Rapping with Roger.

Roger Nusbaum and I are having a discussion on his blog. This morning he posted this.

I don't know how serious this may or may not become but as a quick reminder, bear markets don't usually start with crashes. I would think a crash would be no different if it happens this time around. This is not a prediction but ties in with past writings of relying on logic instead of emotion.

Usually sharp selloffs snap back sooner than people expect, think Asian contagion, Russian Ruble & LTCM and 9/11. That may be worth remembering.

To which I replied.

None of your snapback examples occurred while the Fed was hiking rates. The best strategy in each of those cases was short until the Fed cuts and then buy.

"This time it's different" is a difficult argument to make but the current stance of the Fed and increasing reluctance of central banks to finance U.S. borrowing could be a pretty big impediment to following the same course of action.

I don't have a problem with your point so much as your examples.

He then responded at the bottom of this post.

You may be right. But if there were some sort of horrible event to cause a crash, wouldn't the fed one way or another act? They can add liquidity and jawbone in addition to lowering rates. I would think the fed would do something, again, in the face of a crisis.

So I added to my comments as well.

This time around a catastrophe would need a G3 or G10 response. The Fed would have a tough time convincing foreign creditors to continue lending as rates fell. They are having a tough time keeping foreigner lenders (like Korea) in as it is with no crisis and rising rates priced into the forward market.

While the Fed may want to offer stimulous they also need to avoid a dollar collapse. I don't think a simple rate cut would manage it.

The U.S. has an unprecdented demand for international funding. By committing to borrow so much the U.S. has in effect given up its ability to manage interest rates counter-cyclically. The current worries in the dollar and long-term interest rates in some ways represent the possibility that creditors force U.S. interest rates to be pro-cycle by demanding higher interest rates from the U.S. when its growth prospects look weak.

The concerns in the market yesterday don't seem like they can be solved by lower U.S. interest rates.