FINAL THOUGHTS...FOR THIS WEEK

Firse snow flakes of the year...Anyway, there is another point to keep in mind about the Fed's actions and this is really puzzling because they have (at least New York does) some of the finest market people around...or they used to.

A big problem in the clearing of the housing market is that no one really knows what the right price for individual properties should be as the myriad of federal and state programs, incomplete documentation and financing options make the true price non-attainable. In it's QE II effort, the Fed has exacerbated the problem. Let me explain.

A market, any market, is based on the principal of supply and demand. The biggest, deepest market in the world of debr in the U.S. Government obligations market surpassed only in the size of dollar trading by the foreign exchange market. To be very simple what the Fed has done is, in trader term, to put a "bid" under this market or to put it another was the world now knows that there will always be a buyer within a certain maturity range. Knowing that to be the case, the normal supply and demand factor is removed meaning that the price of U.S government securities is going to be artificial and the yield on the same will be as well in inverse relationship to the price. In other words, it aint an open and free market any more although the Fed is saying the activity will not have that great an effect to which I respond, "Then why the hell do it in the first place?"

So what you say, good for us, interest rates will probably stay low and everybody likes low interest rates especially the stock market. Ah, but here's the rub. The entire debt market, for all practical purposes, keys off the market for U.S. treasuries, especially the 10 year bond. If you muck with the treasury market you creat artificial values for most other debt scurities which leads to greater uncertainty as to asset values underlying the debt. The uncertainty as to asset prices leads to the mispricing of risk which gets us into the stook we found ourselves in in 2008. That all started with a liquidity bubble fueled by guess who...BINGO! The Federal Reserve who told everybody at that time not to worry, they knew when to turn off the tap.

The snow has stopped. Have a great weekend and don't worry: be a good economist and just assume we have geniuses in charge. EVERY SINGLE ONE.