by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
The Federal Reserve released it’s August statement yesterday and pundits are scrambling to interpret what was and (equally as important) wasn’t said. Financial market participants have a 10-15 year history of trying to “outguess” the FOMC and focus more on the commentary than the actual decisions. The result has been volatile market movements directly after a word was changed from “probable” to “eventual” in the Fed commentary.
I’ve learned to trust Fed Chairman, Ben Bernanke’s judgement. An astute student of Milton Friedman’s study of The Fed’s role in the Great Depression, Bernanke has taken considerable action to preserve a healthy banking system. Free market enthusiasts would argue that his intervention is artificially postponing the eventual asset deflation reflective of a dour economy. I’d argue that his actions were necessary to promote confidence.
Confidence.
Sean Purcell and I discussed the press’ obsession with doom and gloom yesterday. Last month a Qantas 747 lost a portion of its fuselage, had to quickly descend below the 10,000 “hard deck”, and make an emergency landing. The 2.0 world gives us citizen journalism in the form of this passenger video. Watch it and you’ll see a professional air crew inspiring confidence in faithful passengers.
The Australian News realized that “professional” and “rational” won’t sell fishwraps and elected to lead with “Terror As Huge Hole Cripples Qantas Plane“:
A QANTAS jet plunged 20,000 feet and was forced to make an emergency landing after a giant hole was ripped in the plane’s undercarriage, passengers say.
The Qantas Boeing 747, en route from London to Melbourne, via Hong Kong, landed safely today and a “gigantic” hole was discovered in the belly of the plane, near the wing.
Some of the 346 passengers on board told of debris flying through the depressurised cabin, and oxygen masks dropping from the ceiling. Some said the plane had plunged about 20,000 feet after a door “popped”.
“There was a terrific boom and bits of wood and debris just flew forward into first (class) and the oxygen masks dropped down,” Melbourne woman Dr June Kane told ABC Radio.
An option to “lead with the bleeder” rather than the heroism of the air crew. I’m not minimizing the traumatic effect of a plane floor falling out. While the “pucker” factor had to be huge on that jet, the pilot intervened and took action to avoid a disaster. Coordinated efforts by the Qantas air crew inspired faith in the passengers.
Faith.
Last August, the floor was ripped off the fuselage of the credit market when American Home Mortgage was the first prime lender to close its doors. Each subsequent mortgage company failure was like a panel of the fuselage flying off. Bernanke descended below the hard deck by “plunging” the Fed Funds and Discount rates. He called the tower and asked for assistance. Oxygen masks were provided to help the weakest of passengers. Yesterday, he got his air crew to serve us coffee rather than encourage panic.
Should that Qantas plane have fallen from the sky and sent hundreds of innocent souls to heaven? It certainly could have been morally justified, considering the Qantas record for maintenance. Preservation, perhaps, was on the top of the pilot’s mind rather than moral outrage as he elected to minimize the damage of past poor decisions.
Intervention is justified when fighting for your life.
The Fed said a lot in its know nothing, do nothing statement, yesterday:
“ Ladies and Gentlemen, this your Captain speaking. We’ve experienced an equipment malfunction in the underbelly of the craft. While the situation required us to drastically alter our course, we’ve been in contact with the tower and expect to make an emergency landing in the near future. We ask that you remain in your seats at this time and fasten your seat belts. The air crew will be coming around to offer you complimentary soft drinks. There is a slight crosswind on the ground which may cause discomfort upon landing. The weather is a balmy 65 degrees on the ground and we expect to land shortly. Sit back and enjoy the ride. Thank you for flying…”
The Fed pilot is inspiring confidence. Maybe we should all have a little bit of faith.
Tom Vanderwell says:
Brian,
Well said. I wish more people had the confidence that you and I do that Bernanke is doing what needs to be done.
A different “angle” than the one I had yesterday but very insightful.
Thanks!
Tom
August 6, 2008 — 9:32 am
Brian Brady says:
“A different “angle” than the one I had yesterday but very insightful.”
Slightly different but unified in our faith that we’ll pop out the back of this safely. A bit banged up but safe nonetheless.
