Posted on 12/14/2007 2:55:23 PM PST by frithguild
If I were a writer of articles, I would never make "Spur" part of the headline - but that's just me...
But I do have to admit that Ben Bernanke and the Federal Reserve are sorely trying my bullish patience. They're supposed to be the solution, yet they're turning into the problem.
The issue is that Bernanke is delivering on his promises all too well. When he started as Fed chairman last year, he committed to making the process of monetary policy more transparent. And that's just what he's done.
What's wrong with that? Plenty. Monetary policy is one of those things that's better off shrouded in mystery. You actually don't want to know too much about how it's done.
It's kind of like hot dogs. Do you really want to know what goes into them? Believe me, you don't.
What goes into the Fed's hot dogs is a tremendous amount of uncertainty and guesswork. We may want to believe that the wise men who make up the FOMC are masters of the universe who have access to information and insights that are way beyond us mere mortals. They'll know what to do, no matter what the crisis. We're in good hands.
But the reality is that they're just folks, no different from you and me. They don't know what the stock market or the economy or the weather will do tomorrow, any more than you or I do.
The only way they're really different is that they, and they alone, control a printing press that can print as many dollars as they want it to print.
Think about it. At the Oct. 31 FOMC meeting, the Fed made it clear that there were going to be no more rate cuts. Dozens of speeches by Fed officials in the subsequent weeks reinforced the message.
But then the credit markets started to come unhinged again, like they did in August and September. There were no signs of economic weakness — just panic on Wall Street and in the City of London.
So by the time the Dec. 11 FOMC meeting rolled around, the Fed had completely changed its tune. Well, sort of completely. The FOMC's post-meeting statement was all about how the economy is slowing (even though there's no evidence of it). Yet they only cut rates 25 basis points, not the 50 that the market was expecting.
Huh? What kind of sense did that make? With that nonsensical combination of inexplicable words and indecisive deeds, the Fed satisfied no one and confused everyone. So as soon as the statement was issued, stock prices collapsed and credit markets seized up again.
Then Wednesday morning the Fed made it even worse. It announced a program of targeted liquidity injections, coordinated with other central banks around the world, designed to relieve the pressure in credit markets building up as the year's end approaches.
It's a great program. Bernanke and his colleagues should be applauded for coming up with it. But timing is everything. However noble their plan may be, they made fools of themselves with the timing of it.
They should've put their new liquidity facility in place two weeks ago, when it first became obvious that credit markets were freaking out about meeting the special requirements of year's end. Instead, they announced it the morning after an FOMC meeting that had triggered a market minicrash.
The timing gave the impression that the liquidity facility had been whipped up overnight by a frightened Fed, specifically to deal with the market's disappointment following the FOMC. Fed officials have adamantly denied that, and cited several good reasons for the timing. I believe them. But the truth doesn't matter. It's all about appearances.
That's why after the liquidity facility was announced, markets rallied at first — but then gave it all up, as it sank in that the Fed was acting like it really doesn't know what it's doing.
If it's all about appearances, then the appearance should be confidence. Markets thrive on confidence, and the best thing the Fed could do right now is inspire that confidence. That's always what Alan Greenspan did. He made plenty of mistakes. And when he talked, half the time we didn't really know what he meant. But he always acted like he was in control, whether or not he really was.
Right now the current Fed is eroding confidence by not acting confident. One day we're not going to cut rates. The next day we are. The economy isn't weakening. But we're going to say it is. We're worried about inflation. But we're cutting rates anyway. Hot dogs.
What would Alan Greenspan have done? I don't know, but I doubt he'd let us know that he was so confused.
I imagine that he'd say something like this: The credit markets are seizing up, and they're forcing us to intervene by lowering rates when we otherwise might not. We're confident that lower rates will help the markets heal, and if there are any economic side effects we'll be able to take care of them in the future.
I think that accurately describes what's going on. Which is part of why I'm basically confident as a buyer of stocks. Because that's a pretty good reality. We have a credit crisis on our hands, but the Fed is going to fix it.
The only real problem is that the Fed's confused handling of the situation is eroding confidence. And confidence is what we need to get out of the problems we're in.
So the reality is good, but the psychology is bad. Not an ideal situation, but given a choice, I'll take reality over psychology any day. Reality pretty much always wins. So be patient. It'll all turn out alright, and then the Fed can brag about the great job it did.
And stocks will be at all-time highs again. It's frustrating to have to wait while all this craziness plays out. But that's why we bulls make the big bucks. Hang in there.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors.
Sorry all - error in posting there. My comment went in the article section by mistake, and vice versa.
He would have known that his strategy of throwing money at any and every problem was going to come to a head and would have chosen to resign in plenty of time to pass the problem to a fall guy.
Oh dear. Even Kudlow isn't talking about all-time highs and he's as much of a financial demagogue as they come.
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