Jabba The Hutt, Jerome Kerviel, Davos And Market Reflexivity: Tying It All Together

Tyler Durden's picture

Read this short monologue by the Fed's Dick Fisher from the Fed's January 2008 meeting. Then read it again, especially if you are the Chairmanwoman of the Fed.

* * *

Well, Mr. Chairman, I’ve seen the discount rate tally. I’ve listened carefully to all my fellow Presidents and to Governor Kohn. I suspect I know what your fellow Governors are going to recommend. I’m in a distinct minority at this table. This weekend, by the way, I searched the newspapers for something to read that didn’t have anything to do with either a rogue French trader or market volatility or what the great second guessers were blabbing forth at the chat show in Davos; and in doing so I happened upon a delightful article. I hope you saw it in the Saturday New York Times on the search for a motto that captures the essence of Britain. My favorite was nemo ne inclune lacet, which very loosely translated, I think, means “never sit on a thistle.” [Laughter] Well, that’s where I am. I’m going to risk sitting on the thistle of opprobrium for my respective colleagues by making the recommendation that we not change the funds rate and that we stay right where we are.

Now, for the record, I would have supported last week’s 75 basis point cut for the reasons that it would put us ahead of the curve and bought adequate insurance against a recession. I told you that directly, Mr. Chairman, and I mentioned it to Governor Kohn as well. Judging by the policy rules on page 21 of the Bluebook, as well as by the adjusted rule that our economist Evan Koenig has developed in Dallas, we are, indeed, ahead of the curve from the Taylor rule standpoint as we meet today with the rate of 3.50. As was mentioned earlier, we have not been docile. We have cut rates 175 basis points in a matter of months, and we’ve taken some new initiatives that I think are constructive and useful. I’d like to see more along the lines of the TAF. To be sure, in the discussion that we had in that emergency meeting, I had the same concerns that President Hoenig expressed in the call, but with the wording change that was put forward by Governor Kroszner I ended up where President Hoenig did. I regret not voicing my discomfort with the penultimate sentence in the statement—the one dealing with appreciable downside risk after the move we took—as I felt that it undercut the potential effect of our decision. During that call, you may recall that I pointed out the pros and cons. I began my intervention on that call by saying that there’s a very fine line between getting ahead of the curve and creating a sense of panic. I also expressed concern of the need to be mindful of inflation, as many have at this table today. There are some critics who say we panicked in response to the market sell-off of that Monday. I do not believe that’s the case, and I don’t believe it’s the case because I find it impossible to believe. As I’ve said repeatedly in this room, other than in theory, markets are not efficient, and on the banks of the Hudson or the Thames or the Yangtze River, you cannot in practice satisfy the stock market or most other markets, including the fed funds futures market, in the middle of a mood swing. When the market is in the depressive phase of what President Lockhart referred to as a bipolar disorder, crafting policy to satisfy it is like feeding Jabba the Hutt—doing so is fruitless, if not dangerous, because it simply will insist upon more.

But attempting to address the pathology of the underlying economy is necessary and righteous, and that’s what we do for a living, and I think we are best sticking with it. We’re talking about the fed funds rate. I liken the fed funds rate to a good single malt whiskey—it takes time to have its ameliorative or stimulative effect. [Laughter]