If you study Bernanke (like we both do, Tom), you can’t help but sleep an extra hour each night
August 6, 2008 — 10:51 am
Jim Cosgrove says:
Brian,
Don’t you think that by leaving interest rates unchanged the Fed is in effect saying that “another quarter point isn’t going to make any difference, we’re at the bottom of the market now and, as it always does, the cycle will begin to change naturally”?
Markets cycle, always have and always will. Sure this downward cycle was exacerbated by rising energy prices and a lot of really bad bankers/lenders got caught with their pants down but in the end this is just the natural business cycle and just like the Dr. can’t help you when you have a common cold the Fed can’t change the natural laws of economics.
Take some aspirin, drink lots of fluids (your choice) and by spring it will be better.
Jim
August 6, 2008 — 11:25 am
Jeremiah Arn says:
I don’t agree, guys. It’s a little like the debate about whether McCain is the best choice since we are already in Iraq. Your assumption says the GOP should be trusted since they inspire confidence with the everything-is-under-control rhetoric.
Perhaps a sensible option would be to take an honest look at how the mess was created before we judge the character of the Fed and its chairman.
August 6, 2008 — 11:31 am
Sean Purcell says:
Great post Brian. You know how much I enjoy the difference between what’s actually happening and what the press “reports” but pairing the Quantas flight with the Fed is a stroke of genius.
BTW @Jim – agree with your cycle comment. I would add that the Fed’s actions lag the economic cycle and their effect is generally after the fact.
August 6, 2008 — 12:08 pm
Brian Brady says:
“Perhaps a sensible option would be to take an honest look at how the mess was created before we judge the character of the Fed and its chairman.”
I believe that Osama Bin-Laden created this mess. Hence, my bias towards the Bush-Mc Cain- Bernanke cabal.
August 6, 2008 — 12:10 pm
Tom Vanderwell says:
Brian,
I’d get that extra hour of sleep if it weren’t for the kids and the loans I’m writing…..
🙂
Tom
August 6, 2008 — 1:08 pm
Jeff Brown says:
If Bernanke critics would take some time off taking cheap shots, and read his book, they’d at least be informed as to his thinking.
Bernanke is the relief pitcher here, not the guy who loaded the bases with nobody out. Just sayin’…
Your analogy was perfection, Brian. The media could turn a joyous wedding reception into a party designed to create tomorrow’s alcoholics.
August 6, 2008 — 1:38 pm
Geno Petro says:
“Bernanke has taken considerable action to preserve a healthy banking system.”
Coming from you, it makes me feel a little better about the future of this business. When these reports get splattered all over the news every month I generally don’t know what/what not to think about what is/isn’t said; what’s on/between the lines; what might/might not happen next.
August 6, 2008 — 2:19 pm
Sean Purcell says:
Geno,
You crack me up. Your take/non-take on what is/is not happening is refreshing. Brian may/may not be right, but he sure does/does not give us something to think about/ignore. 🙂
August 6, 2008 — 2:31 pm
Mike Farmer says:
Although I am against the Fed’s creation to manipulate the money supply, to criticize Bernanke at this point would be like claiming a surgeon, by removing the steak knife, interfered with the wife’s plan to fix her husband’s living problem.
Of course Bernanke has to manipulate to try to fix the prior manipulations. It comes down to the best, most trusted, manipulator once you have set manipulation as the means, which we did many, many years ago. I trust Bernanke to manipulate smarter than most.
Whether having established the Fed orginally as a manipulator was a good idea, well that is another question, one that we can’t hold against Bernanke at this very late and ingrained stage.
However, for the sake of economic purity and principle, I go on record as saying the Fed should never have been created in the first place and should be ended at the first opportunity. Ha! That’ll be the day.
August 6, 2008 — 2:59 pm
Vance Shutes says:
Brian,
I have no issue with Bernanke and the Fed. My issue is with the “press” in America. As a nation, we’ve become so “dumbed down” that the media can only capture our attention with histrionics. F*** that. It doesn’t cut the mustard with the 2.0 world anymore. And still, the idiots in charge of the MSM continue their ostrich ways, while the supposed “pillars” of the media (NY Times, LA Times, Wash. Post, etc…) collapse in ruin. And I’ll cheer mightily when the last of the fearmongers and muckrakers have gone. Good F*****g riddance to them and their ilk.
