From panic to penicillin - Bernanke, blogged
While the FTSE 100 finished a giddy 165 points up, the US didn’t manage quite such a feat of euphoria. The Dow see-sawed, dropping more than 450 points before regaining more than 300 points of its losses.
Cut through the noise though, and it was another down day, tacked onto the previous week’s losses, says David Gaffen at MarketBeat. And what noise it was. Rich material for the live market bloggers, like Greg Newton at Naked Shorts. At lunchtime he noted, “the usual suspects are still talking about a liquidity problem, which is curious considering the cash tossed so willingly at financial services basket cases.”
MarketBeat summarises the analysts’ views of the latest Fed cash dump.
Without a doubt, what could have been a horrific trading session was headed off before the opening bell due to the Federal Reserve’s action. But the concerns about the handling of the current economic downturn have only multiplied. Analyst views of the Fed fall broadly into three camps — those that think the Fed is way behind the curve; those that think the Fed has become beholden to the markets, and those who believe the Fed is doing a masterful job. (This third group is more of a cult at this point, though.)
Felix Salmon at Market Movers is among those unimpressed by the Fed’s decision to take the slash and burn option just a week before a scheduled meeting.
the Fed is charged with keeping employment high and inflation low; it’s not charged with protecting the capital of investors in the stock market. So this action smells a bit like panic to me, and it might also have prevented the kind of stomach-lurching selling which could conceivably have marked a market bottom.
Barry Ritholtz, at the Big Picture, has a similar concern, describing the move as a “shot of penicillin to a cancer patient.” The Fed may merely have delayed the inevitable, he argues. “This market saving cut prevented a thorough, 5% wash out. In other words, all the Fed did was prevent a healthy capitulation.”
Naked Capitalism’s Yves Smith offers a “less than respectful commentary” on the Fed’s market-saving move. What the hell is the Fed doing meddling with the stock market, he wants to know?
What bothers me is the de facto declaration that stock markets are to be a low (or contained) risk zone. I started out in the securities industry in 1980, when most sensible people thought equities were speculative (this was two years before the infamous Business Week “Equities are Dead” cover).
Over at Econbrowser, James Hamilton takes a charitable tack and is prepared to accept that there may be more to the Fed’s 75bp move than a panicked attempt to avert a stock market plunge:
I suspect that the Fed is using equity prices just as I and many other economic analysts do, namely, as a useful aggregator of private and public information about near-term prospects for economic growth. All the recent indicators have suggested a significant deterioration of real economic activity over the last two months. I take the global stock market sell-off as one more confirmation of that assessment, and new information about the global scope of the problems we face.
The trouble is, he adds, 75bp won’t prevent a recession, any more than 50bp did in April 2001. But it might mitigate the damage: “I believe the FOMC cast its vote….with those who declare that a recession has already begun.”
Paul Krugman in his NYT blog points out that Bernanke spent a lot of time worrying about Japan’s 1990s experience, and in particular the way in which monetary policy became ineffective. The best way to avoid that “liquidity trap”, as argued in a paper co-authored by Bernanke in 2004, is by “maintaining a sufficient inflation buffer and easing preemptively as necessary.”
The Interfluidity blog reads between the lines of the lone FOMC dissenter, William Poole’s comments on the notion of a Fed put.
Poole is at pains, throughout his talk (whose theme is moral hazard) to claim that stabilization policy uses the stock market as a instrument of policy, but that this does not imply that the stock market can use the FRB as a backstop or guarantee. In the question of who’s using who, Poole wants to make it clear that the FRB is the boss. But, if the Fed must intervene to prevent “panics”, it has placed itself in the role of a parent habitually blackmailed by a self-destructive adolescent….
…It’s not a particular policy action that’s bad, it’s the macroeconomic game that we’ve settled into that has to be changed if we want markets that aggregate external information and make wise allocation decisions rather than focusing on intrafinancial Kremlinology.
No comments:
Post a Comment