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September 18, 2008

Now For the Good News…

It's tempting not to put any content into a post with this title today. Even a perpetual optimist like me finds his irrational exuberance dampened by what's happening in the world's financial markets. But there is good news and it's more fun to write about than doom and gloom.

Inflation was down last month

The consumer price index DECLINED 1% month-over-month in August as energy, housing, and food prices fell. This trend will continue at least another month based on what's been happening in September to those same three components. Obviously good news for people on a fixed income. Also good news because the Fed can concentrate better on recession-fighting when it doesn't have to also worry about inflation and the possible misery of stagflation. Needless to say, the Fed is grateful for all the help it can get.

Oil prices are down

Oil prices are below the $100/barrel price they were at last winter (although have moved up in the last few days). This means it may NOT cost significantly more to heat our homes this winter than last. I put my money where my mouth is and didn't sign a fixed price agreement for heating fuel but I'm nervous about this bet. It also means, for now, pressure has lightened on consumer wallets.

Oil consumption is down

Low prices together with low consumption mean that a lot less money is flowing out of the country to pay for oil – even less than was last winter. Bad for the bad guys that sell us oil; good for us because we need the money here at home. Note that the markets are punishing Putin more for the invasion of Georgia than Europeans dare to; When oil process are falling and you're wondering which oil producing country not to invest in, one which doesn't respect either international law or property rights (markets care a lot more about the latter than the former) is a good target. Guess where that investment'll end up if we allow offshore drilling?

The government is having an easy time borrowing money

People are flocking to the safety of federal debt lowering the cost of financing our deficit and making cash available to the feds; good thing when the feds have so many bailouts on their plate. Long term it's very bad to see money only available when it flows through the government.

Housing Prices are down

Huh? Good news? Yeah, it really is. Housing prices were inflated. Many people couldn't afford houses at those inflated prices. Even worse, people who couldn't afford houses at those inflated prices bought them anyway with the help of loans they shouldn't have gotten. Now prudent people – if they have a down payment and an income – can afford to buy houses again. Mortgage rates are still low. Mortgages based on t-bill rates will stay low as people flock to t-bills. This bubble had to burst so recovery could begin and the distortion of a tulip market in real estate could be cured. Not that the bubble-burst isn't very painful, particularly for those of us who overpaid and/or paid more than we could afford. But continued house price inflation would have been even worse than the cure because the eventual collapse would have been even worse.

Lehman wasn't bailed out

Hard for me to say because I have both friends and an account there. But the bailouts had to stop to make companies sell to stronger entities while they still can – as Merrill promptly did. I still don't think the bailout of Bear Stearns should have happened and think that Lehman might have avoided failure or sold itself earlier in that case. I'm not at all sure about the bailout of AIG or the form of the bailout of Fannie Mae and Freddie Mac – but there's a lot I don't know (and hope central bankers do).

The Fed didn't lower interest rates

Making money cheaper isn't the cure for every ill. There's a pretty good argument that Greenspan screwed up badly and helped ignite the housing bubble by lowering interest rates too far to deal with the aftermaths of the dotcom implosion and 9/11. When cash is trash, we're all likely to get trashed in a pursuit of higher returns.

That's probably all the good news you can stand in one day.

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