Wall Street Boos Bernanke

Wall Street Boos Bernanke. (See here) where a msn money piece reports the stock market took a dip after the Fed cut its federal funds rate from 4.5% to 4.25%.

Personally, I would not have been upset if the Fed had held the line and kept interest rates where they were. It is my opinion that Wall Street investors just want to the Fed to step in and provide easy money to bail out the market.

What does lowering the Fed rate do? It injects liquidity into the supply of money available right? Well there is plenty of liquidity out there. The value of the dollar has been dropping in the international money market because ALREADY there is not enough demand for the existing supply of dollars. Continuing to cut the Fed rate is like adding fuel to the fire, further dampening demand for the dollar and motivates a further drop in the dollar's value.

Now I am not concerned about the current decrease in the value of the dollar. All in all, it is my opinion that some type of correction of the dollar's value was required due to the trade imbalance. Costs of imports to the American economy should go up, costs of exports should go down yielding an improved balance of trade. Given a little time, American consumers might even start seeing "made in USA" on more of the goods they purchase at Walmart.

However the dollar going into free fall is not a good thing. If foreign citizens (and particularly foreign investors) start to see the dollar as a worthless piece of paper (and there have been rumblings that this is already starting) we are going to regret having allowed things to get that far out of whack.

Now I understand that Mr Bernanke and his group are trying to walk a fine line. The economy slipping into recession would in and of itself also decrease demand for dollars. I get that. However foolishly sounding the charge and rushing to the rescue of those threatened by the sub prime mortgage mess also would invite disaster.

There is plenty of money out there. The plunge of the dollar stands as evidence. Domestic investors just need to figure out a way to sop up some of the excess supply that is available out there in the international market. The Fed stepping in to provide a low cost alternative is not going help rebalance the supply and demand of dollars.

Isn't it from Wall Street where we normally hear the wise old sages lecturing us about allowing market forces solve all of our problems? Well the sages are starting to sound more like heroin addicts screaming "Give me my fix"; only the fix they need is cheap, easy money and I guess they could care less whether the economy goes down the tubes as long as their addiction is fed.


Post a Comment

<< Home