1/22/08

What's Up with Bernanke?

I don't have the academic credentials of the Fed chairman, but it seems pretty odd that every time the market is set to drop a significant amount, the Fed lowers rates either on the Funds rate or the discount window. Stocks were tanking in August 2007, so the Fed cut the discount window rate by .5%. In mid September 2007, with the market tanking again, the Fed cut rates by .5%.

Yesterday markets around the world swooned. The DJIA, Nasdaq, and S&P futures indicated a big drop here. So what happens before the market opens? Bernanke cuts rates by .75%.

The cut can't be any more blatantly tied to the stock market. But is the Fed supposed to be worried about the stock market, or the general economy? Granted, the stock market influences the economy and the economy influences the stock market, but they are two independent entities that often go in different directions. There are probably economic reasons for another rate cut, but why should the stock market dictate when the cut comes?

The last cut sent stocks to new highs. This one, so far seemed to have an early effect on futures, but at the time of writing the DJIA futures are once again down 500 points. Will there be another .75% cut at the end of the month or sooner? If the market keeps going lower, I'd bet on it.

Just wondering, is Bernanke aware that eventually he will run out of room to cut rates? Is inflation no longer a top concern?

Trying to stave off a recession by papering it over with money seems like a recipe for disaster. Holding the recession off can turn it into a depression.

I used to have a good impression of Bernanke. (Not for any economic reason. He gave a C to one of my law school professors--one that I didn't particularly like--when she took his class at Princeton. That made him ok in my book.) Since the summer, however, I have my doubts. But only history will judge. Greenspan, for example, was thought to be a genius until recently. We'll see with Bernanke.

As we say good bye to getting any kind of return on our savings accounts, I'm thinking of waiting for a bear market rally to buy one of the inverse ETFs.