But I’m also mindful of psychology, and that’s what I want to devote the remainder of my comment to, and then I’ll shut up. My CEO contacts tell me that we’re very close to the “creating panic” line. They wonder if we know something that they do not know, and the result is, in the words of the CEO of AT&T, Randall Stephenson, “You guys are talking us into a recession.” To hedge against that risk is something to them unforeseen, even after they avail themselves of the most sophisticated analysis that money can buy. CEOs are, indeed, doing what one might expect. They are tightening the ship. They’re cutting head counts to lower levels. They’re paring back cap-ex where they can beyond the levels they would otherwise consider appropriate after imputing dire assumptions of the effects of housing. I’m going to quote Tim Eller, whom I consider the most experienced and erudite of the big homebuilders, which is Centex, who told me, “We had just begun to feel that we were getting somewhat close to at least a sandy bottom. Then you cut 75 basis points and add ‘appreciable downside risks to economic growth remain’ in your statement, and it scares the ‘beep’ out of us.” He didn’t use the word “beep.” These are his words, not mine. Imagine scaring a homebuilder already living in hell. The CEOs and CFOs I speak to from Disney to Wal-Mart, to UPS, to Texas Instruments, Cisco, Burlington Northern, Southwest Airlines, Comerica, Frost Bank, even the CEO of the felicitously named Happy State Bank in Texas, repeated this refrain, “You must see something that we simply do not see through our own business eyes.” They do see a slowdown. They are worried about the pratfall, as I like to call it, of housing. They’re well aware of California’s and Florida’s economic implosion and broader hits to consumer welfare across the national map. I recited some data points from those calls yesterday. But they do not see us falling off the table. They worry aloud that by our words and deeds we are inciting the very economic outcome we seek to cut off at the pass by inducing them to further cut costs, defer cap-ex, and take other actions to hedge against risk. They can’t fathom it but assume that we can.

Our Beige Book contacts and the respondents to the business outlook survey in Dallas say pretty much the same thing. One of those actions is to fatten margins by passing on input costs. Now, I mentioned the rail adjustment factor yesterday, and I’m troubled by the comment that I quoted yesterday from the CEO of Tyson Foods. “We have no choice but to raise prices substantially.” I mentioned that Frito-Lay has upped its price increase target for ’08 to 7 percent from 3 percent. Kimberly-Clark notes that it is finding no resistance at all to increasing prices in both its retail and institutional markets, and I mentioned that Wal-Mart’s leaders confirm that, after years of using their price leadership power to deflate or disinflate the price of basic necessities—think about this—from food to shoes to diapers, they plan in 2008 to apply that price leadership to accommodate price increases for 127 million weekly customers. This can’t help but influence inflation expectations among consumers.

I experienced a different kind of price shock two weekends ago, when I went to buy a television so I could watch President Rosengren’s football team demolish President Yellen’s. [Laughter] I was told that they had doubled their delivery and installation fees because of a “fuel surcharge.” Well, I reminded the store clerk that I had been there about the time of the Army-Navy game, around Thanksgiving, and that gas prices had not doubled since the Army-Navy game, and he said, “Mr. Fisher, we’re selling less, and we will take what we can get away with however we can get away with it.” With one-year-forward consumer expectations, according to the Michigan survey, already above 3 percent, everyone from Exxon to Valero to Hunt Oil and our own economists in the Greenbook telling me that oil is likely to stay above $80, and the national average price therefore above $3, this mindset really worries me. I’m going to add one more very troubling little personal anecdote. Driving home from work last week I heard a commercial for Steinway pianos. The essence of the advertisement was that manufacturing costs had increased and that you could buy a piano out of their current inventory at the “old price” that was in place in 2007; but come February 1, there would be sizable price increases, so you’d better purchase your piano quickly. It has been thirty years since I have seen advertisements to go out and buy now before the big expected price increases go into effect. Now, this is an isolated, little bitty incident, but I fear this may be just the beginning of the more pervasive use of this tactic.

Everyone in this room knows how agnostic I am about the predictive value of TIPS and the futures instruments comparing TIPS with nominals, like the five-year, five-year-forward. I’ve sent around an eye popping chart that shows the predictive deficiencies of the professional forecasters that were tracked by the Philadelphia Fed. I know that dealers are telling us that inflation is contained, but I have spent many years in the canyons of Wall Street, and I would caution against their disinterest in the predictions that they offer. When I see that every measure of inflation has turned up, learn from studying the entrails of the last PCE that 83 percent of the items therein experienced a price upswing, consider the shortcomings of the few tools we have for evaluating expectations of future inflation, and then hear from microeconomic operators of the economy that, by golly, we’re going to take what we can while the getting is good, I can’t help but feel that we cannot afford to let our guard down by becoming more accommodative than we have already become with our latest move.

