The Federal Reserve

Taking Stock: Dow Jones 12,400

by Ross Kaplan on April 9, 2011

Ben Bernanke’s Unintended Consequences

The good news?

Ben Bernanke has confounded naysayers, and proven that The Federal Reserve really can resuscitate (levitate?) the stock market — now up 85% from The Crash of ’08 lows.

How?

By printing money — lots and lots of money — and driving interest rates into the toilet (and keeping them there).

The bad news?

There are a lot of side effects.

Such as:

–A declining U.S. dollar
–Racing commodity prices (filled your gas tank lately?)
–Spiking gold and silver
–Food inflation, especially in poorer, more vulnerable countries
–Trillions in new U.S. debt
–Myriad new bubbles(?) inflated by yield-starved investors fleeing cash

Benefit – Cost Analysis

Which leaves the question, “was the Fed’s ‘monetary activism’ good policy?”

Unfortunately, when you apply a cost-benefit analysis, what seems clear (at least to me) is that the benefits have been bestowed on a small class of individuals (Wall Street, wealthy investors), while the costs have been imposed on a much broader and more vulnerable swath of society (savers, the poor and middle class, retirees).

Two and 1/2 years after The Crash, what (still) seems hardest to swallow is not just the lack of accountability for those most responsible, but the fact that the rescue effort, incredibly, actually served to (further) enrich the same individuals.

That ain’t how the system was supposed to work . . .

{ 0 comments }

Why Alan Greenspan Can’t Retire

by Ross Kaplan on February 17, 2011

Why is This Man Still Collecting Speaking Fees?

Why can’t Alan Greenspan retire?

About to turn 85 next month, it’s not that he isn’t old enough.

And, after all these years of lucrative consulting and speaking fees, it’s not exactly like he needs the money.

So, why is Greenspan spending his time going around the country giving talks to finance-related trade and industry groups, instead of lounging by the pool or doting on his grandchildren?

Because then there’d be no one to peddle his revisionist history of the 2008 financial crash.

Revisionist History

So, according to Greenspan, the financial and real estate melt-down that ushered in TARP, ZIRP (“Zero Percent Interest Rates,” or really ZIRP II), millions of foreclosures and trillions in fresh U.S. debt was an unforeseeable “perfect storm”  that roils the economy once every one hundred years or so.

Neatly omitted from this story line:

–The role that zero percent interest rates — courtesy of the Greenspan-led Federal Reserve — played in creating and driving liquidity into the housing market.

–The role that Wall Street played in satisfying investors’ demand for yield by creating rivers and then oceans and then still more oceans of securitized debt tied to housing.

–The role that the credit rating agencies played in blessing all that crap as Triple-A paper.

–The role that credit derivatives — purposely unregulated at Greenspan’s and others’ behest — played in magnifying the losses when they inevitably came — and allowed, obscenely, insiders who profited from selling securitized crap to profit again when it inevitably collapsed.

–The role that nosebleed Wall Street leverage — OK’d by none other than the SEC and quietly blessed by Greenspan — played in necessitating Wall Street’s multiple bailouts.

Nah, according to Greenspan, it was a 100 year storm that nobody could have predicted or prevented.

“No Questions, Please”

So, Mr. Greenspan, if you really believe so strongly in your explanation(s) for the crash, why not engage in some real give-and-take with your (hand-picked) audiences?

Why insist that all questions be submitted in writing in advance, and not allow any Q&A afterwards?

For $50,000 (or $100,000 or whatever you get paid per rehearsed script talk these days), it seems like the least you could do.

P.S.:  Even scarier than the prospect of Greenspan selling his counter-narrative is . . .  seeing people who should know better letting it go unchallenged.

{ 0 comments }

King Derwin’s Magicians — and Ours

by Ross Kaplan on October 10, 2010

Waiting on Economists’
“Chants and Charms?”

“A mighty good chant,” said the King, looking very pleased. Are you sure it will work?”

All the magicians nodded together.

“But,” said the King, looking puzzled, “How long will it take?”

“Be calm, oh, Sire, and have no fears,” chanted the magicians.

“Our charm will work in ten short years.”

–”The 500 Hats of Bartholomew Cubbins,” by Dr. Seuss

Watching an inspired production of the famous Dr. Seuss story by The Children’s Theatre yesterday, I couldn’t help noting the parallels between King Derwin’s magicians, and Barack Obama’s economic magicians.

Just like Dr. Seuss’ magicians, our government magicians profess confidence that their “spell” — TARP, zero percent interest rates, quantitative easing, etc. — will have the desired effect.

King Derwin pronounces the magicians “fools,” and promptly dismisses them.

Meanwhile, in the real world, we are giving our latter-day magicians more power, and waiting for their chants and charms to work.

P.S.: How do you say “economist” in Japanese?

{ 0 comments }

Profiting from Bubbles: ‘Grab Marshmallows’

by Ross Kaplan on October 8, 2010

What’s an Investor to Do?

[But] as long as the music is playing, you’ve got to get up and dance.

–Former Citigroup CEO Chuck Prince

Perplexed by a stock market that (inexplicably?) is once again on the rise — along with all manner of commodities (oil, gold, silver, etc.)?
That, despite at best conflicting economic signals (continuing weak employment numbers, constricted lending, soft housing, etc.).

You shouldn’t be.

Behind the scenes, the Federal Reserve has signalled its ongoing commitment to print money as a way to stimulate the economy, via a mechanism euphemistically labelled “quantitative easing.”

“Grabbing Marshmallows”

So how should investors play such an environment?

If you have the stomach, take Barry Ritholtz’s advice (my paraphrase):

When the Fed adds even more gasoline to the conflagration, [investors] should grab some some marshmallows and sticks and head over to the boy scout jamboree campfire.

–Barry Ritholtz, “Do You Wanna Be Right, or Do You Wanna Make Money?”

Note to the intrepid: the trick is not waiting around for the embers.

{ 0 comments }

The Wall Street Journal Whiffs on Warren

September 19, 2010

Protecting Consumers From Banks It turns out that Harvard Professor Elizabeth Warren will head the new Consumer Protection Financial Bureau, after all. The Bureau, which Warren proposed creating, is charged with ensuring that “consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination.” Seeing as how millions of consumers are routinely [...]

Read the full article →

No, Not THAT QE II!!

July 16, 2010

First, the Trial Balloons What is all this fuss I hear about the Supreme Court decision on a “deaf” penalty? It’s terrible! Deaf people have enough problems as it is! –Befuddled spinster Emily Litella, one of Gilda Radner’s several characters on the original Saturday Night Live. Emily Litella comes to mind as the murmuring about [...]

Read the full article →

Housing Market Hindsight

June 29, 2010

Low Interest Rates — Then & Now Three (four?) years into the housing market downturn, what conclusion is it possible to draw? In retrospect, it seems obvious (at least to me) that it was a liquidity-driven phenomenon. Add a tsunami of cash, subtract any vestige of underwriting standards, and real estate will go up. Subtract [...]

Read the full article →

Needed: Glass-Steagall . . . for the Housing Market

May 25, 2010

Life after Life Support There are no atheists in foxholes. –Famous aphorism There are no free market Republicans in today’s housing industry. –Real estate version When it comes to the housing industry today, even the Republicans sound a lot like Democrats. For now, at least, people of all philosophical stripes understand that the housing market [...]

Read the full article →

← Older Entries