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Ode to Jackson Hole

JMW Turner... "The Shipwreck"

This is a repost from Shopyield, August 24, 2008 at the time of last year’s Jackson Hole conclave… here is Chairman Bernanke’s speech from the event this year

~~ “None of them knew the color of the sky. Their eyes glanced level, and were fastened upon the waves that swept toward them. These waves were of the hue of slate, save for the tops, which were of foaming white, and all of the men knew the colors of the sea. The horizon narrowed and widened, and dipped and rose, and at all times its edge was jagged with waves that seemed thrust up in points like rocks… ~~ Stephen Crane, “The Open Boat

The Kansas City Fedral Reserve’s Annual Economic symposium was held this weekend in Jackson Hole…

This is a conclave of central bankers… gloomy crowd …. good thing that they were in such a lovely setting… takes off the edge…

Now one can be of mixed mind about whether cenbankers passively ride the storm of economic cycles or in fact use their vast toolkit to sway economic conditions up and down…

I think we are just coming off a long period of command and control cenbanking… the dominant cenbanks use interest rate policies to slow, speed and stabilize…

In the US the Federal Reserve uses the primary dealers and the repo system (and now all the additional lending facilities) to liquefy the monetary system and lower and raise interest rates…

This worked well until recently… and then the magnitude of balance sheet destruction wrought by the subprime holocaust enfeebled all the old tools… this boat is taking on water… the tight, efficient system that worked through the Federal Open Market Committee has loosened up… no more taut lines… the rigging is loose…

Now at the Jackson Hole spin party a brave Dutchman sallied forth

~~ ” ..Mr. Buiter slams the Federal Reserve, European Central Bank and Bank of England for what he says was a mishandling of the financial crisis and monetary policy over the past year.

He gives the worst marks to the Fed, saying it’s too close to Wall Street and financial markets — responding to their needs to the detriment of the wider economy.

Mr. Buiter, a former member of the BOE’s Monetary Policy Committee, said the Fed overreacted to the economic slowdown — misjudging the importance of financial stability to the overall economy — and created a deeper inflation problem as a result…. ” ~~

Now a Dutchman claiming Fed/WallStreet deep love, at the cenbanking party, can’t go unchecked

An American stands to tell a tale… a Dutch tale…

~~ ” One day a little Dutch boy was walking home when he noticed a small leak in a dike that protected the people in the surrounding town. He started to stick his finger in the hole, but then he remembered his moral hazard lesson. “The companies that built this dike did a terrible job,” the boy said. “They don’t deserve a bailout. And doing that would just encourage more shoddy construction. Besides, the dumb people who live here should never have built their homes on a floodplain.” The boy continued on his way home. Before he arrived, the dike burst and everyone for miles around drowned, including the little Dutch boy.

Mr. Blinder continued: “You might have heard an alternative version of this story circulating around the Fed.”

In this kindler, gentler version, the little Dutch boy, somewhat desperate and very worried about the horrors of the flood, stuck his finger in the dike and held it there until help arrived. … It was painful. The little Dutch boy would much rather have been somewhere else. But he did it anyway. And all the foolish people who live behind the dike were saved from the error of their ways….” ~~

That was Alan Blinder, the former Fed vice chairman, telling the tale of the choices of one little boy to either allow the flood to sweep away all or heroically saving all the foolish people and the primary dealer dike with one little finger… oh… what little boys can do…

Now I think the story more closely resembles the “The Open Boat” a short story by Stephen Crane… I’m thinking this storyline is a better description of the state of the Federal Reserve, the primary dealers and the financial markets…

The plot is four men in a dinghy trying to survive after their ship capsized…

The characters in the boat are:

The Captain: The captain is injured and unable to help row the lifeboat. The captain is more forlorn and dejected than the other characters after having lost his ship. And yet he feels that it is his duty to guide the men to safety. Ben Bernanke…

The Cook: In the story the cook is described as fat and untidily dressed. He does not help row, but he does bail seawater out of the boat. He is the most talkative of the group, and remains optimistic that they will be rescued. The primary dealers…

The Correspondent: This character is autobiographical in the fact that Crane himself was shipwrecked off the Florida coast while working as a war correspondent. The taxpayers…

The Oiler:The oiler, Billie, is the only character in the story whose name is given. He is the only character who appears not to survive the ordeal. He is the strongest rower and seems the most likely among the group to survive. But, at the end he drowns in the shallow water just off shore while the other characters are saved. Lehman Brothers…

# # #

Yes, I think the story is more nuanced than the Dutchman or American let on…

The taxpayers will survive, worse for the wear…

The primary dealers will survive… fat, loud and untidy… cooking and bailing…

Chairman Bernanke survives… hopefully a little less enamoured of the sly pack that waits at the Window… there are other methods Chairman… move some of your vast research staff to a “big think” project…

Lehman Brothers… sorry friends… someone has to pay… and your CEO has a once proud place in the center of the liquidity pantheon… and its time to purge out the uncleanness… your corporate structure melts into a new form… you did have a good long run…

# # #

Looking back one year… an ode to August, 2007…

With great difficulty I gained my feet, and looking dizzily around was, at first, struck with the idea of our being among breakers; so terrific, beyond the wildest imagination, was the whirlpool of mountainous and foaming ocean within which we were engulfed … Amid a roaring, and bellowing, and thundering of ocean and of tempest, the ship is quivering, oh God! and — going down.

— Edgar Allan Poe, from “MS found in a Bottle”.