Rates! They are a'fallin!

Ben Bernanke at the FOMC met and cut rates yesterday by another 50bp. Let me just say that, in the past, I've been a big proponent of Bernanke. He is a well respected technocrat and I think he's very intelligent. The current actions of the FOMC are a bit troubling to me... We haven't gone over a cliff yet... but I'd like to see us advance a little more slowly towards the precipice then we seem to be.

Rates have dropped 1.25% in three weeks. That level of drop is unprecedented in modern U.S. Economics. BUT... and this is a big but... we're probably okay as long as the Fed decides, "Okay, we've cut alot... let's wait a bit and see what happens"... The problem that the Fed got into before was that they expected rate cuts to work a little quicker and when they didn't, they worried that they weren't working at all. At a fed funds rate of 3% (prime of 6%) we're now at the bottom edge of what most economists would consider the "neutral, non-inflationary" interest rate (generally regarded to be 3-5%)... The fed is essentially leaning on the accelerator of the economy ever so slightly. Let's now make the mistake we did before and put the petal to the metal, however. There's a tendency by FOMC directors, to think of the rate changes (rather than the rate itself) as the accelerator... "If we want to accelerate the economy we should cut rates"... That's not entirely accurate... The first question needs to be, "What's the rate at now?" and if the answer is "Low", the next question should be, "Do we want to accelerate the economy more than we are right now?"

I think the economy doesn't need any acceleration... If we're headed into a recession it's not going to be a typical one. Banks need to purge their bad loans and cure themselves of this moral hazard they've created (i.e. "The Fed will bail us out"). Current markets seem to be pricing in another quarter point rate cut by mid year. That's about the pace I would expect. The fed has now races us considerably lower then we were and its time to pause and catch our breaths.

There's another reason to be wary and slow down. We've now flipped the financial market economy on its head. There's going to be an inevitable reallocation of resources as a result of these cuts. As a result, we need to pause and let those resource allocations begin to happen... The move from 6.25% to 3.00% is going to cause a lot more reallocation of resources then the subsequent more from 3.00% to 2.00% will... Let's keep that in mind. If anyone speaks to Ben Bernanke on a regular basis, point him to my blog... Clearly, I'm the expert he wishes he was ;)

The generation divide

I've been thinking alot about the problems facing social security and our current deficit. I think we're going to see an increasingly large generational divide between the young and the old. Thanks to the hype surrounding this election and Obama's appeal to the youth, we're seeing huge voter turnouts and political participation. That's bringing a lot of people into discussions they wouldn't have had before. This is no small thing. Many of these people are going to start asking questions like:

1) Why is social security failing? (answer: It's a pyramid scheme that should've been fixed a long time ago)
2) Why do we have a national debt? (answer: Because we've spent more than we've taxed)
3) Whose fault are 1 and 2? (answer: It's grey... but you can certainly put a larger portion of the blame on Baby Boomers then on the people 20-35)

The AARP is widely regarded as the most powerful "silent" lobby in America. They're not as flashy as some of the bigger groups. Nor as loud (I'm looking at you ACLU!). But they're involved in a lot of things and it's not politically smart to attack them... ever. Old people are sympathetic and old people vote.

The problem is that the AARP, by definition, is looking out for people with a shorter planning period then the rest of America.

Here's the facts (trying not to bring politics into it)

1) We've spent more money then we've brought in from taxes. To the tune of $9 trillion dollars. That's an amount of money that's unfathomable to most people. That's roughly the size of 30 (yes 30) Microsoft Corporations.
2) Our taxes are at historic lows.
3) Congress hasn't authorized an expense reducing budget in a long long time (ever?)

I think there's going to be a growing number of the younger generation that look at those things and blame the older generation. The divide won't be quite so pronounced amongst the Gen X crowd (60s-late 70s) but will probably be felt pretty strongly by the Gen Y group (late 70s through the early 90s)... This group of people is young enough to feel morally segregated from the decisions of the older generation (it's hard for a 28 year old to feel responsible for something that started when they were 20... let alone an 18 year for something that happened when they were 10)... And yet it's this group of people that will be beginning to take over control of the government in 2017 when things are projected to start coming into more clear focus... I think we're going to see a lot of articles, rhetoric and discourse surrounding the notion that, "The very people that created the problem are now milking it with Social Security"... The political backlash could potentially be severe.

Iowa Caucus Predictions

Haven't posted in a long time but I wanted to go on the record with my predictions for tonight in case they pan out. This way, if I'm right, I can point people to the blog and show how brilliant I am. If I'm wrong, well, maybe noone will ever see my blog ;)

Here's my predictions for the Republican side:
1) Huckabee wins by a very, very narrow margin over Romney
2) Romney finishes second
3) McCain finishes a strong third (not close to Romney but statistically significant difference from the next two)
4) Thompson slightly ahead of Ron Paul
5) Ron Paul
6) Rudy Giuliani (again, separated from Paul and Thompson)

For the Democrats:
1) Obama
2) Edwards
3) Clinton
4) Richardson
5) Biden

it'll be very close at the top 3. I'll also say, I may be misreading what I believe to be the populism of Iowa. If that's the case, I would expect Huckabee to finish second and Edwards third as they are the two most populist candidates in their stump speeches. I have Edwards finishing 2nd because he's the 2nd choice for ALOT of people. I think there were alot of people that liked Edwards but then shifted to Richardson or the other fringe candidates as they became known. As those people fail to hit the 15% mark, you'll see some of them shifting back to Edwards. Edwards is also targeting the more rural areas which Kerry did to great success 4 years ago.

On the Republican side, I think it'll be very close. If Huckabee wins in a walk, that could spell the end for Romney since he would be exceptionally unlikely to win New Hampshire. McCain's numbers have been impressive in Iowa and I think he's well respected for speaking the truth (no hint of pandering when someone goes to Iowa and says he's pro-immigration and anti-ethanol). Ron Paul continues to do well in a state known for its independence (maybe there's a secret love of the gold standard in Iowa).

One of the truly fascinating things about this election season is going to be the action of the third parties. If Giuliani picks it up in New Hampshire and Florida, we may again see this discussion of a third party candidate. Michael Bloomberg continues to be coy about his possible candidacy and Ron Paul has raised a TON of money without much media help (and, oh by the way, he's run for office as a libertarian before). None of those candidates overlap (neither Bloomberg nor Paul is a favorite of the social conservatives... Bloomberg is decidedly more pro-business then Paul who's the libertarian)

It's not beyond the realm of possibility that we could have, at least temporarily, 5 presidential candidates after the primaries. That would virtually guarantee a win for the Democrats but it might be actually a better deal for one of the independents. If Paul takes 10% from the Republicans and the social conservative candidate takes 10% from the Republicans then Bloomberg just needs to take 15% from the Democrats along with 10% from the Republicans to be viable.

Tonight is like a little mini-superbowl for me so I'm pretty excited. Have fun!