Is Our Central Bankers Learning?

Twice in the past three days, important central banks have actually done something slightly positive.  Sunday night it was the European Central Bank deciding to intervene in the Italian and Spanish sub-sovereign bond markets.  Yesterday it was the Federal Reserve setting expectations on how long it plans to keep its current low-interest rate policy.  The ECB's intervention has worked, at least temporarily, as the interest rate premiums for both countries vs. Germany have dropped sharply (divide the numbers by 100 to get real world units).  The Fed's statement was aimed at general sentiment, not any specific index, so it's a little early to say if it worked.

In both cases, however, the gap between what is being done and what should be done is still far too wide.  Hopefully, these two actions were just first steps towards more sensible policies.

Update: 2011.08.11: Yves Smith talks about the central bank actions.

What Goes Down Must Come Up?

Thank goodness our markets are so eminently rational.

Here's an annotated chart of today's market movements. In 30 minutes, starting at 2:15 when the Federal Reserve Open Market Committee released its latest meeting statement, the DJI went up by 77 points, then down 227 points, then up 146 points, and finally down 285 points. In the 75 minutes from 2:45 to the close (the computers took about 7 minutes to spit out the final number) the DJI increased 624 points, or about 5.8% from the intra-day low.

Is there any possible justification for this kind of herd behavior?

CowabungAA+

Ho-ly cow.  Stocks down, bonds up (yields move opposite of prices).  Thanks, S&P.

Up, Down, Turn Around

I want to thank S&P for providing me with this evening's quota of humor.  If you're going to do something as momentous as downgrading the U.S. Government's credit rating, at least get the numbers right first.  And after embarrassing itself so thoroughly, I suspect S&P went through with the change mostly so it could distract everybody from its foolishness.

On the sober, serious side, Salmon has some good comments on the situation.  The US remains the richest country in the world, with very low tax rates compared with other industrialized countries.  But the political risk of default is very, very real.  Heck, if "the deal" had been bad enough, I would have been willing to bring on the default.  As it turned out, the deal is merely mildly counterproductive - at least until the new and improved Catfood Commission II reports in.  But the entire crisis was purposely contrived to extract spending cuts that the Teahadists wouldn't have been able to negotiate with the Senate and White House.  The best analogy I can come up with is a doctor holding a pneumonia patient hostage by threatening to shoot the patient unless the doctor is allowed to amputate a leg.  The US is suffering through a huge jobs crisis, but the Teahadists want to cut government spending, and they were willing shut the US government down and ruin its credit rating in order to get what they wanted.  Fortunately (or not), all they got was a promise to consider amputation in a few months.

BREAKING!  MUST CREDIT... just about everyone.  Okay, here's some text from S&P's release:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.

Heh-indeedy.  Unfortunately, the rest is worse.  But that's not surprising, as the way S&P inserted itself in the debate to begin with showed that it was clearly on one side.  The release as whole is basically a continuation of their pressure to act in a certain way.

Added: Krugman weighs in with a somewhat harsher view of S&P than Salmon.

Added: Drum thinks the risk of actual default was and is remote.  I used to think that, but I no longer believe that the Teahadists are under anybody's control.

Added: Here's a good post on why the practical effects of a downgrade - even by all three agencies - are likely to be minimal.  I largely agree, though I would qualify it with "in the short term" more explicitly. Another qualifier that I would add is "provided nothing bad happens elsewhere."  A breakup of the Euro would send investors piling into any US asset, especially Treasuries, driving down yields sharply.

Allow Me to Be the First to Say

Wheeeeeeeeeeeeeeeeee!

Of course, there's a bit of bias in pointing this out. Rallies tend to happen over days or weeks, and thus are much less dramatic than the sense of doom created by sell-offs. I think the main point to take away from such events is that markets don't know jack about the future. If they did, big market-wide one-day moves wouldn't happen.

Update: Beat Atrios this time.