Balsamo

What the Bear Stearns Resolution Tells Us About the Fed

Well, Mr Miller
you really seem to have faith in government though i doubt that the Bush administration will be remembered for its "great achievements" in the last 8 years.

The question is not if the fed did or didn't the right thing concerning Bear Stern. It did, but my concern is about its brighter strategy. The fed is acting like some kind of intrepid fireman running from on fire to the other while trying to get grand ma's cat from the tree.
In acting as it does, the fed seems to loose sight of the biggest picture.

I have already posted the following, but as your latest article quoted David Malpass from Bear...euh...JP Morgan (?), here it is.

So went the Malpass quote :
“We think there’s a general underestimate of the power of central banks to stimulate their economies in the short term.
• U.S. recessions have occurred when the Fed tried to stop inflation with high interest rates (1974, 1980, 1982, 1990), a situation the Fed may put off until 2009 or 2010. In contrast, when the Fed has held interest rates down to the inflation rate or below, the result has been strong growth, as in 1977 and 2003.”

I found it amazing.
It just illustrates the common confusion that exists when considering stock markets and the economy. Just take a look at a historical chart of the SP 500.
According to Malpass, recessions occur when the fed tries to stop inflation. Ok. But what tells the market. First quarter 1974 : Nice Bear market rally push the SP from around 60 to more than 100; meanwhile fed action made CPI plunge from 12.2% to around 6%....

And Malpass to continue “strong growth resulted from the fed holding rates down as in 1977”
What tells the market? :The SP just plunged in response to around 80…oh and the CPI jumped to 15%...
1982 : Thanks to Volker, we all entered the longest bull market in history.

By the way, the year 2003 quoted by Malpass is misleading as the fed started to lower rates in march 2001…And started to raise rates in July 04… Remember how the markets reacted to both dates?

Now we can consider what Uncle Bernanke is doing now with more background.
My conclusion is that the fed is fighting the wrong threats with the wrong tools.
Another conclusion is that the fed should carefully define what battle diserved to be fought as he cannot and won't win on all front.

But i agree, preserving the banking system to collapse is a priority, but i don't think that bringing the rates down another 100 bp is a requirement.
Letting the dollar fall further is by no mean a step in restoring confidence, on the contrary. Inflation is the mother of all the ennemies the fed is trying to fight at the moment.

One sure thing history tells us, you cannot save the stock markets by letting the inflation win.