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Thursday, November 06, 2008


we are beyond monetary policy

at least for the moment -- via felix salmon, the bank of england attempted to shock the market today with a 150bps policy rate cut. the reaction?

... [B]asically a big "meh". UK stocks remained down on the day, and the pound, astonishingly, actually rose.

as richard koo at nomura highlighted last week, this is a balance sheet recession where monetary policy is no longer effective. it is likely to be deeper and longer than most expect. as corporate defaults now begin to mount in spite of the best efforts of government, we may be prone to chronic and continuing waves of dollar hoarding as the triggered CDS soak up liquidity and precipitate further defaults. unwinding synthetic CDOs are as likely as the relentless march of the housing market back toward affordability on to help overwhelm recapitalization efforts and direct big banks deeper into nationalization and further from risk. there's little policy rates can do to address such problems.

economic freefall has followed the credit crunch and outlined a scenario frighteningly similar to 1873 or 1930. the playbook calls for the transfer of private liabilities onto the public balance sheet, via fiscal stimulus and verious devices of nationalization. the efficacy of the keynesian playbook is questionable, but there can be little doubt that monetary policy has been rendered moot for the duration.

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