swtotd.blogspot.com
The TED spread – the difference between Three-month U.S. Treasuries and Three-month LIBOR and an indicator of perceived credit risk in the general economy – declined from 314 basis points to 131 basis points during the fourth quarter of 2008, after reaching a high of over 458 basis points on October 6. (Historically, the yield spread had been closer to 50 basis points). The S&P 500 bottomed on March 9, 2009 at 676.53. The Second Quarter of 2009 marked the end of the 2007-2009 recession. The rate on Fed Funds, which began 2008 at 4.25%, ended the year at 0.25%. Despite having spent almost half a century on Wall Street, I am an observer not an expert on credit markets, so what follows are opinions that should be taken with the proverbial grain of salt. It is my contention, however, that monetary policy over the past decade has been driven by political wants not economic needs.
In my opinion, the incoming Obama Administration, in 2009, used the credit-driven recession to justify a political agenda of increasing the role of government and “…fundamentally transforming the United States of America,” as Mr. Obama put it five days before the 2008 election. Apart from demonizing Republicans, the first thing the new Administration did was to call the seven-quarter recession a “Great Recession,” reminding people of FDR and the Great Depression. Certainly, the bankruptcy of Lehman on September 15, 2008, and the ensuing credit crisis, made for a frightening few weeks, but the scare was over by the end of the year. While Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and President of the New York Federal Reserve Bank Timothy Geithner have been criticized by some for their handling of the crisis, it is my belief they saved the system. Monday morning quarter-backing may argue that there were some things they did they should not have done and other things they did not do they should have done, but the bottom line is that, while Lehman want bankrupt and other banks were forced to sell out, by the end of December the crisis was largely resolved, as could be seen in the decline of the TED spread mentioned above and in the fact that high-yield bonds had begun to rally a month before year end.
For six and a half years, while the economy expanded from $14.2 trillion in 2009 to $18.2 trillion in 2015, the Federal Reserve left the Fed Funds Rate at 0.25%. It was only in the fourth quarter of 2015 that the Federal Reserve finally lifted the rate to 0.50%. The rate remained at that level until December 2016 when it was increased to 0.75%, just before the Trump Administration took office. During 2017, the rate rose, in three increments, to 1.50%. In 2018, the rate rose in four increments to 2.50% where it remains today – higher than it was but still low by any historical measure. However, once again, political pressure is being put on the Fed, this time by President Trump – and silently acquiesced to by members of Congress – to lower rates, a mistake, in my opinion. It is expected that this afternoon the Fed will reduce rates by twenty-five basis points.
