Friday, March 21, 2008

Why Bernake did Not Suddenly Save the US Economy & Why Greenspan Still Says to Dump the Dollar

There is an interesting paradox going on in the financial markets, while some like Bernake say that markets are correcting, other like former Federal Reserve Vice Chairman Alan Blinder say things are not so rosy and Alan Greenspan is encouraging a dump of the US dollar.

We need some guest posts to explain all of this...first the fools rally:

Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke
By Pham-Duy Nguyen

March 21 (Bloomberg) -- The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.
The
Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos., the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.

Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29.

``Bernanke took care of the commodity bubble,'' said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.''

Concern that the central bank would let inflation get out of control eased after the Fed cut its
key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected.

``Clearly they've gotten some stability,'' said
Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets. ``You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.''
Oil Plunges

Gold had its biggest weekly loss since August 1990 after reaching a record $1,033.90 an ounce on March 17. Oil plunged almost $10 over three days, after rallying to $111.80 a barrel, the highest ever. Corn dropped more than 9 percent for the week, the most since July.

Until this week, commodities had outperformed stocks and bonds as the Fed reduced its benchmark rate five times since September, eroding the value of the dollar and fueling concern that inflation would accelerate. This week's rate cut brought the Fed's target for overnight loans among banks down to 2.25 percent.

Because commodities such as oil and gold are priced in dollars, they have risen as the U.S. currency has weakened in response to the Fed's previous rate cuts.

Oil, soybeans, platinum and wheat all jumped to records this year. The weighted UBS Bloomberg Constant Maturity Commodity Index of 26 futures has gained more than 20 percent every year since 2001. The index is up 10 percent this year.

Gold had rallied as much as 43 percent since Sept. 18, when the policy makers began lowering the federal-funds rate for the first time in four years.

Buying Euros

``The markets have been buying euros against the dollar, buying oil and buying gold as hedges,'' said Andrew Busch, a global currency strategist at BMO Capital Markets in Chicago, a unit of Bank of Montreal. ``The Fed calmed the markets.''

Bernanke, 54, is expanding the Fed's monetary-policy toolkit as he seeks to keep strains in financial markets from spiraling into a full-blown meltdown. The world's biggest banks and securities firms have reported $195 billion in asset writedowns and credit losses since 2007 stemming from the collapse of the U.S. subprime mortgage market.

Expanded Collateral

Fed officials on March 11 announced a program to swap $200 billion in Treasuries for debt including mortgage-backed securities. Yesterday, the Fed expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial-property loans.


Earlier this month, the Fed increased the size of separate funding auctions to $100 billion in March from a previously announced $60 billion.

The Fed yesterday said it had lent $28.8 billion to large U.S. securities firms under the program announced on March 16, its first extension of credit to non-banks since the 1930s.
The Fed also put taxpayer money at risk by making available up to $30 billion to
JPMorgan Chase & Co. for the purchase of Bear Stearns.

Not everyone is convinced that Bernanke has managed to turn the tide for financial firms.

``He has taken extraordinary measures, things that we haven't seen since the Great Depression,'' said former Fed vice chairman Alan Blinder, a Princeton University professor. ``He's working overtime, literally and figuratively, to get this panic under control. But so far, it's not under control.''

U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 yesterday as investors sought the safety of government debt. Bill rates declined as low as 0.387 percent as finance company CIT Group Inc. drew on $7.3 billion in credit lines after being shut out of short-term debt markets.

``This is all about money,'' said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois, who has been trading gold since 1973. ``The Fed can control the price of money but the banks still don't want to lend.''

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

Next, let's look at the result of Alan Greenspan's advice to Investors to "de-peg their currency" from the dollar:

http://business.timesonline.co.uk/tol/business/economics/article3564014.ece

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml

What I do not understand, is how we can ever expect to get the currency fluctuations under control without increases in jobs or manufacturing? It seems to me that commodities will not allow themselves to naturally deflate and will only respond to externally imposed price controls that as a result of natural expansion cannot last, it is the same strategy both China and Venezuela are using and is not normal for "free markets."

This all comes in conjunction with global trade imbalances that favor the producer rich Asian economies and lay the consumer burden on the formerly consumer rich economies of the United States and Great Britain.

Who knows what Bernake has up his sleeve.....but one thing is sure, he does not have a situation he cannot control under control. In fact he cannot even control Greenspan who has been globe trotting telling investors to dump the dollar and diversify their portfolio. And while Greenspan's rhetoric has been less disturbing than it was in November, is still disturbing all the same.

http://www.comcast.net/data/news/html/2005/02/04/51880.html

The only lesson I can draw from this situation is that it may have been better to have Hello Kitty at the helm....

http://timesonline.typepad.com/urban_dirt/2008/03/i-am-spartacus.html

What we are seeing are increases and decreases in hedge markets that are the natural result of price control manipulations by the central banks and the only collateral it is likely to cause is collateral damage. This will come about as a result of wiping out the middle and lower classes decreasing both a large consumer base and the hope of developing any productive capacity within consumer economies. This week, as a result, Ben Bernake wins the Milton Friedman economic warfare award for his unadulterated pursuit of destruction of the middle and lower classes. And we must give a special mention to Alan Greenspan for his role in the destruction of overall dollar value in the world economy...Keep up the good work gentlemen...Soon Atlas will Shrug and all those pesky workers can be replaced by robots.

Please see Dana's post for a excellent- though moralistic- discussion about the Hoovervilles springing up around the country....it is a very real exposition of the new economic reality for many in the United States. I can almost hear the senate hearings in the distance now..."those people have had it too easy in the United States....was that or was that not what you er-uh said Mr. Kissinger? And did you or did you not influence Mr. Bernake's decision making?"

http://delawarewatch.blogspot.com/2008/03/george-bush-revives-hoovervilles.html

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