Everybody is talking at me and I can’t hear a word they’re saying, only the echoes of mismanaged policy. The academics are out and about, making the case as to why they are right and markets are WRONG, although Professor Summers gives much more credibility to the wisdom of markets than Bernanke or Fischer. The reason that this is important for traders and investors is that in the past six years, risk pricing has been based on the positive outcome of Fed policy.
Markets have followed the “green brick road” of the Greenspan and Bernanke PUTS in believing in the omniscience of Fed models and their overseers. THE MEDIA HAS SOLD THE WALL STREET CUSTOMERS ON THE IDEA THAT CONTEMPORARY ECONOMICS IS ROCKET SCIENCE. It is anything but and yesterday during a very solid interview by CNBC‘s Sara Eisen and Simon Hobbes, former Dallas Fed President Richard Fisher acknowledged that the present instability is due to the Fed being over-accommodative in its efforts to create a “wealth effect” and raising the value of various asset classes to stimulate demand and prevent a LIQUIDATION OF ASSETS.
Richard Fisher accepts his role in real-time policy experimentation (AGAIN, IT IS NOT ROCKET SCIENCE). The Fed may have fueled the explosion in risk but it has no idea of how it ends. Science is the ability to replicate and be share of the outcomes but as we hear everyday the OUTCOMES ARE UNCERTAIN. This is not science but DRAFT KINGS probability-based outcomes. The Fed has just informed investors that it is now up to you to sort out the outcomes.
Ben Bernanke posted another Brookings blog today, which I found frightening. He wrote, “Clearly, the Fed would not intentionally seek to destabilize financial markets, but if financial stability spillovers’ of U.S. monetary policy are in fact significant, they pose potential problems for both the U.S. and its trading partners.” Bernanke cites the work of French Economics Professor Hélène Rey in examining the concept of a global financial cycle, which in my terms is the acknowledgement of GLOBAL MACRO analysis and trading. The power of KAPITAL FLOWS around the globe have real impact, and in fact U.S. monetary policy may be one of the TRIGGERS that can affect investor sentiment.
The idea that the world’s reserve bank can immediately affect the world’s financial sentiment is new? Wow, mind-boggling. Bernanke is attempting to deflect any criticism from the Fed and cannot understand how the world does not just accept that the FED did all it could to prevent the onset of a major depression, similar to the 1930s. If there are negative collateral effects then the financial markets will just have to use its collective wisdom to sort through the problems. As Bernanke posts in his blog today: “In the international context, the stability of the U.S. economy is of great importance to the U.S. trading partners, and diverting Fed policy from that goal is really not in anybody’s interest. Likewise, emerging-market central banks that use monetary policy to target asset prices, say, give up a critical degree of freedom in managing domestic demand,output and inflation.”
The bottom line is that Bernanke’s blog is an assertion that international actors should stop blaming the Fed for any financial instability because it was the Fed’s “COURAGE TO ACT” that saved the entire financial global system and everybody should be happy with the outcome. Any negative fallout should be managed by the markets. The problem with Bernanke’s sense of markets is as Stanley Fischer warned today: The market’s are apt to get it wrong, as with its disagreement with the FED on the velocity of rate hikes. As Richard Fischer alluded to yesterday, the markets are losing confidence about the Fed’s omniscience and of course it will be pension funds and other savers that bear the cost of central bankers imitating the great minds at NASA. In the prescient wisdom of the balladeer Tom Lehrer:
Once the rockets are up, who cares where they come down
that’s not my department says Wehrner Von Braun
Some have harsh words for this man of renown,
But some think our attitude should be one of gratitude,
Like the widows and cripples in old London town
Who owe their large pensions to Wehrner Von Braun