The Great Depression Online




Great Depression Online Archive Issue:

Bernanke Toes The Line

Great Depression Online
Long Beach, CA
December 14, 2007

Inside This Issue You Will Discover…

*** Rate Cut Acquiescence
*** When the Solution’s the Problem
*** Welcome to Stagflation
*** And More

Rate Cut Acquiescence

Ben Bernanke stepped up to center stage on Tuesday, December 11th, and did exactly what everyone knew he was going to do…  He acquiesced.

His attempt to toe the line and avoid a potential recession in the face of increasing inflation was transparent when he cut the federal funds target rate by 25 basis points to 4.25%.

The stock market expressed its disappointment and took an abrupt yet elegant swan dive off a cliff – the S&P 500 led the way with a loss of 2.53%, followed by the NASDAQ which fell 2.45% and the DOW which lost just 2.14%.

Andrew Farrell, in an article titled “Fed Fails To Satisfy Wall Street” we found on Forbes.com, reported the following:

“In an attempt to stave off a U.S. recession, the Federal Reserve cut interest rates to 4.25% Tuesday.  Investors, looking for an even bigger cut, dumped American stocks.

“Financial markets had generally expected the Fed's move, but there was some talk of a steeper cut, to a 4.0% fed funds rate.”

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So why didn’t Bernanke cut rates to 4.0%?

Here we return to Farrell:

“While falling interest rates reduce borrowing costs for people and companies and should therefore provide an economist [sic] boost, a rate cut isn't without its costs.  For one, it will encourage inflation at a time when consumers are already feeling strains from elevated food and energy prices.

“It will also put new pressure on the already-weak dollar.  The dollar has lost 10.2% against the euro in the past year.”

We’ll add, too, that we don’t know if either a 25 or a 50 basis point cut was warranted.  Or how about no rate cut…or a rate increase for that matter.  But we presume Ben Bernanke and his team of number crunchers don’t know either. 

Plus, in principle, we’re against price fixing of any kind.  Any country that has ever tried it has had economic ruin.  The Fed doesn’t fix the price of toothpaste, and rightly so.  So why should the Fed fix the price of money? 

When the Solution’s the Problem

Beside’s wasn’t too much credit the problem to begin with?

It was too much credit that caused home prices to bubble up.  And now that home prices are contracting, and threatening to drag the economy down, Bernanke’s solution is to add more credit.

It seems that the solution is now the problem.

Welcome to Stagflation

We’ll concede that there are times you can get away with it…  You can lower interest rates…goose the economy…and avoid a recession.  But to do so with an already weak dollar in the face of rising inflation is mad.

It is asking for stagflation.  That’s when economic growth stagnates and unemployment rises, all while the price of goods and services inflates.

It’s a vicious combination – one we haven’t faced in the United States since the late 1970’s.  And it’s a prospect that’s signaling a return any day now, if not already.

Sincerely,

M.N. Gordon
Great Depression Online

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