Thursday, September 22, 2005


Futures contracts on the Chicago Board of Trade, show that investors are now betting on a 4% short rate by March of 2006. This is down from an implied yield of 4.125% prior to Katrina.

Having lived through the 1970's, I hope the FOMC does not err on the side of restraint. The situation is different but that sort of thinking can get one in big trouble. The big problem in the 70's was the politicians tried to manipulate the markets. They thought jaw boning and price controls were powerful enough to control the markets. They were wrong.

Right now there are many hair-brained ideas being floated. Typically they are ideas to gain favor from voters rather than ideas to solve problems. For example, the French are jaw boning and threatening price controls. The French simple do not understand that free markets work. Some American politicians are just as bad. One proposal is to suspend the gasoline tax! What? The problem is demand increasing faster than supply and we want to lower the price even more? The problem is that roads have been destroyed and money is needed to rebuild and we want to lower the gasoline tax?

Generally it is best for governments to avoid direct involvement in markets.Noting that the government has never been very good at developing new technologies in response to consumer demand Mike atThe Infieldcomments that "private" and "market" are always better than "Government" and "public" Big mistakes can be made by any market but government involvement typically makes mistakes bigger. The FOMC does have the difficult task of manipulating the short-term funds rate. According to the CBOT, figures, the betting by professional futures traders is that the FOMC has another quarter point move to make. I can only hope that another quarter point is enough. The race the economy is in is not to get around the track one time at an extremely high speed but to go around the track many times at a high but safe speed.