April 4 - Wake Up Kellner, The Fed Is On Hold

I respect Irwin Kellner and post his articles on the site often, but his comment today after the Dow and Nasdaq were down more than  500 points each is the most moronic thing I have ever read.   Perhaps emotion got the best of him or perhaps also Kellner needs to wake up.

Today at around 1:00 PM CBSs' Chief Economists Mr.Kellner said "If the Federal Open Market Committee were meeting tomorrow, they'd probably  cut interest rates."

Will The Fed Move Quickly When Stocks Can Move Quicker?

The Fed has consistently questioned lending  practices, rattled on about "irrational exuberance", and supplied bearishly laced comments on inevitable market cycles.  To even begin to think that a 13% drop in the Nasdaq would scare the fed into cutting rates  in these market conditions is beyond absurdity and pointing towards lunacy.  The Nasdaq almost traded 3 Billion shares today and primarily fell due to margin phone calls ("hello sir, you owe us money now"). Is  Greenspan supposed to step in and start hacking down rates because a couple banks might be dry and not want to pay the going rate for funds?

The Nasdaq deserves to drop 13%, you know it, I know it. It probably  deserves to drop 30-50% but this is besides the point.

The Fed doesn't want to act too quickly when market fluctuations happen.  If a 500 point drop in the markets is enough to cut rates (as Kellner  suggested) then why bother claiming this is a free market system at all?   IE: Greenspan says everyone is nuts and loose credit could cause problems but with the first sign of a bear he is suuposed to start  handing out cheaper money to everyone who wants it?

The Fed will cut rates and offer money to those in a liquidity crisis, but to assume that the exact same pattern as in 87 will be taken by the Fed this go round  may be a tad presumptuous.  Even a 1000 point drop on either the Nasdaq or Dow may not be cause to cut rates because, as witnessed today, no matter how large the drop investors will mortgage their souls to buy the  dip.  So what happens if the Dow falls 1,000 points next week and Greenspan cuts rates, do we get a quick 2,000 point rally and a subsequent raise in rates. What a joke. If this is what will happen the Fed should  just give the money to the banks and tell them to buy futures contracts with it.

Cutting interest rates should be used to spur lending in moments of crisis (liquidity), and/or economic woe.  To cut rates  because of a quick reversal in the stock market directly conflicts with the notion that the Fed should not be raising rates when the markets speculatively rally. 

It is an impossibility in policy tinkering to think that every brokerage house and bank should continue to live life in the fast lane when a crisis hits.  With big bear  markets (recessions) some banks will go under and many will have a tough time but for the Fed to step in after a mild sell off and give out cheaper money to the financially sick is the sickest thought of all.  It  may be time for people to stop thinking about "what if the Fed reacts too late?" and start becoming terribly frightened about the possibility of the Fed acting too early. 

These are supposedly free markets and historically there is always more investors which lose money than make money no matter what the long term prospects of stocks are. For years the mania has continued, and just when the markets begin to become as  violent on the downside as on the upside all of sudden people look to the Fed. The hard fact is if you didn't care to listen to the Fed back in December 1996 (good choice) then don't go looking for him to save you when the crash arrives, you deserve what you get.  This includes banks, brothels, internet companies, hedge funds, debt dealers, brokerages, and so on; many deserve to go under because they are only viable during periods of excess. In the case of crisis the Fed must be selective in any bailouts or risk undermining confidence completely.

The dollar is paper and people are sheep, the Fed shouldn't become a sheep to.
Greenspan cutting rates tomorrow would be like a bubble blessing from God.  Give me a break Kellner, and wake up.