The Day After, and the Day Before

I somehow couldn't bring myself to post anything yesterday, the 11th anniversary of the 9/11 terror attacks.  I certainly didn't want to demean the occasion by posting anything related to politics; after all, it was in the aftermath of those attacks that we as a nation, however briefly, set our partisan vitriol aside and came together as one.

And I'd planned an economic diatribe, but I just couldn't get in the mood.  I'm sure you understand.

I'll risk being cliche and tell what I remember of that dark morning.  I was in the shower, and my wife had gone downstairs to let our brood of mutts out.  She had turned on the TV, and came upstairs to tell me that a plane had flown into the World Trade Center.  At first I thought it had to be an accident.

But something just didn't feel right.

What are the odds that Joe Pilot loses control of his Cessna, and manages to fly it into one of the twin towers?  Just as I was contemplating that, my wife informed me that a second plane had flown into the other tower.  No accident.

I hurried to finish getting ready for work, watching the horror unfold on the TV in our sitting room.  I drove to work, listening to the coverage on the radio.  Once in the office, we all gathered around the sales desk.  The market, of course, was closed, and we all watched the coverage on the live CNBC feed that we have in our office to keep up with the markets throughout the day.  I remember the shock and horror as first one tower collapsed, then the other.

I've since visited Ground Zero, and seen the cross left there, formed by what was left of iron girders.  We as a family also visited St. Paul's Chapel, where the first responders took many of the rescuees, and saw the memorials there.  That was perhaps the most powerful part of it for us.

When our daughter was eight years old, in 1998, we visited the Big Apple - one of our favorite cities in the world - and took the ferry to Liberty Island.  Our daughter took a picture of my wife and me with the twin towers in the background, and we cherish that picture now.  On that later trip when we visited Ground Zero, we went back to Liberty Island and had her replicate the shot - a little older, a little grayer, and without the WTC in the background.

On to tomorrow.  It feels funny posting today as well, given what happened in Libya, but there's a Fed meeting today and tomorrow, and the Fed is likely to announce tomorrow that more stimulus is on the way.  I place the odds at around 70% that they'll make a move.

In part, that's because there's an election coming up, and Mr. Bernanke knows that if he does nothing, it hurts Mr. Obama's chances, and Mr. Romney has pledged to replace Bernanke if he's elected (nearly reason enough right there to vote for Romney).  Don't let anyone tell you that the Fed doesn't consider politics in its actions.  That hasn't been the case since at least Alan Greenspan.

Also, the markets thrive on stimulus these days - it's like crack to an addict.  I'll devote more attention to this topic in a future post.  But everybody wants the market rallying, and the only thing keeping it rallying right now is Fed accommodation.

On the flip side, Bernanke is like Barney Fife.  He's got one bullet left in his pocket, and he might not want to use it right now, especially since the economy's likely to get worse.  But that bullet is probably a blank; all the stimulus undertaken to date has done pretty much nil in stimulating the economy, and besides the fact that the Fed can't really gross up its balance sheet much more than it already has, what effect would more bond purchases have?

The Fed has hinted at copying the Bank of England (there's a good idea; copy the plan of a central bank whose country is in recession), and offering low borrowing rates to banks only if they use the funds to make loans.

Great idea.  Guess what?  Borrowing costs for banks are already ridiculously low, and they're awash with liquidity, unlike their British counterparts.  Heck, US banks are offering basically nothing for savings deposits, yet they can't stem the tide of money rolling into their collective coffers.  So why would they need more liquidity?

And they're not making loans with the liquidity they've got, in part because they can earn a virtual (supposedly) risk-free spread borrowing overnight at rates they've been promised will stay low for two more years, at least, and investing them in longer-term bonds.  Why take the risk of making loans in a still-shaky economy?

Also, nobody really wants to borrow right now - at least, nobody whose credit is sufficient to qualify for a loan.

So I'm guessing the Fed will act, the markets will rally ... and the economy will get worse.