The Mess That Greenspan Made - Part 414

Did Bernanke Do That on Purpose?

Yesterday’s Fed policy statement was a curious one. What could have motivated it?

The choice of words to describe the health of the U.S. economy in the form of “significant downside risks to the economic outlook” is clearly what has sent financial markets reeling in the last 20 hours or so and the curious thing about it is that it is so out of character for the central bank.

They are normally an optimistic lot and, after making clear with QE2 last year that one of their policy goals was higher stock prices, why on earth would they choose this point in time to suddenly express the gravest of concerns for the economy?

It’s not likely that they casually added the words “significant downside risks” to the statement and they must have known what kind of impact they would have.

A look back at the policy statements in mid-2008 – about nine months into the recession that had yet to be declared and leading up to the worst financial market turmoil since the Great Depression – they expressed very little concern about how things were going.

In the Fed policy statement from August 5th, 2008, we got these comforting words:

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee.

It wasn’t until the day after the Lehman bankruptcy that downside risks were clearly characterized as “significant”, as seen from the September 16th, 2008 statement.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee.

What should one make of this seeming contradiction between then and now?

Well, the Republican’s letter to the Fed Chairman was probably a factor. To what extent, we’ll never know, but, if I were the Chairman of an independent central bank and I got that kind of letter, I’d certainly want to respond in some way.

Maybe, the Fed Chief figured he’d show them a thing or two about who wields the bigger bully pulpit and, if that was the case, then he has certainly succeeded, so far.

Another possibility is that Bernanke figured another massive bond buying program – in the form of a $1+ trillion QE3 program – would ultimately be needed and, given all the political posturing about how unpopular (and unsuccessful) QE2 was, he’d need some pretty big cover to pull that off and a tanking stock market would go a long way in filling that bill.

My guess is that it was a combination of the two.

A Dismal Outlook for the U.S. Economy

It shouldn’t be too surprising to see the kind of polling data that Gallup has been reporting this week, given that, to many Americans, there never really was an economic recovery from the 2008 recession. From this survey published yesterday, it seems there is little optimism left out there as the hope that many had two years ago has faded.

Even more bad news for President Obama comes via this separate Gallup poll in which, for the first time ever, more than half the respondents blame him for the nation’s economic woes, up from 32 percent two years ago. Of course, 69 percent still blame former President George W. Bush, down from 80 percent in 2009, however, those trends are certainly not the friends of anyone in or near the White House.

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Thursday Morning Links

MUST READS
Global shares drop on Fed warning – BBC
US, China, Germany slumps hammer stocks – Reuters
US unleashes $400bn plan to save ailing economy – Guardian
China’s manufacturing contracts in September – Channel News Asia
Moody’s Downgrades Credit Ratings of Three Large Banks – NY Times
S&P downgrades 7 Italian banks because of sovereign debt risk – AP
ECB Steps Up Purchases of Italian, Spanish Bonds – CNBC
In U.S., Slight Majority Now Blame Obama for U.S. Economy – Gallup
Why Identifying a Bubble Is So Much Trouble – Bloomberg
Why Was Fed Statement Late? 20th Century Technology – WSJ
Pressuring the Fed Can Backfire – NY Times

MARKETS/INVESTING
Oil falls to $82 as Fed warns of economic risks – AP
Gold falls over $50, dollar gains after Fed – MarketWatch
Copper, oil tumble after Fed warning, China data – Reuters
Commodities Erase All of This Year’s Gains – Bloomberg
Long-term Treasury bond yields dive on new Fed plan – LA Times
Changing behavior of crude oil futures prices – EconBrowser
Investors Ignore Andrew Lahde at Their Certain Peril – Real Clear Markets
Gold Sells Off as Investors Scramble for Cash – The Street
How far can gold and silver climb? – StockHouse
Is gold becoming Theglobe.com? – MarketWatch

ECONOMY/WORLD/HOUSING/BANKING
A rough 10 years for the middle class – CNN
Soros: US Is Already in Double-Dip Recession – CNBC
In U.S., 6 in 10 Do Not Expect Economy to Improve Soon – Gallup
King Moves Closer to Fed on Global Stimulus – Bloomberg
UK QE2 coming down the slipway – FT Alphaville
Greeks strike amid pain and anger over austerity – Reuters
Shares of Chinese Developers Plunge on Trust Financing Report – Bloomberg
Billionaires boost London house prices to fourth most expensive in the world – Telegraph
Five years after peak, still no bottom seen in housing market – MSNBC
In the US, 2 housing markets and 2 directions – AP
Questions and Answers About the Fed’s Decision – Fiscal Times
‘Twist Again’ Ben’s political master stroke – MarketWatch

 

Mr. Market to Mr. Bernanke: “Me No Likey”

Well, it looks as though the stock market isn’t too impressed with Operation Twist so far. I’ve not yet scanned the other news, but, based on the sell-off beginning at around 2:30 PM EST and then accelerating into the close of trading, it’s a pretty safe bet that markets were expecting something more from the Fed. After seeing the least volatility in months over the last week or so, stocks are suddenly volatile again as we move further into the two most dangerous months of the year with the Fed now sitting on their hands.

Look for more big swings after today’s 284 point plunge for the Dow (down 323 points from the intraday high just before the Fed policy statement was released). And it was going so good there for stocks last week when everyone thought that the Fed had their back.

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