As you may remember, dear reader, we put in a Country Hotline Service here at the Markets and Money headquarters. We offered to give advice to central bankers and heads of state – for free.
Well, we’re still waiting for the phone to ring. But if the phone ever rings, we’re ready. We can imagine the call:
Ben: “Gosh Bill, I’m in a bit of a jamb. I’ve got rising consumer prices on the one side…and a falling housing market on the other. I should raise rates to head off inflation, on the one hand, but if I do that, I risk sending the economy into a recession. Then, I’ll get blamed for everything. The Republicans will lose the White House – and blame me, of course. The economy will sink – just like Japan in the ’90s – and I’ll get blamed for that too. It isn’t fair…”
Ben: “Wait…it’s actually worse that I made it sound. Because either way I go, I’m screwed. If I cut rates, the dollar will go down and the “crude oil cowboys” are going to push the price up to $200 – and the whole world economy could go into some kind of crisis. If I raise rates, on the other hand, I’m almost certainly dooming all those marginal homeowners to bankruptcy. They all live on credit. And if the cost of credit goes up…they’re going to be squeezed hard. What’s really happening is that we’re on the downside of the credit cycle. So the cost of credit is going up…no matter what I do.
“And don’t even think about mentioning Paul Volcker. I’m sick of hearing his name. Let’s face it, he wasn’t a genius; he was just lucky to be on the right side of the credit cycle. Lending rates peaked out early in his term at the Fed…he could coast the rest of the way. I’ve got the opposite situation. Lending rates are bottoming out…just as I get started. It’s going to be uphill from here on…and I’m left holding the bag.
“Did you see what happened in the bond market recently? The 10-year note yield went over 4%…and it didn’t come back down until speculators started to bet on a rate increase.
“What can I do? Sit tight? But if I do nothing…and sit pat…I’ll get even more criticism. People will forgive you if you do the wrong thing; but they’ll never forgive you for doing nothing. Doing nothing is not an option.”
DR: “Well…what we’re seeing is pretty much what you could have expected, isn’t it? Isn’t this what happens when…”
Ben: “Look…I don’t need any of your lectures…I just want to know what lever to pull on. The one marked ‘fight inflation’ or the one marked ‘fight recession’?”
DR: “Sorry, Benny…it’s not that easy.”
Ben: “What do you mean? There are only two levers. I just wan to know which one to pull.”
DR: “It doesn’t really matter, does it?”
Ben: “What do you mean by that?”
DR: “Just as you said; you’re in a jamb. If you raise rates, while house prices are falling and GDP is nearly flat, you’re almost surely going to have a recession. But if you cut rates, oil is going up…inflation will rise…bonds will fall, and interest rates will go up anyway. Either way, the economy goes into a slump.”
Ben: “Yeah…so what do I do?”
DR: “Well…you’ve got to think about it in a whole different way. People made mistakes. They built too many houses. They paid too much for those CDOs and MBSs and all the rest of it. They bought businesses for more than they were worth. You can’t do anything about those bad mistakes…except help people correct them as soon as possible.
“You’re not doing any favors by offering more credit to a guy who is too deep in debt. And you’re not doing anything good for an economy that is living on borrowed time and borrowed money. What the whole system really needs is a correction. Why not give it one? Raise rates – a lot. That’ll send a message. That’s what Vol….never mind. Give people a reason to save again. And give the speculators a good spanking. Liquidate housing. Liquidate the banks. Liquidate the farmers. Liquidate the stock market. Liquidate the consumer. Liquidate the whole damned bunch. And while you’re at it, go on TV and tell the public the truth; that modern central banking is as fraudulent as Freudianism…and that from now on, you won’t be putting out any more funny money.
Ben: “Hold on…you know I can’t do that…
DR: “Then get out while the getting is good. Maybe you could fake a heart attack or something, and announce your retirement…that would give you some public sympathy…while you leave the next guy holding the bag.”
The phone is still silent.