This week’s Federal Reserve meeting was supposed to be a big deal. Ahead of the two-day gathering, I don’t know how many stories I read suggesting that the Fed might start laying the groundwork for “preemptive” tightening in one form or another. They wouldn’t raise rates. But they would start pulling back on their extreme easy money policies, the argument went.
My response: “Are you kidding me?!”
The one with “Helicopter” Ben Bernanke at the helm?
I thought a much more likely scenario would be: They’ll keep the monetary spigot wide open … they’ll move extremely gradually … and they’ll likely screw things up again, helping encourage new bubbles in other parts of the asset markets.
|Bernanke’s message on Wednesday: Party on!|
Sure enough, that’s exactly what happened! The news released on Wednesday:
- The Fed kept its interest rate target unchanged at 0 percent to 0.25 percent.
- The Fed said the economy was getting better, but that it didn’t care. It would still maintain “exceptionally low levels of the federal funds rate for an extended period.”
- And the Fed said it will stick to its plan to buy $1.45 trillion in mortgage backed securities and “agency” debt sold by the likes of Fannie Mae and Freddie Mac. It even extended the program from year-end through the first quarter of 2010.
In other words, the message to the markets from the Fed is clear: Party on!
The Fed Consistently Errs On the Side Of
Easy Money — Over and Over and Over
Why am I being so blunt? Why am I so sure we’re going to see the same movie … again? Because of recent history.
Starting with Alan Greenspan two decades ago — and continuing under Ben Bernanke — the Fed has become a gigantic enabler of financial risk-taking. The prescription for every downturn in the economy or financial market shock has been the same: Throw money at the problem!
Long-Term Capital Management blows up? Cut rates!
Y2K bug threatens banks? Flood the system with cheap money!
Dot-com bust? Housing bust? Recession? Drive rates into the gutter!
The risk of this strategy is abundantly clear … it keeps fueling new bubbles in the wake of the old ones. Even the Organization for Economic Cooperation and Development weighed in on this topic a few days ago, warning that a key risk right now is “the reigniting of rolling asset bubbles through easy monetary policy.”
But the Fed shows no sign of changing course. Worse, the Fed has consistently maintained this asinine asymmetric policy toward asset bubbles.
What do I mean by that?
Policymakers openly admitted to a policy of IGNORING bubbles as they inflated. They justified doing so by saying that:
- It was too hard to identify bubbles, and
- Even if they could identify them, they’d have to raise rates so much to tamp them down that the economy would suffer.
Instead, the Fed claimed the better approach was to wait until the bubbles popped, then try to clean up the mess with cheap money.
No I’m not joking. This is what went for serious economic thinking at the Fed.
You and I can easily see how that policy has laid waste to the economy and investors twice over — once in tech stocks and then in real estate. But the Fed still doesn’t appear to be making a wholesale shift in its policy toward asset bubbles.
The Fed-Fueled Consequences —
And How to Protect Yourself from Them
That brings me to the present …
|The Fed fueled the housing bubble by continually chopping interest rates to the bone.|
Why would anyone seriously think the Fed will preemptively hike rates? Or take steps to pull back its extraordinary financial support BEFORE it creates another bubble? In recent years, the Fed has NEVER proven itself willing to do so.
Why do you think we had the biggest housing bubble of all time? Because the Fed kept money too cheap for too long (among other reasons). Then when they did start hiking rates, they did so in predictable, quarter-point steps spread out over a span of more than a year.
Why do you think the dollar is falling out of bed right now? Because other central banks in places like Norway and Australia are sending out signals that they might raise rates soon, while our Fed is making no such shift in its policy stance.
Why do you think gold has exploded above $1,000 an ounce? Crude oil has more than doubled from its lows? Sugar prices are up 88 percent? Copper is up 105 percent? Lead has soared 125 percent? Some of it is fundamentally driven — tighter supply, stronger demand. But a significant chunk of those moves is pure monetary policy-driven asset inflation.
|Now is the time to protect your wealth by investing in contra-dollar assets, like gold.|
And you know what? Bernanke doesn’t care!
He doesn’t care if that means we pay more at the grocery store or the gas pump. He doesn’t care if it costs more to travel overseas, or if the purchasing power of our currency collapses. He doesn’t give a hoot about the fact that his monetary policy is enabling the biggest debt binge Treasury has ever embarked on.
But I hope you care. And I hope you’re taking steps to protect yourself — by investing in contra-dollar assets (including gold) and avoiding long-term bonds. The Fed sure as heck isn’t watching out for your interests, which means that you need to!
Until next time,
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