Helicopter Ben running out of ammo
Helicopter Ben running out of ammo
Federal Reserve Chairman Ben Bernanke earned the moniker ‘Helicopter Ben’ by suggesting that, if people refuse to borrow, the Fed can always follow Milton Friedman’s advice and drop money out of a helicopter. It might soon be time for him to start the rotors spinning.
The theory behind monetary policy is simple. You put interest rates up, people borrow less. You put them down, people borrow more. That theory has never played out in practice and it never will. People borrow money when the think they can make money and, when they’re worried they’re going to lose it, they won’t borrow a cent. The former is a problem for Australia’s Reserve Bank Governor, Glenn Stevens. The later a much bigger problem for the US Federal Reserve Chairman, Ben Bernanke.
He and his colleagues on the Federal Reserve Board have cut rates from 5.25% to 2.25% in the space of 12 months. They’ve attempted to directly introduce liquidity, lent money to non-banks for the first time since the 1930s and taken significant amounts of credit risk on to the taxpayers’ balance sheet. The net effect: Federal Reserve credit has grown by an annualised 2.2% since August.
‘The great de-leveraging’ is in full swing and no amount of interest rate cuts will bring it to a premature end. No one wants to borrow and it’s no wonder. The Case-Shiller house price index, which measures house prices in the 20 largest cities in the US, fell 10.7% in the year to January. Housing approvals hit a 13-year low and, not surprisingly, consumer confidence has fallen to its lowest level since 1973. A recession is undoubtedly underway.
When the excess homes built in the boom are being lived in, the banks have written off all their stupid loans and rent provides a sensible return on an investment property, things will slowly return to normal. More rate cuts look likely but, with the official rate already at 2.25%, Bernanke doesn't have too many shots left to fire. In any case, it won't make much difference.
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I agree and wonder what the Fed plans to do if more problems occur - are they going to cut the interest rate to 1%, 0% or even -5%? I'm even more concerned that the Fed's answer to every crises seems to be to flood the market with liquidity rather than to take the hit and try to get the market and economy running in a sustainble way. Still as its election yet in the US there is not much hope of a sensible economic policy.
I have been talking about the great credit fulled asset boom for a long time now and it is pleasing to hear other people starting to say the same thing (people used to think I was a nutter but now they listen!).
My fear is that now seems earily similar in to 1929/30's and The Great Depression which is when I believe Friedman made the comments you mention.
Although I am a very strong believer in instrinic value (and have been buying of late) I do worry about sustained deflation as a result of the unwinding of the credit boom and its ongoing effects on confidence.
Lets hope Bernake sorts out the mess!!!!
Is there any sign of the institutions snapping up cheap property at forced sales ? All the homeless are going to have to live somewhere and the rental market could be a lucrative earner for the institutions with some built in Capital Gain in the future as well.
Hi
deregulated markets will always find a balance!
Notice how the worlds financiers have demanded that all industries must be deregulated to allow efficient market forces to drive efficiency and irrespective of the pain we should allow market forces prevail.
The logic being thrust upon us poor urchins is the weak or stupid fail, the smart or strong survive.
Now we have the unprecedented situation whereby we have government and central bank intervention into the free markets to help save the bankers from there greed and stupidity.
I hope a few learn some pain and humility but I suspect most will find golden parachutes at the shareholders expense.
I am not jaded am I?
Deregulated markets.
In 2005 in the UK a man committed suicide due to the pressures of severe debt (he had 22 credit cards, most of them unsolicited). He owed 130,000 pounds to various institutions and was virtually broke. A writer named Jon Ronson investigated the situation and was told by one of the credit industry hot shots that the unfortunate man was "subprime business, subprime is the golden ring, that is where the big money is made". I immediately thought about financial sophistication, personal responsibility,taking control of one's finances etc. I knew that something like that could never happen to someone who had been educated at say, Harvard and had gone on to run a big finace corporation like say, Citigroup or Bear Stearns.
I hear that there are calls for the big Investment Institutions to be regulated in the US.
Hi Steve!
Do you think the outcome will be the 1929 style of deflation? On the other hand, some pundits are saying that with money printer Ben around, we will have hyperinflation (e.g. Marc Faber). I think Recipe for hyperinflation sums up both the deflation and inflation camp very well.
What are your thoughts on that?
"Revenge of the Trailer Trash" is how I describe the current crisis.
While I do not agree with the way some American's describe these less financially fortunate individuals, I can't help but find it amusing that these people are reaping financial disaster upon the globe. These people were preyed upon by greedy financial institutions with a view to a quick profit. Many of the people who took out Subprime loans in the US have been posting their house keys back to the banks, in a pre-emptive strike upon imminent foreclosure ("Jingle Mail").
It seems the long line of recently unemployed financial staff may also get a taste of Life in a Trailer. This may give them time to ruminate over the consequences of their actions, or more likely, scheme over ways to make a quick buck without thought for others.
Apologies to those financial staff who have lost their jobs and actually cared (unfortunately probably most of the staff who lost their jobs).
I think both the hyperinflation and 1930s style deflation scenarios are extreme (I really like Mark Faber's stuff but when you write the 'Doom and Gloom' report you have an obligation to be extreme!). On balance, I'm more worried about inflation. This week's cover story in The Economist does a good job of putting the situation into perspective. The losses involved are huge but look unlikely to be fatal, and the Reserve Bank has shown its more than willing to put the public purse on the line. The stockmarket doesn't look anywhere near as overvalued as it was in the US in 1929 nor in 1980s Japan. They'll work through it, eventually.
It's an interesting concept, supply and demand. Yes, the market sorts itself out when we're talking about the small fry and the SMEs. But when you're talking about big banks (and especially the Fed) in that shrine to free enterprise, the good ol' US of A, it's a case of the "Golden Rule". Whoever has the gold, makes the rules...
As a child of the Great Depression, in which my Grandfather lost his fortune - and as the fortunate disciple of some experienced mentors - I stick with simple rules. In the midst of carnage there are jewels to collect. It's individuals, and particular businesses, that matter, more than "the market" which is mostly lemmings driven by fear or greed. The higher the potential reward, the higher the risk. Sell on a fall and buy on a rise - but do neither hastily. Only borrow what you can afford to lose. Poor young men can risk everything because they've nothing to lose - so long as they can throw again. Rich old men have learned from their losses and have something to lose, so they are not so spectacular - unless they are pirates by nature. Learn every game you play - and keep a close eye on your servants. Now it seems the servants are overpaid and driven by greed - even celebrated for it. And shareholders are paying the pipers their elected directorscreated. Bernanke is similarly reaping the whirlwind his much-praised predecessor sowed - by not keeping his eye on the young men, and the greedy, who were indirectly his servants to supervise. We're seeing something very similar here with Opes Prime, which seems to have played with other people's assets - and should have been controlled by finance law, and by the Stock Exchange.
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