Wednesday, August 22, 2007

Still No Need For A Fed Cut

After watching former Goldman Sachs (GS) CEO and current Treasury Secretary Hank Paulson on CNBC Tuesday morning I got to wondering.

Paulson essentially said the the underlying economy is strong and that aside from lenders current paying the piper for "loose lending standards", things are good. He said the current situation will "extract a small toll on growth" but that economy will weather it just fine. So that got me to looking at some recent numbers to do a little checking.

Recent figures (May - July)

-Industrial production: Up 0.7% or a 2.8% annual rate.

-Personal consumption expenditures: Up at a 4.8% annual rate (July data is not yet out).

-Payrolls: have risen a 1.2% annual rate or an average of 135,000 per month.

-Second quarter real GDP was up at a 3.4% annual rate, and nonresidential investment was up at an 8.1% annual rate.

So, is anyone surprised that earnings forecasts for companies other than the financials have not been lowered?. Forecasts of earnings for the S&P 500 in aggregate for Q3 and 4 have not been lowered by any significance over the past few weeks despite the problems in credit markets the the stock markets gyrations. Current expectations call for about 5% growth in the Q3 and about 10% in the 4th.

Why then would we want the Fed to lower rates to save poor lenders? Banks like Wells Fargo (WFC) and M&T Bank (MTB), both of whom have conservative lending practices are not feeling the effects of "sub-prime defaults". They have no need for a fed bailout, it is only those lenders who thought lending $500,000 to a person without any verifiable income or any money to put down was a neat little idea.

I have stumped here repeatedly for the Fed to do nothing with the Fed funds rate and still hope they resist the calls from irresponsible lenders. Let them fail, maybe we will get more responsibility from lenders. Even if the Fed did lower the rate, 1/2%, this would have ZERO effect on those people with adjustable rate mortgages that are getting ready for a reset and will not be able to afford the new payment. ZERO. Those people, to be honest, are not much better than the lenders who gave them the loans in the first place. Rates have been rising steadily for the past year and they had plenty of chances to refi the mortgages last year before the bottom fell out of the market. If they didn't, well, too bad. Plese do not waste my tax dollars bailing these folks out. They are in a self induced predicament. What is more important now is getting the point home that if you lend money (or borrow) it and do not demonstrate a solid ability to pay it back, you are responsible for the outcome.

In response to those screaming for a Fed Funds cut, Richmond Federal Reserve President Jeffery Lacker said on Tuesday, "Financial market volatility, in and of itself, doesn't require a change in the target federal funds rate". He also referred to the Feds stated goal on maintaining inflation. "While the most recent months' figures have been encouraging, it is still too soon to be confident that the moderation we have been seeing represents a downward trend". The risk that inflation will fail to moderate, "is still relevant, although some recent reports have been encouraging" he said. Translation? Who cares how the market jumps all around, long term results are what we care about.

Inevitably these loan will be no good and the pain will be felt, let's just pull the band aid off fast and get it over rather than prolong the inevitable.

Then we can move on the the next manufactured crisis..


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