I posted this here rather than start a new thread. With the 10yr rising and some mortgage rates actually climbing, this guy, while typically bearish, is probably right on.
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Contrarian Chronicles 9/24/2007 12:01 AM ET Bernanke: The anti-Robin Hood
By slashing the federal funds rate, the Federal Reserve chief robbed from the country’s future to give a gift to Wall Street. And a lot of ordinary Americans will end up getting hurt.
By Bill Fleckenstein
The Federal Bank of Guardian Angels roared down Wall Street last Tuesday. Its mission — to bail out the stock market — was a success (for now).
But the rate cut was no gift to Main Street, which lies outside the loop of crony capitalism.
Bobble-head Fed
Long ago, the Fed abdicated its responsibility under then-Chairman Alan Greenspan. But now chief Ben Bernanke and the boys at the Fed have taken irresponsibility to a new level, where they have clearly demonstrated that they work for Wall Street — and when Wall Street says jump, the Fed asks, how high?
I don’t quite have the database to research this, but I seriously doubt that we’ve ever experienced a 10% fed funds rate cut, or discount rate cuts of better than 15%, with the stock market a few percentage points off an all-time high.
And at this rate — no pun intended — we could see another record high in almost no time. I suspect that’s never happened before, either, demonstrating that no real pain had been taken prior to the bailout.
Yet the Fed’s board members felt the need — when they knew they were being closely watched and knew they would be telegraphing a message — to telegraph the following message: We don’t care what happens to the dollar or, by extension, the Treasury market. We care only about Wall Street.
A rate cut to be rued
Now the dollar will sink, and inflation will almost certainly rise. And though the Fed was able to drive overnight rates lower by 50 basis points, the most important development in the wake of its action was the decrease in the price of longer-term Treasurys, as rates out 10 years and longer rose over 25 basis points over the next three days.
So while the Fed, in its role of bartender of last resort, can lower short-term interest rates, over time I believe that long rates will rise, as foreigners (and Americans) digest what last week’s Fed action means. Folks will recognize that inflation is not measured excluding food and energy, and will realize that inflation in this country is 5%-plus — which would argue for long-term rates in the neighborhood of 7% or 8%. Thus it has been left up to the currency and Treasury markets to discipline the Fed, which always takes longer and is always far more painful.
Obviously, another consequence is that the moral hazard has been raised yet again. It didn’t take long for someone who probably should have gone out of business for acting irresponsibly to start whining about wanting some more help at the bailout trough. That would be Countrywide Financial (CFC, news, msgs) CEO Angelo Mozilo, who last Wednesday suggested that Fannie Mae (FNM, news, msgs) ought to be allowed to buy mortgages of up to $850,000.
Maybe he’ll get his way, as just that day the Office of Federal Housing Enterprise Oversight reversed itself regarding future growth rates of government-sponsored entities. It’s hard to say exactly what will be possible until some form of financial discipline is brought to bear in this country.
Innocent victims of drive-by central banking
Though it’s obvious the stock market benefited from the Fed’s action, it might not be quite so clear who will get hurt. Obviously, those on fixed incomes, like retirees, will be hurt. Children will be hurt, because they’re the ones who will have to pay for the incredible mess that will have to be sorted out at some point. And anyone old-fashioned enough to save money will be hurt.
Of course, those who will benefit (for now), in addition to the extremely wealthy, are speculators. It seems the national pastime in this country is to speculate and lever up. And then, when one and two plans don’t work, demand to be bailed out. And by the way, your demands will be met.
Cut from the Greenspan cloth
To sum up: Given the fact that folks were going to be scrutinizing what the Fed did, and what message that would send about what the Fed intends to do at future meetings, last week’s 50-basis-point rate cut has to rank up there with the two most irresponsible moves pulled by Greenspan. Those were when:
• In October 1998, on an option-expiration Friday, Greenspan cut rates — with about an hour of trading to go.
• In January 2001, he sprang a surprise 50-basis-point rate cut.
The supposedly clairvoyant crowd at the Fed never sees problems coming, but folks always assume that it will be able to save them via the printing press. Though that’s worked for a long time, in the end it’s going to lead to huge problems for this country, as anyone with an ounce of brains understands.
I don’t think the Fed’s punch-bowl fill-up will be able to ward off recession or restart the housing bubble. All the Fed will have accomplished is to postpone some of the fallout from our current problems while making them even worse in the long run.
