Remora

LimitedInc has made known its shameless crush on the NYT's Gretchen Morgenson. Some have compared it to the howling of a mangy, dying dog at the full moon; others, more mercifully, have compared it to an aging groupy's vain attempts to tempt teen Christian rockers into a three-way. Be that as it may, Limited Inc does not have the same hormonal surge for Floyd Norris. Sometimes his column stirs up thought, and sometimes dust. Today's is a little warning about deflation, with the reminder that hey, deflation is what happens during depressions. Although of course that isn't wholly fair - the great deflation of the 19th century, as we all know, while immiserating peasants and artisans, was a great boon to the urban proletariat and all who made their bread out of the workingman's bones.

Well, Norris takes the opportunity to advise the Fed. Here are two relevant grafs:

"Lower interest rates this year have kept the housing and auto sectors from collapsing, as they usually do early in economic downturns. But housing has started to weaken. "It now appears that a downward path of housing prices will accentuate the negative wealth effect from the stock market's decline," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

A decade ago, Japan's central bank was slow to loosen credit after its bubble burst. There is no way to prove its reticence was the cause of Japan's malaise, but it did not help. It is a precedent that Mr. Greenspan surely recalls."

Well, not causing and not helping are a pretty vague jam to put in the gaps in the story of Japan's excellent bust. It is part of the superstition of the era that central banks operate a little switch when they tighten or loosen money - that they operate as the heart of the financial body. There the central bankers are with their waterworker caps on, turning faucets on and off, and here we are strung out along the financial circuits, getting just the right amount of juice. But Norris's quaint idea about loosening credit ignores the backstory: the Japanese housing market is differently structured than ours, and lowering credit when a real estate bubble like Tokyo's is busting might not make a whole hell of a lot of difference. I mean, to cover his ass on that point, Norris has to reference the speed of the cuts -- but when you cut as much as the Japanese did and the patient is dead, it is hard to see that the speed had too much to do with it. Capital doesn't appear magically when it can get a better rate of return elsewhere, which is why Japanese money fled to the USA. And really, when, as in the heyday of the Japanese insanity, Golf Club memberships are selling for five million bucks, you know the system has gone too screwy to be fixed by your friendly central bankers. Norris is citing the Japanese example to wave his finger in front of Greenspan's nose, as though the Fed hasn't been lowering its interest rate in the most aggressive fashion in, well, that Limited Inc remembers. The Fed's magical mystery rate depression, a hommage to obsessive compulsion, is bringing us into alien territory. When the interest rate gets this low, as Paul Krugman has observed, we definitely start unsettling the markets. The fed's low rates have been helpful in keeping the auto industry booming insofar as zero percent financing means the companies loose less on the transaction, but face it, this boom is has the sick room smell of the housing market with the S&L's in the late 70s -- one of those borrow low from us as we borrow high from other people, which eventually grabs and eats your ass.