Stephen,..Re: I believe that the rate cut was due to an imminent disaster that has been avoided.
Maybe this will help. It's an article from thestreet.com's excellent economic reporter James Padhina.
The Invisible Mouth: Evaluating the Credit Crunch
By James Padinha
Economics Correspondent
10/20/98 2:44 PM ET
Peanut Buttery
JACKSON HOLE, Wyo. -- Moody's recently noted that "a credit crunch owing to a shortage of financial capital ought to be easier to remedy than one stemming from a plethora of bad loans." Indeed. In the first instance policymakers need only lower Interest rates. And wait. In the second instance . . . well . . . direct comments to obuchi@japan.gov.
"Credit crunch" is, of course, a relative term. Real estate loans are still growing at a 5.9% year-on-year rate. Commercial and industrial loans are still growing at a 9.0% rate. The Fed's latest loan survey revealed "little change in standards and terms for commercial and industrial loans to small firms or in banks' willingness to provide consumer installment loans." Regional and community banks aren't cutting back credit. The pace of new issuance of investment-grade corporate paper is actually accelerating -- Salomon reports $3.5 billion during the first half of October against $4.7 billion for all of September -- and there is a queue of firms waiting to come to market as soon as earnings are out of the way. Yesterday Robert Van Order, chief economist at Freddie Mac, emerged to declare that:
From the standpoint of buying houses, there's not a credit crunch.
None of that sounds terribly (Captain?) crunchy.
And none of it matters, for the Fed has found religion. Thirteen days ago: "We are far short of anything that could resemble a credit crunch in the United States." Now: "What we're seeing in financial markets indicates there is a danger of a credit crunch." Five days ago: "I don't think we're anywhere near a credit crunch at this stage." Now: "There are growing concerns that creditworthy borrowers may find it difficult to obtain credit for productive investment opportunities in the coming months."
Which is all well and good. People make mistakes. Things change. The Fed is right to abort if a localized, embryonic credit crunch stands a decent chance of growing into something more unruly and infectious.
Yet one does wonder, as Jim Griffin does, if the "economy really
is sick." If spread blowouts aren't just "short-term, self-reversing
phenomena associated with distressed unwinding of highly leveraged trading accounts." If the Fed isn't just offering "mind candy."
Keep an eye on spreads to gauge whether it is working. The difference between the yield on on-the-run and off-the-run bonds -- Greenspan calls this pure liquidity premium -- now hovers between 15 and 18 basis points. (See an earlier TSC piece for more on the subject.) This spread normally sits in the single digits; it neared 40 basis points earlier this month.
Meanwhile, an updated version of the spread table that appeared in this space first on Sept. 18 and again on Oct. 8 appears below.
(Note: Aug. 17 was the day of the Russian devaluation and debt
moratorium; Sept. 23 was the day Greenspan testified before the
Senate Budget Committee and all but said he would ease;
Sept. 29 was the day the FOMC met and eased; Oct. 15 was the
day of the intermeeting easing; Oct. 16 is the most recent data point.)
No improvement here yet, though it is a bit too early to expect the
hit to produce a high. Perhaps Fed members need only wait longer. And hope spreads narrow and the curve steepens. And ease again if they don't. And keep easing -- damn the dollar and the money supply!
-- until they do.
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I didn't include the table but if you can access thestreet.com at the following URL, you will see the problem in tabulated form.
archive.thestreet.com
Also, you can access the following sites and see the spread and also Federal lending.
moodys.com
bog.frb.fed.us
bog.frb.fed.us
I disagree that AG has kept anyone guessing since from his remarks at USC on Sept. 4th, the market started rallying on the hopes of an ease. I think he further telegraphed his intentions by remarks made at a breakfast for economists in Oct.
It is true a couple of voting members of the Fed see the danger of adding liquidity in this economic environment and the Shadow Open Market Committee was still calling for an INCREASE in rates in late August or early Sept. But current circumstances trumped inflation worries for now.
Regards,
Lee |
