal funds rate which sets the interest rate for funds banks can lend to each other. The fed sets this rate by requiring banks to have a certain amount of cash reserves at the fed in the form of Government securities -- which are basically numbers on a balances sheet that the government says are worth what it says. If, after the closing bell, Bank A doesn't have enough reserves it must find another Bank willing to lend money to it so it can bolster its government securities holdings. By controlling the supply of these securities, the Government effectively controls the target rate of these loans. Keynes dictated that when times are tough and economic activity is low the Fed buys a whole bunch of these securities from banks and the banks can then throw that money around. This raises inflation a bit but also opens the sphincters on Wall Street and releases a flow of trading, which, hopefully busies up the economy. When times are chill the fed is supposed to start selling these securities to banks which raises the fed funds rate.¹

All of which can make you a bit batty to think about: rather than just saying the rate is x and holding banks to it, the Fed pilots the boat by effectively locking the tiller and trying to control the wind. Greenspan and Milton Friedman's Neo-Classical nabobs at the fed in 1995, though, were all like "fucks to that, we care about inflation first and foremost, not controlling growth in a cyclical way," and set the federal funds rate at a stable level. Now, pause for a second, Keynesian economics offers a pretty straightforward way to predict what the rate's going to be at any point in time. If the economy's bad (and inflation's under control) it's safe to say it will be pretty low, and if the economy's alright it's safe to say that the rate will be relatively high. Ideally, in this system the rate is predictable, and banks like predictability, because it gives them a base income, and therefore a base to plan all their other bets around. This is called hedging, and for us nerds gives a root for "Hedging your bets".

If the fed funds rate is stable, however, and there is no way of knowing whether or not it will change, banks will lose their collective shit and start looking for safer bets to bolster their base. And out of Greenspan's backwards diction:

"While there are many policy considerations that arise as a consequence of the rapidly expanding global financial system, the most important is the necessity of maintaining stability in the prices of goods and services and confidence in domestic financial markets"

We start to see what he was thinking. Basically he removed a stable bet and forced banks to invest outside of Government -- on top of it all, the dude absolutely hated economic models and formulae -- by inserting a healthy goddamn dose of randomness and whimsy into a historically predictable vehicle. Here we go:

See 1994 to about 2001? Flat. So where do banks look? What has been, historically a pretty solid bet? What changes rates basically inline with the economy, the way the fed funds rate is supposed to? Ummm:

And, goodbye empire.

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1. I may be wrong about all this. I received a C+ in economics 101 in college. Not bad for the librul arts! Return.

For more reading about further economic fantods see:

• Cityphilia
• As Credit Crisis Spiraled, Alarm Led to Action
• What's in a Number?

Racketeering.

No matter how attractive it is, uttering "And so it begins" is hardly ever warranted. Take Hillary Clinton for example: its hard to say her campaign's dismissal of party rules from running in Michigan and Florida to the recent run on the superdelegates is a strategy wholly unforeseen. But it would be nice just for once to not be prescient:

Mrs. Clinton’s aides said they would also argue to superdelegates that they should give less deference to a lead from Mr. Obama because much of that had been built up in states where there were caucuses, which tend to attract far fewer voters than primaries, where Mrs. Clinton has tended to do better than she has done in caucuses.

“I think for superdelegates, the quality of where the win comes from should matter in terms of making a judgment about who might be the best general election candidate,” said Mark Penn, Mrs. Clinton’s senior campaign adviser.

Unfortunately, Senator Clinton's campaign aides are right; the democratic races in caucus states, even in this heated political season, are attended far less than those in primary states, and even more frustrating, often these races are thrice removed from the popular vote. In Washington, for example, the caucus on Feb. 9th only served to elect delegates to a district caucus held on May 17th at which point the actual Convention delegates are elected. This sort of tiered voting is a far cry from true popular vote democracy, and therefore lowers the quality of the results, which is a hard pill to swallow. However, as you can see in the table in my previous post below, Obama cleaned up in recent primary races, races run in true democratic fashion (as true as could be hoped at this stage at least).