Mr. Chairman, you know because we’ve talked about this that I’ve anguished over this. In fact, to be politically incorrect in a government institution, I have prayed over it. It is not easy to go against the will of the people you have enormous respect for, but I have an honest difference of opinion. I truly believe we have it right at 3½ percent right now. I think that, even with some important language changes, we risk too much by cutting 50 basis points at this juncture and driving the real rate further into what I perceive, even on an expectations-adjusted basis, is getting very close to negative territory. Mr. Chairman, I think we’ve gone as far as is prudent for now, and that 3½ percent, together with the other initiatives we’ve taken to restore liquidity, is sufficient. So I ask for your forbearance in letting me sit on the thistle of recommending no change.

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akak's picture

Now you leave Sally Struthers out of this!

Almost Solvent's picture

I thought it was Larry Summers?

akak's picture

Oh, is there a difference?

alphamentalist's picture

does yellen sport the leia bikini in this analogy?

Urban Redneck's picture

A mind is a terrible thing to waste (or abuse)


cougar_w's picture

you saved me. i was serioulsy contemplating sippuku.

Theta_Burn's picture

Hillary's new makeover?

ShrNfr's picture

Nah, she always looks worse than that.

DavrosoftheDaleks's picture

I like Fisher even more after reading this.

Crash N. Burn's picture

I like Fisher even more after reading this.


 Something is definately afoot:

Fed's Lacker calls for new laws to end too-big-to-fail threat

On CNBC yet! Now, we watch.

" ...if we now see political officials echoing the language of Lacker; this would elevate our politicians to the status of Cowards.

On the other hand; if Lacker’s unequivocal call-to-action is met with nothing but stony silence by our governments, this is equally unequivocal: governments of Traitors, who serve only one Master – the One Bank. There is no rational, logical, or economics-based “defense” of any kind for too-big-to-fail. As a mere concept; it violates all of the principles of capitalism, and basic economic fundamentals.

No corporation is supposed to be allowed to grow large enough to become “systemically important”. Ever. Period."

The End of Too-Big-To-Fail? The End of The One Bank?


 Let us see which tune our politicos danse faster to - greed or self-preservation.


fockewulf190's picture

I was hoping for some scantily clad Fisher pics in chains since ol´Jabba popped up.  But alas, time has not been kind to the princess, and I wouldn´t hit it even with a 12 pack in me.

Save_America1st's picture

Sounds like pompus bankster theater to me...

why does this guy go through all this bloviating as if he actually gives a shit about "the market" or a free market, or how their moves cause turmoil for the market? 

He and the rest of those fucking scumbags work for foreign banksters who own our fiat supply system and who don't give a flying fuck how badly their policies destroy this country as they vacuum every bit of wealth and life out of the pockets of the 99.99999% of the rest of us. 

If that dude actually gave a fuck then I think he's in the wrong fucking job.  He should be out there on every program, show, radio, internet and whistleblowing from the roof tops what a fucking scam the non-Federal Reserve system is right along side the likes of Ron Paul and G. Edward Griffen. 

Since he's not, then fuck him and all the rest of them. 

And as Ron Paul says:  END THE FED!

That's what really needs to happen. 

Cacete de Ouro's picture

I would say the market is more like the Sarlacc in the Great Pit of Carkoon. Jabba looks like a choir boy in comparison

Mercury's picture

Well, Fisher's fears about inflation at least turned out to be overblown.

So far anyway.

101 years and counting's picture

3.5%?  the Fed cant go more than a few days now without printing at least $3Billion dollars or else SHTF.  ah, the good old days before Ben kidnapped capitalism, raped it and then slit its throat.

