Bernanke is Missing Something

I am long the market and I am very pleased that it moved up so strongly in response to the Fed's rate cut today, but I think that it shows that this man lacks balls.

The Federal Reserve sliced the Federal Funds rate by 50 bps to 4.75% and the Fed's overnight bank lending rate by 50 bps to 5.25% (the latter move follows a previous move of 50 bps).

In doing so, the Fed stimulated the stock market to surge higher, the dollar to surge lower (also, presumably good for the US economy) and volatility indexes to fall.  Hooray!

But, Bernanke unfortunately showed that he is willing to ingore reality and cave in to the vocal demands of a mortgage brokers and hedge funds that rode the mortgage boom too long and needed to be bailed out. 

Here is why he was mistaken to cut:

 

1)      There is no recession.  The economy is strong.  Aside from one weak and questionable jobs report two weeks ago, we have had no material indications of a recession.

2)      Inflation, which has been Ben’s primary concern, has not gone away no matter what indicators the Fed is conveniently choosing to look at.  If anything, oil prices (over $81 a barrel) are likely to continue to act as a significant tax on the economy, especially if left unchecked.

3)    Moreover, by adjusting monetary policy, Bernanke is increasing liquidity, but the underlying crisis is not a liquidity crisis; rather, it is a credit crisis brought on by too much liquidity.  Bernanke is arguably therefore only allowing the factors which contributed to the current problems to rearise, rather then for the current problem to sort itself out through natural free market forces.

Today's rally will quickly evaporate.  Today's problems are long-term and without quick fixes.  In the next year, credit problems will re-emerge, the real estate market will continue to fall dramatically, inflation will become more significant and September 18 will be recorded as the day when Bernanke proved himself impotent.

 

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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Comments

  • soczie

    September 19, 2007

    I wouldn't go so far as to make a judgment about the man's testicles. But, I agree that today's move does show a real absence of being a measured response. It looked panicked, and is probably the wrong move for all of the reasons that you stated. I therefore was surprised that the market went up so strongly and believe that this was primarily driven by short covering.

  • Cindy Daniels

    September 19, 2007

    This article needs a better title. I find it offensive.

  • go lehman go

    September 19, 2007

    He seems to have given in to Angelo Mozilo and Chris Dodd, collapsing the dollar and leaving us all much poorer in real terms.

  • David Walsh

    September 19, 2007

    Bernanke had no choice and there is very little downside risk. The housing market is poised to collapse and he needs to do something to keep it from happening.

  • Mkhan

    September 20, 2007

    Wrong. He has both of them. What a great move to scare out the shorts that are weighing on the market once and for all.

  • jeremybean

    September 20, 2007

    This is ridiculous. He has made the move to try to keep people in their homes and that is the right move.

  • koej

    September 29, 2007

    I also don't like the title, but agree that he has failed to show the courage of his conviction in fighting inflation. By keeping the interest rates artificially low, he is jeopardizing the health of the US economy.

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