Bernanke is responsible for the market meltdown
The Fed has lost all credibility in the markets. On Wednesday, Ben Bernanke was unable to put his money where his mouth is. Earlier, he jawboned on inflation, trying to match the BoE and the ECB in rhetoric, but his actions speak louder than words. He did not raise rates as I predicted.
On Thursday, the market was down, marking the worst June since the Great Depression. In my view, this is a direct result of Bernanke’s loose monetary policy as U.S. base interest rates are at 2% while inflation is running at 4%. This is like paying banks 2% to borrow from the Fed.
The result has been inflation in commodities, particularly in food and energy, and market turbulence. We saw the reaction to Bernanke’s dovish actions in the market moves yesterday: oil up, gold up, markets down, and dollar down. While Bernanke thinks he is helping the banking industry, he is only delaying the inevitable and making the unwind process that much more difficult and protracted. Loose money is what got us into this mess, not what will get us out.
It will be very compelling to see the ECB raise rates in contrast. If they do raise rates, expect the dollar to fall further. This will be bad news for the U.S. economy.
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Agreed, Ben Bernanke is a smug so-and-so, but the link between low Fed rates and food/oil price inflation is fairly tenuous, bearing in mind that oil/food prices are rising much faster than everything else.
I firmly believe that oil/food is a bubble (have there been terrible harvests recently?) and yes, that is in part stoked by easy credit, but it’s the house price bubble that was the biggest act of recklessness.
Food and oil have been rising faster. It’s not going to be a one for one correlation. There are other factors like supply and demand at play. But, there is a commodities buvbble, particularly in oil.
My thesis is it’s partly about global liquidity. The Fed is printing money and that money is finding itself to the hottest investment sector as it had before: emerging markets in the mid-1990s, tech stocks in the late 1990s and housing and leveraged buyouts earlier this decade. Now, its oil and commodities.
This doesn’t mean there aren’t fundamental factors underlying these moves. It means they have been immensely exaggerated by Fed policy as they were in these other bubbles earlier.
One other thing: I have invested heavily in commodities and oil over the past 10 years. I have also been a consultant to some participants in these markets. Almost every company I visited has told me that there was a huge gap in investment in capital and people after the 1980s collapse of commodities.
The fundamentals for commodities comes not only from increasing demand but also from 20-odd years of under investment. Even if we think we can invest in the resources, where are the people with the expertise to lead the next 25 years? A whole age cohort is missing.
Bernanke needs to go!