WB: Ben to Wall Street: Party On, Dudes

July 20, 2006

Billmon:

I’m sure Uncle Karl and the other members of the White House minstrel show were pretty pleased too, almost as much as Atrios even. But all this happiness, and the bullish stock and bond prices it tends to produce, actually increases the risk that Ben and I will both be wrong and inflation will become a serious problem, by and by.

Ben to Wall Street: Party On, Dudes

Posted by b on July 20, 2006 at 04:52 UTC | Permalink

Comments

The thing that galls me to no end, is that these so called “leaders” whom makes these decisions, have nothing to lose, hold no accountability, and exercise no caution; have nothing at stake.

Posted by: Uncle $cam | Jul 20 2006 9:43 utc | 1

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Posted by: Uncle $cam | Jul 20 2006 10:04 utc | 2

It’s a very weird position Billmon to maintain the Fed Chairman should engage in pro forma rhetoric vis a vis inflation. Meaning he should mouth the typical platitudes about fighting inflation even if he doesn’t think, like you apparantly, that it is a serious long term threat. While we of course assume any statement by any Fedperson is carefully crafted so as to have almost no meaning and will hold the maximum ambiguity to actually come out and maintain he should in essense lie is hard to take from you.
There is a gross misunderstanding about the Fed being “tight” during this now two years of Fed Funds Target raising. During the entire period the Fed has been aggressively expanding its retained portfolio of securities, meaning buying up ,Treasury Paper in open market operations, and providing liquidity to the syatem. This is not a tight policy. Futhermore the traditional idea of how credit markets are supposed to work and what “tight” policy is supposed to achieve is a drop in the supply and demand for credit. Most certainly this has not happened. The supply and demand for credit is still expanding at a relentless almost parabolic rate. Greenspans well telegraphed tiny increases since they were so well advertixed had the effect of insuring that the credit market would not falter. Add in the aggressive addition of liquidity thru the aforementioned almost 7% rate of increase in their portfolio and what you have is the opposite of tightness.
The market not the Fed has been making rates rise and the Fed has been fighting it tooth and nail the whole time. One step behind the curve, execpt perhaps that they have wanted the long end to rise more to keep the yeild curve positive.
The banking system is now a secondary player in the credit creation bussiness. It follows that the Federal Reserve system, a banking system after all, has been rendered a secondary status as well. It is beyond bizzare that this Fed worship has conincided with the credit market becomming detached from the banking system and thus to Fed influence.
The explosive growth of credit has also become a worldwide phenomenon, another nail in the coffin of the belief that the Fed controls anything. Their control now involves mostly controlling expectations and in that Greenspans rule was to always promise unlimitied liquidity to the financial markets. Bem will follow that tradition probably with turbochargers. His dismissal or inflation was thus perfedtly in tune with his beliefs and his role.

Posted by: rapier | Jul 20 2006 12:24 utc | 3

I’ll admit being puzzled by Billmon’s optimistic outlook vis-a-vis inflation. Our explicit national debit is gaining on $9,000,000,000,000. Add in entitlement obligations and that number way more than doubles. Where will the money come from to pay those bills? “Printing press” seems the likely answer.
Look at the choices. Some sort of recession is likely good for our long-term prospects, but not good for the GOP this year. Cooling in the housing market? Same thing.
Bush doesn’t appoint anyone for any reason other than political gain. Congress rubber stamps whatever Bush does.
So why the slightest doubt about exactly what Bernanke is up to?

Posted by: American | Jul 20 2006 13:16 utc | 4

IMO, that something along these lines would happen was obvious months ago. I just wish I had waited until last week to transfer my money to the S&P-indexed fund.
ME uncertainty was the tigger here: Wall Street needed (erm the White House needed) a break (a distraction) from all the bearish circumstances (from the real world).

Posted by: Obs | Jul 20 2006 14:14 utc | 5

I just wonder what politician will run (and win) promising to “clean up house” once our short-term financial party is over. It’s a dirty job, and nobody wants to do it. Maybe we’ll have to pass out and have a hangover and then swear-off the hard stuff for a good-long while.

Posted by: Obs | Jul 20 2006 14:20 utc | 6

I wonder how relevant comparing Fed policy during the previous bought with runaway inflation to policy today. IMHO the biggest difference is that now the USA is a borrower when before it was a lender. I believe that during Reagan’s terms the US went from being the world’s largest creditor to the world’s largest debtor. For a debtor, inflation is good. It means you pay back pennies on the dollar. It is the creditors that will suffer, and today that is the petro-economies, Asian central banks and as collateral damage those investors too timid for the roller coaster in the equity markets. Anybody ownings USD T-bills today is doing it for other than investment reasons, eg. to keep their currency down or rent the US defense umbrella.

Posted by: PeeDee | Jul 20 2006 21:03 utc | 7

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