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Great Depression Online Archive Issue:

Bernanke Hits The Panic Button

Great Depression Online
Long Beach, CA
January 25, 2008

Inside This Issue You Will Discover…

*** Bernanke Hits The Panic Button
*** The Fed Now ‘Gets It’.  We Don’t
*** Unintended Consequences
*** And More

Bernanke Hits The Panic Button

Federal Reserve Chairman Ben Bernanke hit the panic button on Tuesday, January 22nd, with an emergency 75-basis point interest rate cut.

We have some questions…

Why 75-basis points?  Why not 50…or 25…or no rate cut?  Why not a rate increase? 

And why couldn’t Bernanke wait until next weeks regularly scheduled Federal Open Market Committee (FOMC) meeting to fix the price of money?

Here Martin Crutsinger, an AP Economics Writer, tells us why…

“The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, slashed a key interest rate by three-quarters of a percentage point on Tuesday and indicated further rate cuts were likely.

“The surprise reduction in the federal funds rate from 4.25 down to 3.5 percent marked the biggest one-day rate move by the central bank since it cuts its discount rate by a full percentage point in December 1991, a period when the country was struggling to get out of a recession.”

So with stock prices dropping worldwide and fears of recession, Bernanke seized the moment to revitalize the markets by lowering the cost of money.  How much, we know, was just a WAG.

For while the Federal Reserve is supposed to provide “…a safe, flexible, and stable monetary and financial system,” Bernanke knows what his job really is – it’s to do the expedient.  That is, to keep asset bubbles inflated and avoid a recession at all costs…regardless of what it does to the value of the dollars you hold. 

And economists have come to expect it…

The Fed Now ‘Gets It’.  We Don’t

‘"This move is not an instant fix,’ said Ian Shepherdson, chief U.S. economist at High Frequency Economics.  ‘The economy is still staring recession in the face, but at least the Fed now gets it."’

Here we’ll pause to remark that only an economist could say something so utterly silly…thoughtless…and idiotic. 

Maybe we just don’t ‘get it’.  But what we do get, and what Ian and the Fed do not, is that it was artificially low rates – rates fixed below the rate of inflation – that created the asset bubble that got us into this mess to start with.

And now that asset prices are deflating, they’re foolishly attempting to pump the bubble back up with more credit.

Blowing more air now, into this contracting credit bubble, is like charging to a new credit card because all the other credit cards are maxed out.  It may postpone the day of reckoning…but it will ultimately make it worse.

Unintended Consequences

And just because it has worked before to postpone the day of reckoning by producing a credit induced boom, doesn’t mean it will work now.  In fact, it hasn’t worked in Japan for the last eighteen years. 

Besides, it’s healthy economic growth we should be after, not an “instant fix” nor another credit driven speculative asset bubble.

Plus the unintended consequence of all the new credit based money (i.e. debt) that’ll flood the economy is rampant price inflation.

We suspect it’s coming to a grocery store near you.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  We'll be back on Tuesday with some insights on the escalating food price inflation.  In the meantime, don't lose a wink of sleep over the wild market gyrations.  Find out how Pete overcame insomnia without seeing a shrink or taking dangerous sleeping pills or other prescription drugs: Overcoming Insomnia.

 

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