Now or later

Placing their shared public bias towards higher rates on hold the BOE and ECB both took no action on rates at their regular meetings today, dutifully paying lip service as well as further billions in taxpayers' money (through the inflation tax), to the delicate nature of current conditions. Gold is breaking out above $700, having rallied 10% from the low of early July, and m* has to say that makes a lot of sense, while Hong Kong's Hang Seng index, also a beneficiary of abundant liquidity, sits at 24,000, up 40% on the year in local terms.

In the "Now" column, yesterday's Fed Beige Book survey of regional economies showed little thus far in the way of impact beyond housing construction and financing from the current crunch in, uh, housing construction and financing. Atlanta Fed Governor Lockhart commented, "So far, I have not seen hard or soft data that provide conclusive signs that housing problems are spilling over into the broad economy..." And, "I would like to see inflation sustained at a somewhat lower rate -- with emphasis on `sustained.' If inflation is allowed to accelerate, bringing it back down will be costly and painful..."

Governor Lockhart is a non-voting member until 2009 and so faces less public pressure than others, or the ECB today for example, but one would think he has a pretty good vantage point on the economy in overdeveloped Atlanta. Is it possible Toll Brothers management does not have Lockhart's phone number?

Nonetheless, with equity markets having already baked in at least 25bp from the Fed for Sep 18th, the probability of the Fed coming up with anything less (thereby disappointing a technically irrelevant constituency that happens however to pull the levers of public opinion) has to be seen as very small.

Yet despite the seeming inevitability of something the Fed's maneuvers thus far demonstrate its great reluctance to do, the debate (excellent summary today by the FT's Krishna Guha) as to whether a rate cut will actually do anything for the animal spirits of the abcp market or consumer confidence comes down fairly clearly against in m*'s mind.

In the "later" column, where recession fears are getting a pretty good airing at the expense of inflation fears (and moralists moralizing on the morals of bailouts, credit bubbles, and profligate Central Banks etc.) a few prominent economists are starting to gather. Chief among them is Martin Feldstein, of Harvard, NBER, and high off the last word at the Jackson Hole confab last weekend, where he said the possibility of a recession, based on what is happening in home construction and home finance, may be strong enough for an anticipatory response now from policymakers even at the expense of higher inflation "later."

m* says, what's the rush?

Look at the problems in the market transmission mechanism. Are rate cuts going to bring transparency to bank's off-balance sheet financing of the asset backed commercial paper market (a trust problem)? Are they going to do much to stabilize bids in credit markets for structured home-finance paper of heretofore rated but now unknown quality (an information problem)? Will they do much for the dozens of bankrupt mortgage originators, levered speculative funds, and ill-informed, ignorant, or just greedy investors with losses (an insolvency problem)?

Look at the problem in the housing market transmission mechanism. Home builders and speculators created an excess supply of housing. Are rate cuts going to speed the absorption of houses on the market to the point where builders will have reason to build more? Are rate cuts going to bring back appreciating prices enabling the MEW for consumption cycle to start again?

No. Time may be money, but money is not time. These problems need time.

Rate cuts now will make it easier for banks to hold onto, or demand higher prices for, the $250bn pipeline of deal debt committed to (should policy seek to socialize the swallowing of that bubble). Will that help bring down interbank lending rates? Sure. But vulture investors seeking to relieve banks of this burden are eyeballing double digit returns - levered of course. Is that a cry for help, now?

Rate cuts now will lower the discount rate for equities, making headlines and boosting morale, particularly for the classes with no exposure to equities, but they are unlikely to enjoy renewed access to sub-prime credit as a result. Rate cuts will lower the cost of capital for prime borrowers, perhaps, but prime borrowers do not seem to be suffering at this point.

If things are going to be as bad as the fearful fear, rates are going to have to go low enough to start the bubble machine again. There is plenty of time for that, (remember those monetary policy lags too!). The Fed has done enough, and through it's liquidity injections, is doing enough, for now. Give it time.

If m* is looking for justice, and there may be just a little of it corrupting the analysis today, at least the short squeeze in Countrywide is now definitively done. Sorry BoA. Maybe $18 should have been the "bail in" price!