How to View the Fed’s Actions
As I write this, the stock market is up today as it has been for the past three days. I read that it’s because Fed Chief Ben Bernanke told Congress that he’s prepared to lower interest rates again if needed.
Recent economic numbers have not been good with housing prices falling in much of the country, consumer confident lower, and inflation on the rise.
Two recent articles suggest that the problem is worse than the government is letting on and that the Fed is getting desperate and perhaps seeing the limits of its power to contain a pending meltdown.
Guardian.co.uk suggests that we should be talking about a depression rather than a recession:
[Nouriel Roubini, professor of economics at the Stern School of Business at New York University] says that the Fed is, belatedly, alive to the danger. “To understand the Fed actions one has to realise that there is now a rising probability of a ‘catastrophic’ financial and economic outcome, ie, a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
“That is the reason the Fed had thrown all caution to the wind - after a year in which it was behind the curve and under-playing the economic and financial risks - and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke-led Fed would be more cautious than Greenspan’s in reacting to economic and financial vulnerabilities.”
Bernanke clearly feels that the clock has turned back 78 years to the early months of 1930. He is slashing interest rates because he fears that the Great Depression is just around the corner.
Paul B. Farrell, writing for MarketWatch, gives 11 reasons the economy won’t recover soon. Here’s just one of them:
4. Toxic derivatives: World’s $516 trillion ticking time bomb
Derivatives are great for deal-by-deal risk management in a $48 trillion GDP world. But leverage them 10 times over across the globe and we got a financial “weapon of mass economic destruction.”
Bill Gross warns that the world’s new unregulated “shadow banking system” is printing new money, now at $516 trillion, out of thin air, with no “central banks of last resort” backing up the “Frankenstein” monsters they’ve created.
In another development today, the government lifted restrictions on the portfolio size of Frannie Mae and Freddie Mac, the two GSEs that buy up home mortgages and sell them as securities. Both were major players in the creation of the housing mortgage bubble.
Feb. 27 (Bloomberg) — U.S. regulators for Fannie Mae and Freddie Mac removed limits on the companies’ $1.5 trillion mortgage portfolios, bringing an end to a restriction that stifled their ability to provide financing for the housing market.
The caps, imposed in 2006 after the two largest mortgage finance companies uncovered $11.3 billion of accounting errors, will end on March 1, the Office of Federal Housing Enterprise Oversight said in a statement today. Ofheo kept in place a requirement for the companies to hold extra capital.
Ayn Rand repeated pointed out that marrying government and business is just as bad as marrying government and religion. The last seven years have seen increased efforts to march both couples down the aisle. They’ve been heading in that direction for a much longer time, but the Bush administration gave them a big push and many of the vows have already been exchanged.
Now we will pay the price for these marriages of political convenience.
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