How Policy Is Made

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A butterfly flapping its wings on one side of the world can cause a tempest on the other.

One junior employee at a global investment bank covers up investing $60 Billion he wasn’t supposed to invest. The bank finds out and meets with regulators in its home country and get permission to minimize loses by dumping assets prior to announcing anything to the public. As the assets are dumped in already slumping markets around the world, the self-off accelerates. Based on what is happening abroad, stock futures on New York Stock Exchange, closed for the MLK holiday, plummet. The Federal Reserve holds an emergency meeting and makes a major policy decision with out knowing any of this.

As the story above develops, there is a general assumption that the Federal Reserve knows something no one else does, and it must be bad. Emergency action means a recession must be inevitable. Markets are skittish. People are scared. Politicians are energized. The DOW climbs with the hope further rate cuts from the Federal Reserve are inevitable. In record time bipartisan meetings between the White House and Congress hammer out a stimulus package: a little something for everyone in an election year.

By mid-afternoon Friday the story is out. With the realization that another cut from the Fed may be smaller than was hoped for during the frenzy, markets give up their gains. Although the justification for a stimulus package is diminished, investment banks are expecting their tax breaks and middle-America is expecting a check in the mail so why turn back now?

This Time is Different

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The Federal Reserve announced the biggest single cut in the Federal Funds since 1984, and the first mid-meeting emergency cut since 9/11. It would seem current events have made this NY Times Sunday Magazine article required reading. To sum up how the rest of the world did yesterday, trading in the major indices was off as follows by country:

• India (-7.4%)
• Australia (-2.9%)
• China (-5%)
• Japan (-3.9%)
• Brazil (-6.6%)
• U.K. (-5.5%)
• France (-6.8%)
• Germany (-7.2%)
• Spain (-7.5%), and,
• Canada (-4.3%)

To top it off, US Market futures for this morning (prior to the Fed's announcement) pointed to a precipitous drop of 527 points for the DJIA.

The interesting about link between the foreign markets and our own is it seems to torpedo the popular theory of decoupling (that the global economy was resilient enough to withstand a slow-down in the US). So, I guess we can add Decoupling to the list of now debunked popular theories, along with:

• The business cycle has been defeated
• Gains in real income don't matter
• Supply side tax cats pay for themselves
• Reversion to the mean can never happen
• There is no inflation

I'll omit "housing prices can't come down", and "sub-prime could never impact the larger markets" - those were never reasonable theories, just wishful thinking.

This week's lowlight

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Headline: Deep problems plague U.S. economy, stimulus plans notwithstanding.

'Nuf said.

For those keeping track, the Inauguration is a year away.

The upcoming rebate

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While it looks like some kind of tax rebate for Americans is a done deal, it's telling that the Harvard MBA still wanted—but backed off from—making his hideous tax cuts permanent to goose the economy. What nonsense.

I have yet to see anyone come out and say, in these days of recession, inflation, rising unemployment, and credit crises, that all of these things happened in spite of the Bushies' magic bullet—or "silver bullet" as the illiterate Bushies are wont to say—of massive tax cuts.

So we're stuck with the same old same old because it's all the Bushies know: Cut taxes and the economy will respond positively. Guess what? Taxes have been cut and the economy is in a shambles.

We all knew that the tax cuts were created simply to line the pockets of the oligarchs. Now that the chickens are coming home to roost, this fact is even more obvious, but no one (from the MSM to Josh Marshall) seems willing to articulate it clearly.

UPDATE — I see that Krugman (as usual) gets it.

In a nutshell

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Every so often I come across a passage that encapsulates the appalling havoc the Bushies have wrought upon the country. The following, from the latest The Nation, is such a passage:

The calamitous Administration of George W. Bush has slashed and burned its way through Iraq, our Constitution and the remnants of the social safety net. It has pursued imperial aggression, lethal incompetence and crony capitalism as if they constitute official policy, leaving the next President with a multitude of crises, from Iraq to New Orleans to Guantánamo Bay.

With the Iowa caucuses behind us, may a candidate emerge who sees these problems and works actively to correct them.

You’re Doing it Wrong

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Although I haven’t had a chance to read the entire article, some pictures are worth more than a thousand words.