Krugman Has a Good Point, So Nu?*

Krugman notes that while the capital infusions of the Fed are in the $200 billion range, outstanding mortgages are in excess of $ 11 trillion, so the Fed bailout is about 1.8% of the mortgage market, and the number rapidly dwindles when examined in the context of other markets also in trouble.

The idea is not that the Fed will save these markets, but rather that the it will "slap the market in the face" to calm it down from hysteria, much like those old film noire detective movies.

Thing is, the Fed has done this twice, and it's not working. What's more, the interest rates that really matter to the economy, "The rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising", because people are having to price an unknown level of uncertainty into their lending.

This is what is meant when it is said that the Fed is, "Pushing on a string". It can lower rates all it wants, but the rates paid by businesses and individuals are now rising.

One of the things that I harp on, but that Krugman does not have the space to deal with in the constraints of a New York Times editorial, is the effect of the strength of the dollar on the Fed, and the effect of the Fed on the strength of the dollar.

Specifically, when the Fed cuts rates, it reduces the returns on the US dollar, which makes the currency less attractive, which drives the currency price down.

While this does help exports and reduces the advantages of imports, it also raises prices, because foreign dollars compete more for US products, like groceries (I posted about this in yesterday's economics update).

So we are in a situation where we cannot win, and we cannot get out of the game.

^*It's one of the few Yiddish idioms that I grasp as a 3rd generation America Jew. Nu literally means yes, but, "so nu" means, "So tell me something I don't already know"?