The Fed’s airheaded bubble orthodoxy
By Steven Pearlstein
Friday, November 13, 2009
The Federal Reserve is still going through its “lessons-learned” exercise from the recent financial crisis, but there’s one lesson it clearly has not yet absorbed — the one about ignoring and enabling credit bubbles.
That’s the only conclusion that can be drawn from the Fed’s decision last week to not only keep its benchmark interest rates at zero but also let everyone know that it intends to leave them there for a good long time. In case anyone missed the message, Fed officials and other central bankers and finance ministers repeated their promise several days later at a meeting in St. Andrews, Scotland, where they vowed to not let up the gas pedals of fiscal and monetary stimulus. And on Tuesday, the point was driven home again by members of the Fed’s policy panel in three separate speeches.
Not surprisingly, all of this sparked a week-long party in financial markets that had already experienced powerful rallies over the past six months.
Even with Thursday’s modest pullback on Wall Street, U.S. stocks are up 60 percent since March, and share prices in emerging markets have nearly doubled. Commodity prices are soaring once again, led by gold, which is now selling for more than $1,100 an ounce, and crude oil, which is up a whopping 126 percent since February. A rally in the junk-bond and third-world debt markets has driven interest rates back to where they were before the crisis. In urban China, India and Brazil, property prices have doubled in the past year.
“The markets are on a sugar high,” Mohamed El-Erian, chief executive of Pimco, the giant money manager, told Newsweek’s Rana Foroohar last week.
Judging from how sharply and quickly these prices have risen, it’s a pretty good guess that most of the buying has not been done by long-term investors who are suddenly upbeat about the prospects of global economic growth. The better bet is all this is the handiwork of short-term speculation by banks, hedge funds, private-equity funds and other financial center wise-guys moving as a herd, financing their purchases directly or indirectly with some of that yummy zero-percent money provided courtesy of the Fed.
. . . There’s no way to know how long all this can continue before one of these bubbles finally bursts, the dollar spikes upward and investors all rush to unwind their trades at the same time. But it is a good guess that it will last as long as the Fed and other central banks indicate there is no end in sight for the current cheap-money regime. The longer they wait, the bigger the bubbles, and the bigger the mess to clean up.
The Federal Reserve is, of course, a regulator of the banks, run by the banks. That’s how they chose St. Andrews, Scotland for their get-together, while crucifying AIG for taking an executive meeting at a spa.
The Fed sets the rate for their own members and their own members are sloshing around in cash at 0%, while your and my credit-card rate is nominally 18%–unless you miss a payment and it soars to 30%, along with your home mortgage. That’s assuming you still have a home.
Here’s the deal, in Fed-speak:
We’ll loan you a wagon-load of dough at no interest–zero–none at all. We’ll get that money from the poor saps who are the American taxpayer and here’s the best part–if you crap out on the money, if you lose it all out there speculating, we’ll forgive you.
Yeah, we burned GM and made their chairman step down; made them drive instead of fly to Washington to beg, but you guys are special. You guys are our guys. You don’t even have to wear a ski-mask to get the deal.
No one’s looking. Sure, the common Joe is losing his home, the actual unemployment rate is up around 22-25% (who actually knows?) and health-care is something else Joe’s not going to get, but so what?
You guys are our guys and we always take care of our own.