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CNBC this morning:

Most traders agree that this is not a liquidity problem, it is a credit problem. There is plenty of money around–it is just not getting to the players who need it, like the mortgage companies.

If that’s true, why are so many clamoring for a rate cut? If it is a credit problem, cutting the funds rate will make little difference, particularly since they have already flooded the market with liquidity. It will not magically make billions available to Countrywide or any other mortgage lender.

Still, traders like Charles Campbell at Miller Tabak has pointed out that this is a psychological Bear market–and in these kinds of markets a Fed cut–stock traders hope–will have the psychological effect of freeing up money to the players who need it.

Maybe. What is really needed is for major financial players, a strategic player (like Fannie Mae or Freddie Mac), or foreign players, to step in and make the market function normally. Expanding Fannie and Freddie’s role–allowing them to buy more mortgages–is widely advocated, but generally opposed by their regulators.

Hmm… “Make the market function normally.” A contradiction in terms? Like telling someone to “Act naturally…” Remember, Mr. Smith is watching…

Martin Wolf, yesterday in the FT:

Not so Jim Cramer, hedge fund manager and television pundit, who declared last Friday that chairman of the Federal Reserve, Ben Bernanke, “is being an academic!…My people have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business, and he’s nuts! They’re nuts! They know nothing! . . .  The Fed is asleep.”So capitalism is for poor people and socialism is for capitalists. This view is not just offensive. It is catastrophic.

Written by adswithoutproducts

August 16, 2007 at 11:20 am

Posted in markets

4 Responses

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  1. There’s also the possibility that in the long run it’s neither offensive nor catastrophic, but rather a recognition on the part of the capitalist class that markets are not on their own an efficient means. Remember that markets are the aggregate of small decisions, but even a series of well-made, well-intentioned (“good”) individual decisions can lead to sub-optimal outcomes.

    Consider the Prisoner’s Dilemma, in which 2 actors who act independently both go to prison, while mutual solidarity leads to no prison time for either. Yet, informing on one’s partner is a better individual outcome, without question, because it minimizes the risk of a longer sentence without changing the odds of avoiding prison altogether.

    Or, note the restrictions required to support the assertion that markets lead to Pareto efficiency – perfectly competitive markets for all goods, no transaction costs or externalities. These are extreme, unreal assumptions at the very least. Pareto efficiency has its limits (equitable distribution of wealth/income, for one thing), but even within the confines of market-worship it requires a model with dubious premises.

    The real question is, where’s the Cramer outrage about people who have never been in the game?

    Dave McDougall

    August 16, 2007 at 11:37 pm

  2. but rather a recognition on the part of the capitalist class that markets are not on their own an efficient means.

    If only this were the case. But I doubt to my last fiber of flesh that the market-class is going to suddenly realize that the free-market isn’t the answer to every question other than the question of their own solvency. (I saw Cramer the day after this meltdown absolutely blasting Hilary Clinton, who made an appearance on the CNBC morning show, for her “socialism”… If only… But it was still, yes, offensive…)

    The real question is, where’s the Cramer outrage about people who have never been in the game?

    Exactly my point. I wouldn’t, however, hold my breath waiting. What Martin Wolf said captures the situation to a T. These people quite clearly believe that they do and should have a different relationship to the government than other, “less productive” folks.


    August 16, 2007 at 11:49 pm

  3. Thanks alot for these links, especially the Olin Wright and the Harvey. For those interested, here is the accompanying interview with Harvey:


    August 19, 2007 at 2:45 pm

  4. the liquidity is the very problem of the credit. The liquidity produces effects by its own real existence, while the credit produces effects only by its effects. That’s what make the credit a destructive phenomenom : it doesn’t exist, it have no innehrent positive value. An economy based on credit is autodestructive , because it does not produce anything but only sell and buy illusions.


    September 1, 2007 at 2:06 am

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