The Fed "Beige Book": Bedtime Reading For The Demented And Depressed

The Federal Reserve’s most recent "beige book" is enough to frighten even the hearty and the brave. It may be one of the most pessimistic assessments of the economy to come out since the current financial crisis began.

Looking through the contents of the document has to raise the questions about why analysts think banks will recover soon and why forecasters do not see a deep recession into 2009.

No matter how close the reader looks, there is not one iota of upbeat news in the latest Fed report on the economy. As Reuters writes the analysis in the document "reflected the twin challenges of weak growth and price pressures that limit policy-makers’ options."

The "beige book" is a Rosetta stone which shows that the stock market is probably well ahead of itself and the recovery in banks shares is premature. It also raises reasonable questions about whether companies hit by inflation in the price of fuel or commodities are really about to get much better or if hope has triumphed over reason. The 80% improvement in airline shares over the last week comes to mind.

The Fed document makes no effort to pull its punches. It is not a political analysis of the economy. It is a from the ground up look at how badly things are going from region to region.

The data from the book are likely to cause another important debate within the agency about whether inflation or recession is the worse plague. Inflation is condition mostly imported from overseas in the form or oil and more expensive goods from countries like China, which have their own problems with rising costs.

A recession, on the other hand, is a more local issue. The Fed can help businesses and consumers by lowering their costs. That, at least, is to some extent within the agency’s power.

The economy has entered a bipolar state cycling between prices and a deeply undermined credit system. The Fed cannot treat both conditions at the same time. And, inflation cannot be treated at all.

Douglas A. McIntyre