OK, I’ve stepped off my soapbox now. Just in time.
August 6, 2008 — 4:10 pm
Brian Brady says:
“Good F*****g riddance to them and their ilk.”
I bring out the best in everybody. Amen, Vance
August 6, 2008 — 5:13 pm
David Shafer says:
Nice job Brian,
You know in my opinion when the sh%% hits the fan, I want a steady hand in charge, not someone that is controlled by their emotions or their ideology. As to the press, we all know how and why they print what they do, so we shouldn’t get all outraged when they do what they do. Keep up the good work!
August 6, 2008 — 5:43 pm
Mike Farmer says:
I don’t know, Dave, I think we need to be more outraged because of what they do. I echo Vance. We need a whole lot of outrage, plus we need to keep air in our tires.
August 6, 2008 — 5:56 pm
Tom Vanderwell says:
Vance, Dave and Mike,
I’m with you on the main stream media. Maybe that’s why I don’t read the paper any more or watch the national news. Is CNN still in business?
I think I’d be more inclined to get outraged about the media if I thought it would do any good. Instead, I’ll just keep telling it like it is and go from there.
Yes, I do agree on the steady hand in charge. And I do think that in many ways, it’s already on the fan…..
Tom
August 6, 2008 — 7:07 pm
Brian Brady says:
“plus we need to keep air in our tires.”
I understand that fully inflated tires would reduce foreclosures by 3%
August 6, 2008 — 7:35 pm
Sean Purcell says:
plus we need to keep air in our tires
If you could inflate some politicians 3% they would be 100% full of it.
August 6, 2008 — 7:41 pm
Tom Vanderwell says:
Sean,
If we inflate the politicians 10% would they explode?
🙂
August 6, 2008 — 7:49 pm
Karl Christen says:
Brian,
Nice article and nice comparison. Funny though the different perspectives of those in various area’s of the country. Been in Phoenix this week and one of the local stations are laughing how bad it is and how the banking system is in complete chaos, and how were one step from the great Depression again.
But in Utah people are buying homes, the homes haven’t dropped as much, but there is still an overall feeling of what’s going to happen next.
So if your at ground zero, Phoenix, LA, Florida, it’s really, really bad. If your somewhat removed from ground zero everything is in better perspective.
Anyway, nice article.
August 6, 2008 — 10:25 pm
Richard says:
I think your explanation that the Fed’s actions are driven by keeping the banking sector afloat hits the nail on the head. In terms of simple economic stimulus, the rate cuts over the past year look like panicky overkill, and helped let inflation out of the bag (Paul Volcker must be throwing things at his television). However, as an unstated bailout (by increasing the loan spreads banks can earn) it may make some sense, while the public pays for it in an informal “tax” called inflation. Unfortunately, with Fed rates at 2.0% and the Federal deficit mushrooming (I believe some members of the Bush White House must also be ‘shrooming, but that’s another matter), monetary and fiscal options are limited right now. The only possible magic bullet would be a continued decline in the price of oil. I believe there is still enough speculation in the price for this to be possible (how else do you explain a futures chain with 2016 prices some $5 lower than current levels?), as long as we don’t blow it with some further misadventures in the middle east.
August 7, 2008 — 11:56 am
Brian Brady says:
“Paul Volcker must be throwing things at his television”
Indeed. Volcker didn’t have to fight Bin-Laden & Co, though.
“The only possible magic bullet would be a continued decline in the price of oil.”
I expect it to drop below $100 by Chrsitmas due to decreased demand and the expectation of expanded drilling.
“I believe some members of the Bush White House must also be ’shrooming, but that’s another matter”
If you’re talking about that STOOPID ethanol policy, we’re in the same camp. Thanks for stopping by and lending your opinion, Richard. I hope we see more of you
August 7, 2008 — 12:48 pm