Thursday, December 4, 2008

The Beige Book reminds me of the spiritual

The Federal Reserve released its eighth and final Beige Book for 2008, and it paints a gloomy picture of the national economy. The Beige Book is one of three briefing documents that the Federal Open Market Committee (FOMC) uses in its meetings for background information. (The other two are the Green Book and the Blue Book, which are prepared by the professional staff of the Federal Reserve and are not, as far as I know, available to the public.) The Beige Book (the copies that are distributed to the FOMC members have beige covers) is a summary of economic and financial conditions in the twelve Federal Reserve districts.

The December 3rd edition was bleak. I read only a bit, but credit is tight, retail sales are weak, manufacturing activity and construction are falling, and unemployment is rising. "Almost all Districts noted reductions in exports." There were few bright spots. Demand for some skilled workers remained strong, and "Minneapolis and Dallas reported growing demand for bankruptcy services." Another is that there is no upward pressure on prices. And the farmers in the Chicago district had done well on the futures markets: "Much of this year's corn and soybean harvest had already been sold ahead at profitable prices, with most of the rest going into storage instead of being sold at today's lower prices."

I was struck by the repeated references to the tight credit. Credit is not tight because of a low amount of reserves--the Fed has poured reserves into the system. The source of this tightness seems to be something new--a problem with capitalization and trust. There are plenty of reserves, but apparently because the interbank markets are not working properly (a lack of trust), banks need a lot more reserves than they need when the system is functioning properly.

Which reminds me: the Marxists were wrong when they said that economics was about materialism. Economics is in fact a spiritual study because most of what is important is not material. Trust and confidence are not material, and neither are expectations, preferences, value, liability, and ownership. They are the foundations of economics and they are as spiritual as faith, hope, and good intentions.

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