NOTaREALmerican's picture

Re:  Ben kidnapped capitalism

I thought Alan kidnapped it?

cougar_w's picture

I thought James Pierpont Morgan kidnapped it.

realWhiteNight123129's picture

What worries me is that Fisher did not see a credit overheating resulting in a credit bust. Bank currency can be created from base money or against credit. So you can have inflation because the expansion of the base money or because of the expansion of credit unchecked. A credit induced currency expansion results in a bust because rising prices lower the margins and if the intrest rates are high enough, the profits shrink to a point where the debt is not repayable and we go into a credit bust and deflation. Credit has a sucking effect on the economy because interest and principles have to be paid, so that is why a credit induced boom results in a bust. Inflation coming from base money though does not ahve have repayment of principal and interests attached to it. So the base money keeps going in the economy unless you slow it with reserve requirements, high rates to bride base money into idleness, if you do not raise rates and keep them constant at 5% like in XIX a credit boom would self-destruct anyway but if you had a new discovery of Gold (base money) the prices would rise progressively and continuous until all the gold had made its way fully into the prices of commodities.

I am disappointed that Fisher does not know the difference between inflation from credit (resulting in a bust) and inflation from base money (inflation unabated until we reach a new price paradigm --think of the Spanish Gold impact on prices in Europe--).


Sonic the porcupine's picture

He might have been less wrong than other members of the fed, but it's still the height of arrogance and nievete to think you have it "just right" at 3.5%.

Squiddly Diddly's picture

" When the market is in the depressive phase of what President Lockhart referred to as a bipolar disorder, crafting policy to satisfy it is like feeding Jabba the Hutt—doing so is fruitless, if not dangerous, because it simply will insist upon more."


Keep feeding him Wookiee's.

disabledvet's picture

"first it must insist on a lot"


THEN it must insist on more.
"gotta get the sequence right" here TD.

(Appears to have gotten both actually.
750 billion..."with MOAR" as a follow on.
Who says you can't time the market?)

The Fed(s) just walked away with all the money it would seem.

LFMayor's picture

Any of you see that documentary about the Star Wars fans?  Well, when those goddamn freaks are embarrassed for you, you KNOW you've fucking hit a new low.

This metrosexshul bean counter Fischer can't even come off as cool and mangles a star war reference?
Jabba ate a fucking frog/mind flayer and belches.   Smoked a hookah, too. 
Had women chained to his sandstone futon.  Personally I think the Hutt was da bomb.  He probably crushed whores like Fatty Arbuckle, too.  Lucas couldn't show it, but he INFERRED IT.

This putz tries to pull some clever byline out of his ass and fumbles it worse than the freethrow shot he got from the 20 yard line back when he was the all star 2nd baseman on his High school Scholastic Bowl team.  I mean FUCK ME, COME ON MAN!  How much you make a year and this is fucking best you can do, O' duke of cool?  Hire that shit out next time.

It's a TRAP:  Admiral Doenitz
Live long and prosper:  Jar Jar Binks
I don't need another drink:  Any fucking Mick Irishman

akak's picture

All that verbal diarrhea, and not a single mention of "animal spirits"?

What is the art of bloviationalizing Greenspanking coming to?

cougar_w's picture

These guys got nuth'n. Buncha rookiez.

ZeroPoint's picture

Are they actually advocating.....capitalism???




cougar_w's picture

No no no. You clearly missed the part about looting the Treasury and creating a corporate welfare paradise. Go back and read it again.

NOTaREALmerican's picture

He's not a team player.  

1000yrdstare's picture



Unless you got a wonky chewbac....

pupdog1's picture

Dead ringer for Larry "the economics hut" Summers.

Raging Debate's picture

We the people, of the world now declare war on you arrogant pieces of shit globally in leadership that cannot or will not rescind laws that say you get to be above the law of natural human rights, endowed by our creator. The United States government has decreed corportions are people with far more natural rights that can exist or be sustained. Period. We the people wish to thank you for sanctioning this financial war to humiliate you globally so you faces dont dare appear outside of what will be a glorified cave like Bin Laden but perhaps slightly better digs. We wage this war you sanctioned against yourselves legally (sorry i must laugh now) because you will not humble yourselves. This war is for those that refuse.

Have a nice day. Oh so sorry you WILL learn Boolean logic and the lessons of evolution and not just the raw 'I was born out of a rich woman's vagina kind. Hubris is a concept, NOT logic. We paid you to lie for us for millenia so we can easily forgive but there is this thing called the Internet you used to front-run us globally. What that is is, if you know what is I am talking about IS a giant mirror which all must look into like it or not.