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TMFAleph1 (95.04)

Writing Exercises and Rate Cut Musings

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September 19, 2007 – Comments (3)

10:33 AM EST

This is the first in a series of writing exercises, the purpose of which is to train to write more quickly and without the writer’s fear of the blank page. The way it works is this: write 300 words in ten minutes every day, without fail. The writing can be on any topic whatsoever, the important thing being to acquire the discipline to write a fixed amount in a set time. The exercise was suggested to me by my colleague at The Motley Fool, Tim Hanson.

On with our thought of the day.

I was disappointed and somewhat surprised that the Fed cut interest rates by 50 bps yesterday. I always thought (in my naiveté) that the Fed’s primary mandate was price stability. This isn’t to say that it can’t pursue other, secondary goals, but it would seem to me that this aggressive move could backfire. Of course, I’m not privy to the kind of information that Mr. Bernanke sees as part of his daily functions, but I didn’t see the need for the cut. Perhaps things in the short-term financing markets are much worse than I have been able to interpret from my following of recent happenings?

Of course, according to Edward Prescott (advisor to the Minneapolis Fed bank and co-recipient of the Nobel Prize in Economics), monetary policy doesn’t cause recessions, so perhaps the converse is true – it doesn’t cause asset bubbles, either. One person who must believe this is Mr. Greenspan, who is on a media tour promoting his book this week. I was amazed to see that this fellow has not a shred of self-doubt about himself and his record as Chairman of the Fed – he would accept no responsibility for the housing bubble. All in all, it has been a bad week for current and former Fed Chairmen, in my view.

*** The above text was written (and spell-checked) in ten minutes. As a result, some of it may not stand up to rational scrutiny. I apologize pre-emptively for any errors, omissions and misrepresentations. ***

3 Comments – Post Your Own

#1) On September 19, 2007 at 12:34 PM, TMFAleph1 (95.04) wrote:

Erratum: The correct time stamp is 11:33 AM EST.

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#2) On September 19, 2007 at 3:38 PM, Imperial1964 (98.29) wrote:

One thing of note is that the Fed's decision wasn't simply a whim by Bernanke, it was a unanimous decision by the Federal Reserve board.  I think the fact that such a bold decision was unanimous is telling, especially in the face of the clear inflationary concerns.

If I was a short-term trader I would've sold into the rally yesterday.and bought foreign equities and hedges against a falling dollar.  It is clear to me that this won't be the last rate cut this year.

As I recall, the Fed's mandate is to promote 3 things:  Stable money, full employment, and economic growth.  Unfortunately, full employment causes inflation and is therefore contradictory.  Also stable money and economic growth can be contradictory, just as full employment and economic growth.  So it appears to me that they've been implicitly given the freedom to pick and choose how (and if) they balance these three objectives. 

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#3) On September 19, 2007 at 6:28 PM, TMFHelical (99.10) wrote:

So its a trend is it?  Some (me for example) see it as a conspiracy to have TMFers the first page of the most active bloggers list - LOL.

Good luck bouncing the HypnoToad.

Zz - trying to get back there myself, probably will sometime.

 P.S. - I do notice that Tim is about to fall off that page himself and hasn't blogged since April ....hmmm.....

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