Friday, December 14, 2007
Go figure. Just two days after the Fed was lambasted for not cutting the discount rate by 0.50%, a set of data are released that suggest that Bernanke and co. should be hiking, rather than cutting, interest rates. OK, that's a bit of a simplification.
Macro Man, for one, has tried to separate macroeconomic policy drivers from microeconomic drivers. The microeconomic case for policy relief is fairly strong, as a market fairly central to the entire financial system (and by extension the economy) has more or less ceased to operate. Providing term liquidity is not about bailing out rich bankers or hedge fund managers; rather, it's about helping to ensure that Main Street banks are not so risk averse that they refuse to lend to high quality household and business borrowers. That's why he thought that doing 0.25% on the discount rate was an own goal.
And what of the macroeconomic case for policy easing? As far as Macro Man can make out, the entire case can be summarized in the chart below.
Housing has taken a dent out of growth mechanistically via reduced housing investment from homebuilders. And yes, as the chart above indicates, there has been a hit to household wealth, and thus to consumption. But housing equity doesn't tell the whole story, of course. Aggregate household wealth is still comfortably positive on a y/y basis.