Re: PKT Seminar: Theories of the FRB (resending)

[Doug Henwood <dhenwood@xxxxxxxxx>]

My defense following upon Jamie's:

I know it's cynical, but I think one should probably ignore, or at least
take with many grains of salt, what the Fed says publicly. I realize that
makes analysis very difficult, but there's a good deal of truth in IF
Stone's dictum that all governments are run by liars and nothing they say
should be believed. The Fed may not lie outright; instead their published
remarks are generally so vague that you can read whatever you want into them.

So how to divine what they're up to? I think the only way is to listen to
what their friends in the financial markets and the biz press are saying.
That's where my analysis comes from. And the line there is that
unemployment is too low, capacity utilization is too high, and that CPI
is a backward-looking indicator.

The same crowd also says that if the Fed had kept short rates at 3%, the
rentiers would have panicked, feeling a near-Weimar was around the corner.

In this, I don't mean to promote the wisdom of the markets. Far from it.
Just today, the markets are full of talk about Friday's imminent
employment report. People are saying that in 10 out of the last 12 years,
the unemployment rate rose between Sept and Oct, and that initial Oct
employment figs are usually revised downward with time. In fact, neither
of these things is even remotely true. But they're forming expectations
for Fri at 8:30 am.

I still think, along with Keynes, that average folks have no business
playing in the stock market. It's too damn risky, and they're usually
wrong. Merrill Lynch uses the trading behavior of their own margin
account customers as a contrary indicator; what does that tell you?

Also, ARMs are a nice way for finance to transfer risk to odd-lotters and
away from the big folks. Again, what does that tell you? If you think you
can predict interest rates, more power to you; otherwise, people should
avoid speculating on their mortgage payment.

The dollar is a serious problem, about which Greenspan cannot speak
publicly. Could you imagine the political firestorm if he told Congress
that he had to tighten to draw money from Tokyo? The U.S. *needs* foreign
capital, and it cannot be so cavalier about mistreating offshore
creditors. I don't care if AG said a word about this - it's on the minds
of money-runners and scribes, however.

Doug

Doug Henwood [dhenwood@xxxxxxxxx]
Left Business Observer
212-874-4020 (voice)
212-874-3137 (fax)