Re: Fed cuts rates 0.50 bps

From: Jeff Bone (
Date: Wed Apr 18 2001 - 20:50:25 PDT

Adam Rifkin wrote:

> Jeff wrote:
> > We gotta take a hard stand against the ooh-scary boogeyman,
> > inflation. Even when he doesn't exist. :-(
> Inflation of housing prices exists, right?

Rising costs are an effect of inflation, not inflation itself. Costs can go up
in some market segments without going up across the board. Price increases can
also be the result of a general increase in the velocity of money rather than a
swell in the money supply due to overavailable credit.

I was being flip, BTW --- I don't really think the *purpose* of all the rate
increases was to cause a recession, but I think that may well be the effect. We
won't know for sure until later, but you tell me --- this *feels* like a
recession, doesn't it? In Austin, for instance, there's been no change in house
prices since last year --- because there's too little liquidity in the housing
market right now to set new comparables! (My realtor told me this just the
other day.)

There's almost no movement; buyers and sellers are at an impasse. Sellers are
setting prices according to last year's highs, while buyers are refusing to
bite, choosing to wait instead, because (this is a real quote from a real buyer)
"last year's comparables don't make sense anymore, and they're just going to
wait." Anecdotally, new construction starts in homes have gone to zero, whereas
there was anywhere from a 9 month wait for the shittiest builders to 24-36
months for the most sought-after ones a year ago. Net result, whereas this time
last year a house in my neighborhood had offers the day it was listed, there are
probably 2 dozen houses in my hood right now that have been on the market since
early Feb. I know of only one sale around here recently.

> I thought "recession" and "depression" were defined in terms of
> negative growth. We haven't had that yet as an economy, right?

I guess it depends on how you define economy. There certainly have been some
instances of zero or negative growth in some segments --- even in our banner
years, 1998 and 1999 --- outside of the urban / tech area. The roll-up numbers
have kept us out of that definitional territory, though, IIRC.

> Also, as far as I can tell unemployment has not really changed
> at all during all these interest rate increases and decreases.

And that's actually a problem. Unemployment is another one of those traditional
inflation markers; in part, the Fed increases were a response to the impression
that employment was *too high* to be healthy, which was driving wages up, which
surely was having an inflationary effect. Better to smack that bitch economy
upside the head and get back to slightly higher, healthier unemployment
numbers. (Not making that up; check out Woodward's book about Greenspan. "Book
about Greenspan." Everytime I say that, I feel like Carl from Slingblade,
somehow. ;-) Always looking out for the interest of employers everywhere: thx,
Uncle Al.

> So we're not actually in a recession, right?

I dunno. I've become convinced that for all the fancy definitions and theories
and models and tools, today's economists pretty much have no fucking clue what's
going on in the economy, even when they see it happen. :-/

The purpose of all those rate increases ostensibly was to engineer a soft
landing for an overheated economy, but this is predicated on a self-admitted
lack on Greenspan's part of understanding of what the "new economics" was doing
-wrt- productivity. It's *okay* for an economy to be in hypergrowth, if you
assume that there are strong underlying fundamentals like productivity
increases. Problem is, the standard models have no place for (the new kind of)
productivity increases and historically strong consumer confidence, both of
which have the effect of increasing the velocity of money. So much for a soft
landing; Al more or less threw the yoke forward and dived into the surface,
landing gear still up. It's going to take some time to count the casualties.

(Note I'm not bitching about the dot-com thing, specifically; there *was* too
much investment there, prices were too high, and a shakeout is a good thing.
The current downturn is effecting the production-based old-school economy as
well, or so I hear from my GF who's a soap chemist / R&D manager at a soap

Just like there's a certain point in a person's life when they should no longer
drive, so should there be a point in the lifecycle of an economic theory when it
should be put to pasture and not used to direct decisions about monetary
policy. A huge clue that this point had been reached *should have been* the
productivity issue; but no, Al had to rachet up interest rates a bazillion
times. Remember that when you get laid off, or look at the shortfall in your

There is an upside, though, as an entrepreneur. Those $150k+ / yr developers
are going for as little as half that these days. ;-) (With one foot in both
camps, not sure how I feel about that.)


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