Comments on: Cutting through the nonsense about the ‘Bernanke Put’

By: Tom Noonan

Tom Noonan — Mon, 01 Oct 2007 13:26:19 +0000

Do you wonder why Ben Bernanke dropped the Fed rate 0.5% rather than the expected 0.25%? Well in August 1929, Benjamin Strong dropped the Fed rate 0.5% (J.K. Galbraith, “The Great Crash”. 1954/1975). Then the market recovered straight away, like now, but the Fed walked away and the market crashed in October.

By now the fall in the USD is manifest; and really the USA can’t just become the play money of the region, to prop up mad speculators, but it is a window for the really smart money to slip out the door – like Goldman Sachs then.

I’m not a futurist, but talk of moral hazard is so much horseism and distraction. These guys play for real like around a canasta table playing with heaps per point, and giving the public nonsense as judged by its internal inconsistencies.
In passing, classical theory: central banks should raise interest rates while lending freely on good security – if there is any left.

Look foreward to future fire-works.

By: Nicholas Gruen

Nicholas Gruen — Wed, 26 Sep 2007 01:55:41 +0000

And/or charge them more for such liquidity.

By: Fred Argy

Fred Argy — Wed, 26 Sep 2007 00:50:15 +0000

Nicholas, I fully agree with Summers on ‘moral hazard’: the risk of encouraging bad behaviour is small beer compared with the risk of general financial market instability.

But Summers does not address the risk of raising inflation expectations, which has the potential to generate instability in long term bond markets. Obviously Bernanke kept this risk in mind when he reduced by 0.5% but resisted the temptation to reduce rates by 1% (as some were advocating).

The other issue is this. As any large financial institutions, especially commercial banks, have an ‘implicit guarantee from the central bank that their depositors will not be left high and dry because of liquidity mismanagement, why not force these institutions to take out deposit insurance? The Campbell Commitee serious considered this option but in the end decided against it. I forget why.

By: Jc

Jc — Tue, 25 Sep 2007 15:21:57 +0000

I think though larry is missing a big point here. There will be a cost taken not by the taxpayer in the strict sense of the word although we don’t know that yet seeing the Fed is “repoing” mortgage securities. The real cost will be felt through the socialization of a lower standard of living for all Americans in comparative terms as a result of a cheap dollar and large infusion of high powered money from the fed.

By: Jc

Jc — Tue, 25 Sep 2007 15:16:04 +0000

He’s right, to a certain extent. But there is a serious issue that has accumulated as a result of past actions/ distortions with the money supply and a low interest rate policy that went for too long.

In other words they’re in this soup because of prior policy mistakes.

The problem now is that the fed is creating another bubble somewhere else and the whole thing will happen again. Only thing is that next one could be the tsunami no one will be able to control. They seem to be getting bigger and bigger.

The old barbarous relic is now trading at $730 and will go higher as the Fed continues to lower interest rates.

In other words the gold price is essentially telling us that the Fed is on the way towards monetizing the problem.

There’s no free lunch here though. The effect of monetizing will be felt as downward slide in the US standard of living compared to the rest of the world. In other words the dollar will buy less.

What’s really interesting is just how low volatility is to make the Fed act compared to early times like the 70′s.

Uncle Al left Ben a really ugly job.