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His predecessor overshot the mark
Sunday, August 19, 2007
This commentary from The Economist says all the right things about the job Fed Chairman Ben Bernanke has been doing and what lies ahead for him. As it relates to interest rate cuts, the advice is to stand firm.
Investors should think twice, however, before assuming that Mr Bernanke will soon act to reduce the federal funds rate. While perspective may be in short supply on Wall Street, it is the job of the Federal Reserve to look beyond the behaviour of a limited sub-sector of the economy during a short timeframe.
If only it were that simple.
It is not the Fed’s job to shield financial actors from risk, and Mr Bernanke no doubt realises that his credibility is at stake
While mortgage lenders and financial institutions heavily invested in American mortgage securities have struggled mightily, recent reports from the broader economy have been anything but uniformly negative. Employment numbers have held up even as home construction has collapsed. For the moment, conforming mortgages remain stable and large firms unconnected to the home-mortgage market have yet to experience serious trouble. Moreover, financial markets remain in positive territory for the year, despite the past week’s gyrations.
...
It is not the Fed’s job to shield financial actors from risk, and Mr Bernanke no doubt realises that his credibility is at stake. If a quick rate-cut touched off a renewed episode of inflation, it would be difficult for the Fed to rapidly reverse course. Mr Bernanke must also be acutely sensitive to the common criticism that his predecessor, Alan Greenspan, overshot the mark by dropping the federal funds rate to 1% in the wake of the downturn of 2001, thereby encouraging the markets into a renewed phase of exuberance.
Mr Bernanke is well aware of the hats that belong to him and the ones that do not. If broader indicators begin to show weakness spreading throughout the economy, then the Fed may act to ease a forthcoming downturn. But do not expect Mr Bernanke to bend to the demands of overextended investors suffering through short-run volatility. As the chairman knows well, he must always keep a cool head even as others lose their shirts.
This week's cartoon:
3 comments:
while I do not want the Fed to deflate the value of my money, it comes to no surprise "the economist" advises for the Fed to stand pat. They are wishing for higher US rates and a stronger dollar.
Europe is extremely tired of the weak dollar. They are getting killed by our lower prices of exports.
The airbus / boeing competition is a prime example.
The privately owned Federal Reserve Bank Corporation is directly responsible for the booms and busts in our economy. How many Americans are hurt by the housing bubble bust, and the high cost if inflation? Americans should be outraged at the mismanagement of our economy, by the Federal Reserve Bank, and should be calling for the abolition of the Federal Reserve system. REPEAL THE FEDERAL RESERVE ACT OF 1913!
To add to the rant of the previous commentary, fun facts on our "monopoly money":
While it is obvious by definition that the US dollar is in effect "monopoly money", since the Fed controls the issuance of currency and more importantly the banking system, it is less well-known that the Fed didn't always have a monopoly on money.
In fact, at first, pure-fiat Federal Reserve Notes competed with silver and gold certificates issued by the Treasury. In essence, the Fed's fiat money competed with the government's money, which was semi-hard money.
Then in 1933 the gold backing was pulled for US citizens. But Fed money still had competition in the form of silver certificates.
That was finally eliminated in 1968. At this point we were on a pure fiat currency, having only recourse to Federal Reserve Notes.
Coincidentally, in 1971 Nixon eliminated convertibility to gold even for foreigners, the world having essentially been weaned from real money entirely. Americans no longer knew well enough to object.
So, monopoly money; but it wasn't always this way--even while the Fed existed.
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