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Can more be done?

November 1st, 2008 · No Comments

Well, not a whole lot, but there are some things..

This comes from Jim Cramer:

  • “The U.S. has now done everything it can to save itself,” Jim Cramer told viewers of his “Mad Money” TV Show Friday.
  • The fate of the U.S. economy and the stock market rests firmly in the hands of the European and Chinese central banks.
  • Cramer said the federal government has run out of tools after the countless rate cuts, bailouts, takeovers and seizures. “We can’t do much more than we already have,” he said.
  • He said whether the U.S. endures a recession or jump starts growth depends on the actions of the central banks of the world. He noted their moves will be more important than the outcome of the presidential election.
  • “The Europeans are playing with fire,” he said, “and they must act now.” He begged the European central banks to act swiftly to avoid a global crisis.

First question, are the Europeans willing to play game? Well..

ECB Members Backpedal on Rate Cut
Friday, October 31, 2008 10:27 AM

  • ECB Executive Board member Lorenzo Bini Smaghi warned on Friday against setting interest rates too low and the Bank of Italy chief said there was limited scope for using monetary policy to boost the economy.
  • The cautious comments from Italy’s two ECB Governing Council members came ahead of a European Central Bank meeting on November 6 where bank President Jean-Claude Trichet has said a rate cut is “possible.”
  • Economists polled by Reuters expect a half percentage point rate cut to 3.75 percent. It would follow the recent global trend. After a cut by the U.S. Federal Reserve earlier in the week, Japan cut interest rates for the first time in seven years on Friday to 0.30 percent. The Bank of England is expected to follow suit too.
  • Belgian Central Banker Guy Quaden reinforced expectations for an ECB cut. “The ECB meets next week and another rate cut is a possibility,” he told business daily De Tijd.
  • But Bini Smaghi, who has also said a cut next Thursday is a “possibility,” injected a note of caution.
  • Let’s remember that interest rates in the previous (economic) cycle remained very low, perhaps they got too low in an effort to stimulate the economy at all costs,” Bini Smaghi said at a conference at the Luiss University in Rome.
  • We must avoid repeating the same mistake, of bringing rates down to levels that are difficult to get out of.”
  • Bank of Italy Governor Mario Draghi said rate cuts made by central banks around the world, aimed at countering the financial crisis, had made a positive impact but said there was not much more room for maneuver.
  • “The quick loosening of monetary policies contributed to containing the repercussions of the financial turbulence on the real economy,” Draghi told an audience of bankers in Rome.
  • “The commitment remains, but given the low level of interest rates now in the U.S. and the ample liquidity made available by central banks, monetary policy’s room for maneuver tends to be reduced,” he said.
  • Expectations of a rate reduction were boosted by data showing euro zone inflation fell to 3.2 percent in October as oil and other commodity prices helped inflation ease from September’s 3.6 percent, in line with forecasts.
  • It is likely to cheer the ECB who will see it, alongside dire recent economic figures, as further justification for lower rates.
  • Draghi, who is also chairman of the Financial Stability forum, said despite some positive elements like improving credit conditions, the world economy would remain in the doldrums until at least the second half of 2009.
  • “Based on the evolution of global demand, as expected by major international bodies, ongoing stagnation will continue at least until half of next year,” he said.

We see an uncomfortable parallel with Japan in the early 90s here. They too were reluctantly to cut rates, and paid a heavy price for it. On the other hand, Bini-Smaghi does have a point when he argues that rates have been too low at times, to deal with the deflationary effects of a popped bubble.

Basically, the bubble cycle has replaced the business cycle, and an under-regulated and over-leveraged financial sector prone to reckless speculation has hijacked monetary policy. Also, getting these ‘masters of the universe’ expecting a bail-out every time their bets go wrong creates a moral hazard problem and induces them to be even more reckless the next time around.

However, now is perhaps not the ideal time to worry about that. Let regulation contain over-leverage and contain the hyper financial system. Inflation is dead in the water for now, we need rate cuts in Europe.

What more can authorities do? Some suggestions:

  • Infrastructural investments, creates work and demand for goods and services, helps future economic growth, isn’t permanent. Better than (most) tax cuts, which might just be saved instead of spend, and have a tendency to become permanent
  • Supporting people stay in their houses, Here is one way. Luckily, plans are already drawn up (although not everybody is impressed with these)
  • If worst comes to the worst, just balooning the money supply further (the ‘Zimbabwe solution‘). It worked for Japan to get out of their asset deflationary spiral.

Tags: Credit Crisis