Bernanke takes some flak at Bloomberg

Two reports at Bloomberg today add to the continuing criticism that Fed Chairman Ben Bernanke has been taking since he began cutting interest rates back in August. While many on Wall Street have applauded these moves, figuring that easier money in 2007 and 2008 will help cure the problems caused by easier money early in the decade, a small but growing number of analysts have been critical of the rate cuts.

In Price Measure Says Rate Can't Fall as Traders Expect, more people seem to be noticing that the Federal Reserve is cutting interest rates while inflation is rising. Controlling inflation expectations has been one of the key elements of the Bernanke Fed's fight against inflation - as odd as that may sound, to have to fight the very thing that they are instrumental in creating.

The fight doesn't appear to be going so well at the moment.

In Bernanke May Risk 'Fool in Shower' Label for Economy, the recent and future rate cuts are viewed as possibly causing the economy to be overstimulated over time, as the lagged effects of the cuts are felt.

Federal Reserve Chairman Ben S. Bernanke may have to risk becoming the proverbial "fool in the shower" to keep the U.S. economy out of recession.

Renewed turbulence in financial markets puts Bernanke, 53, under pressure to open the monetary spigots wider to pump up the economy. Traders in federal funds futures are betting it's a certainty the Fed will cut its benchmark interest rate from 4.5 percent tomorrow, and they see a better-than-even chance the rate will be 3.75 percent or below by April.

"The Fed has to assure the markets that it's ready to ride to the rescue and cut rates by as much as necessary," says Lyle Gramley, a former Fed governor who's now a senior economic adviser in Washington for the Stanford Group Co., a wealth- management firm.

The danger of such a strategy is that Bernanke may become like the bather, in an analogy attributed to the late Nobel- Prize-winning economist Milton Friedman, who gets scalded after turning the hot water all the way up in a chilly shower. The monetary-policy equivalent would be faster inflation or another asset bubble in the wake of aggressive Fed action to tackle the slowdown in the economy.

There's that word turbulence again. In my view it is far too hopeful a term that seems to be popping up more and more the worse things get. You'll know we're really in trouble when they start using phrases like "systemic problems" in place of "turbulence".

As for the shower analogy, according to the business school at the University of North Carolina, in these slides(.pdf), the hot-cold water adjustments are attempts to stabilize the economy that can "prove destabilizing because of time lags" where a government might be "constantly stimulating or contracting the economy at the wrong time."
A couple of points here.

First, if ever there was a "fool in the shower" it was former Fed Chairman Alan Greenspan who left interest rates far too low for far too long while encouraging speculators to take on even greater risk while at the same time staunchly backing a "hands off" policy for market regulation.

The result is what we see unfolding today.

Second, it seems obvious at this point that, since Paul Volcker left town in 1987, the water at the Federal Reserve runs at two temperatures, but not hot and cold. Over the last twenty years, hot and very hot would better describe what comes out of the taps at the Fed.