The other tough pill that her campaign is selling is the question of the Michigan and Florida primaries, both of which Clinton won by ignoring the party's ban on campaigning in each state by doing just that (and by keeping her name on the ballot in Michigan). Michigan is a red herring, for she was the only popular candidate on the ballot, and a choice of one, practically -- Mike Gravel et. al really don't count, is a non choice: if you can only vote Hussein, he'll win. But, Florida is unfortunately not. Any argument for democracy must be based on widespread voter enfranchisement, to argue that Florida can not count because they at the state level broke arbitrary rules is disingenuous to the whole democratic experiment. This is a completely infruriating conclusion. In the end, it will come down to, in a framed debate, a matter of allowing votes from neither or both states, and the argument on those terms is over before it started.

Thugs and 'Cuz Written in Urdu.

One of the shining beacons of New Media Journalism is the New York Times. Since their redesign the amount of new offerings in the form of video and specials, like the way they've been handling Campaign '08, are inspiring especially due to the amount of creativity they've been bringing to the table. One of my favorite recent packages is this wildly entertaining video on two rival Urdu language newspapers in Queens. What's most astounding about it however, is its synergy with the print piece. Rather than following the written story closely, the video branches off towards one of the editor's smoking habits, and the other's perfectly encapsulated relationship with his son. The print article adds a bit of color not in the video: the editor's son is a Chomsky quoting upstart who is wary of his father's close, yet troubled, relationship with his rival working in the building just next door. Having a bit of experience in both of these forms, print and video, it's a pretty amazing accomplishment to have one form not directly echo the other, but add to it.

Also, the Times's blogs are completely spectacular. From Nizza's, the Lede focussing on off-beat news (where a recent post covered how a oil platform was evacuated because of a dream), to Errol Morris's Zoom which includes pie-graphs, faked photographs, and dissertation length articles on the problems of photography, it's a wonder that people would read anywhere else on the web (that's a little far but still...). One of the most fascinating discussions you'll see (anywhere on the web), and I'm a little late on the trigger, is this discussion on the Freakonomics blog where an author sat down with a group of actual reformed criminals and watched The Wire to judge the show's accuracy. They call these viewings "Thugs and 'Cuz," 'Cuz' being the author. Over the course of the series you'll find them making great observations over Bunk's guilty conscience and finding fault with Prop Joe's great failing. It's a must read.

Oh, The Gray Lady.

On the train to work today I read this surprisingly vapid story in The Times. On the frontpage. Above the fold. The basic assumption of this decidedly human interest story is that the credit crunch will bestow upon those Americans who "have proved staggeringly resourceful at finding new ways to spend money" a new found faith in saving money. At the outset we're treated to the popular history of American's love for easy money and fine dining:

"In the 1950s and ’60s, as credit cards grew in popularity In the 1950s and ’60s, as credit cards grew in popularity, many began dining out when the mood struck or buying new television sets on the installment plan rather than waiting for payday."

That Americans have been using credit cards, and credit as a whole, with ever increasing frequency is as strong a fact as global warming, but to attribute this phenomenon to increased consumption of television sets or fine dining is irresponsible. Any undergraduate economics major could tell the reporter that the credit crunch revolves around the increased use of credit as a sort of plastic safety net. During these "freewheeling days of credit and risk" Americans watched their real buying power and salaries stagnate as inflation went up while credit increasingly filled the void. Instead of investigating the hard evidence, The Times, editors and all, thought it apt to interview one Elena Gamble of Elk City (I'll quote it all because it's gold):

Not long ago, Elena Gamble would have looked at the Cadillac parked across the street from her modest home in Elk City, Okla., and felt a twinge of jealousy.

“We live in a small town, and everybody looks at your clothes and what you drive and where you have your hair done,” said Ms. Gamble, who earns about $2,600 a month as a grievance counselor at a local prison.

Now, she and her husband — a prison guard who brings home $2,000 a month — are grappling with $10,000 in high-interest debt. They no longer go to the movies or out to eat, except occasionally to McDonald’s. They quit their Internet service. Their car was repossessed. “What we say now is, ‘If we can’t afford it, we can’t buy it,’ ” Ms. Gamble said.

And when she looks across the street at that Cadillac, her envy has been replaced by pity for the neighbor on the hook.

I wonder if their neighbor is really "on the hook". I have no idea who they are, and the article bases this conclusion on Elena's interview. Is it too much to ask that a Times' reporter go across the street and ask the neighbor, "Excuse me are you able to make payments on your car?" Certainly not the journalistic integrity I expect from the gray lady.