Ambrose is on a roll

The writing of Ambrose Evans-Pritchard of the London Telegraph is, if nothing else, provocative. As a lover of gold who is both skeptical of modern financial alchemy and wary of central bank complicity, he can always be counted on to provide a view of financial markets that is far from the mainstream.

After reports filed over the last two days, he is clearly on a roll.

Yesterday's story followed up on some of the details surrounding last week's about-face by Ben Bernanke - an about-face that led to a cut in the discount rate and an easing of the Fed's monetary policy stance.

We can presume that Ben Bernanke did not undertake this volte face lightly, given his determination to end the Greenspan practice of reflexive bail-outs - and to shake off his own image as an easy money man. I suspect Mr Bernanke now fears the economy is hurtling into a brick wall.
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America is sliding into the worst housing slump since the Depression.
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The bond markets know the fuse is already lit on mass default, which is why $2,000bn of US sub-prime and Alt-A debt packaged as securities is being marked down so violently on books - German, French and Dutch books as it turns out.

The hit to the real economy will follow soon. Americans now face wealth deflation on both the housing and equity markets.
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In the end, the world's central banks can always reflate the markets - if they are willing to tolerate the side-effects. The 1930s liquidity trap has been overtaken by new methods of stimulus, as Mr Bernanke made all too clear in his "helicopter" speech in November 2002. "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost," he said.

The Fed can "expand the menu of assets that it buys", he said, citing agency mortgage debt, a gamut of bonds and even use of "commercial paper" as collateral. The process began gingerly last week. The markets may come to know real fear before it is finished.

And now comes this one today on who should be blamed for the mess:

The witch hunt has begun. French president Nicolas Sarkozy has vowed to hunt down the "speculators". Germany's Angela Merkel is eyeing laws to curtail hedge funds.Brussels has launched a probe of the rating agencies, suspected of sticking "AAA" and "AA" grades on sub-prime debt for venal motives. The US Congress is orchestrating a show trial of "predatory lenders".

The blame-game was ever thus. Wall Street bankers were hounded after the 1929 crash: some went to prison. But if you track down the root cause of this credit bubble - now popped - the "blame" lies with Asian, European and Anglo Saxon central banks.

They created this mess, if that is what we now face. It was they - in effect governments - who intervened in countless complex ways to push down the price of global credit to levels that warped behaviour, as the Bank for International Settlements (BIS) has repeatedly noted. By setting the price of money too low, they encouraged debt and punished savings.
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The central banks have said their task is to fight inflation, not to police asset prices. Critics retort that the US asset bubble in the 1920s and Japan's bubble in the 1980s both occurred at a time of low inflation. Belatedly the Bank of Japan, the ECB, the Swiss, the Scandies and the Bank of England are questioning the wisdom of ignoring asset prices, deeming it wise to "lean into the wind" to slow excesses. But it is very late in the day. The credit bubble is already with us.

Somehow, that smug look on Ambrose's face seems a bit less pretentious than it did about six months ago.