FED RATE CUTS: USE History as a Guide, Not Gospel

``Every crackup is the same, yet every one is different. Today’s troubles are unusual not because the losses have been felt so far from the corner of Broad and Wall, or because our lenders are unprecedentedly reckless. The panics of the second half of the 19th century were trans-Atlantic affairs, while the debt abuses of the 1920s anticipated the most dubious lending practices of 2006. Our crisis will go down in history for different reasons.”-James Grant-The FED’s Subprime Solution

We’d like reiterate our view where policy actions such as rate cuts are no guarantee to the resolution of the imbalances in the US economy, much more to expect the same in the financial markets.

In the words of Standard & Poors’ Chief Strategist Sam Stovall (highlight mine), ``Our advice this time around is, as always: use history as a guide, but not gospel. The rate reduction, in our view, relieved the tension surrounding the credit crisis, but it has not removed the underlying concern surrounding the economy and the stock market.” (The S&P group expects the S&P 500 to end the year at 1510 or 2.44% up than Friday’s)

As a concrete example, the recent series of action like the provision of contingent liquidity, lowering of discount rates and the temporary exemption in the financing of brokers-dealers have not relieved the markets of the present stresses YET.

This from Mish Shedlock (highlight mine), ``There have been some 300+ government initiatives to make housing more affordable and every one of them failed including Fannie Mae and Freddie Mac. The reason they failed is because by promoting housing with tax breaks, cheap loans, the ownership society, etc etc home prices are bound to rise. And rise they did until a blowoff top was reached which is exactly where we are now."

One must be reminded that the recent monetary policies initiated by Mr. Greenspan to prevent deflationary depression have been a structural contributor to the recent credit bubble, whose pain we are today experiencing. Put differently, the temporary efforts to boost economic activities through diverse government policies or interventionism results to the boom bust cycle. These may not happen all at once, but as the Austrians assert, they eventually set in.

Further we’d like to add that aside from finding its roots in the attempt to maneuver and manipulate the markets to meet their desired ends; like clockwork authorities validate our observation that they are REACTIVE in nature to the envisaged problems and employ treatment-based political appeasement measures.

The growing clamor for rate cuts has evidently seen political pressures militate on the authorities, where the need to take action has prompted the Bush-Bernanke tandem to go public with matching rhetoric.

I’d like to quote Nassim Nicolas Taleb anew, ``Everybody knows that you need more prevention than treatment, but few reward acts of prevention. We glorify those who left their names in history books at the expense of those contributors about whom our books are silent. We are not just a superficial race (this may be curable to some extent); we are a very unfair one."

So if one is to expect collective government’s knee jerk measures to resolve on the present fixes, the odds looks likely against it.

But of course, we can’t shut our doors to miracles.