Don't be mad, but I told you so!
Oh yes, I told you so, and more than once. Drowned by the robotic one-note din of market participants clamoring for more and greater Fed rate cuts since August, I and a few others have argued (for example here one September 4th and October 1st) that more rate cuts would open a clear road to disaster, a superhighway to the downfall of the American superpower.
Since my October 1st predictions, the dollar has fallen 10% against the Euro and the Yen, copper has risen 8%, gold 20%, oil a stunning 50%, natural gas a mind-blowing 57%,... Need I go on? Food prices are now so high that there have been riots in several developing countries. We worry about the stock market. Other people around the world have more pressing concerns.
Then on October 8, I expressed an idea that maybe, just maybe, the Fed was too attentive to the worries of some on Wall Street, and not attentive enough to the households of America. Fixing a few hedge funds and Bear Stearns may be a good idea, but it is less of a good idea if the American middle-class is paying for it through lower returns on savings accounts, and through higher inflation. It is also perhaps not such a good idea if the Fed opens its discount window to investment banks.
And on December 12, I argued that the Fed's mandate needs to be reexamined in this age of globalization. The consequences of Fed actions, not only today but for a period going back 10 years, have siphoned an enormous amount of wealth from the United States to other countries which are now flexing their muscle via sovereign wealth funds. These funds are now estimated to hold $3 trillion in assets and to be growing at a $500-billion-a-year clip if oil remains at $100 per barrel. Oil is now approaching $120. Unless we are willing to see our independence and sovereignty jeopardized, the Fed needs to incorporate a strategic component into its thinking. Growth with low inflation are fine goals but no longer sufficient by themselves as America loses its leadership position.
Now that the storm has receded, perhaps temporarily, the media is getting louder in its criticism of recent Fed action. The Wall Street Journal, never a fan of lax monetary policy, has gotten increasingly loud, as in today's editorial:
"Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake."
Last week, the Journal published an op-ed by Stanford Professor Ronald McKinnon, arguing for higher interest rates.
Across town, Bloomberg news is suggesting Bernanke ought to act more like Volcker in order 'to avoid being tagged Burns'.
On September 4, in Nanny Capitalism, we wrote the following:
If History is a guide, and it often is, government intervention in the markets is not always a recipe for stability and it can sometimes make things worse than if the market took its own course. The collapse of the most aggressively careless of risk-takers is a necessary component of a well-functioning free market and the Fed's move to shore up this group will only mean greater trouble for everyone down the road. Advancing leverage to a greedy speculator is like handing a case of whiskey to an alcoholic but the Fed insists that we can drink all we want without getting intoxicated.'