Safe Investing: Should you trust the Fed? Part 2

Save investing doesn't mean just picking safe investments. In fact, it has more to do with a certain mind-set. One way to develop the right mind-set is to find good sources of information, knowledge and, if you really work at it, wisdom, to help guide your decision-making. In my last post I concluded that the Fed is not one of those sources. But there are other good sources out there.

I'm not an economist. I do, however, read what other people say - people who have proved to me that they're smart plus have some decent track record of calling things right - over long periods of time. Then I put 2 +2 together.

As I was cleaning up some old blogging notes, I noticed my very first post. Coincidentally, it came right after the comments Bernanke made on July 20th, 2007 - the comments I used in my last post to illustrate why we can't trust the Fed's pronouncements and judgment. It only reinforces my conclusion. And boy am I glad I didn't rely on Bernanke's comments in making my investment decisions.

After Bernanke made his comments, here's what I wrote on August 1st. This was almost two years ago. Remember what's happened since then. (Am I tooting my own horn? Yep.)

Bear Stearns continues to garner bad press. Now they’ve announced the “freezing” of withdrawals from another hedge fund that’s got problems. Today’s Wall Street Journal announced their Asset-backed Securities Fund won’t let investors take out any more money. The claim is raising cash for redemptions will force liquidation of securities in the fund that are under a lot of “price pressure.” Liquidation now will cause the prices of those securities to go down further and faster, causing more redemption requests, causing more price declines…etc., etc., etc. It’s just like a run on the bank. Panic sets in and, of course, will spread to throughout the markets.

Bear drew a line in the sand. The buck stops right here at Bear. We’ll stop the thing before it gets started. The trouble is, it’s already started. The freezing of redemptions is like FDR’s “bank holidays” during the Depression. That was where the President of the United States declared banks closed to prevent more banks from closing their doors for good, due to all the customers demanding their money at the same time. Is the comparison with the Depression mania a fair one? Or is it just more or less a coincidence? We’ll have to see.

One thing we do know: the cat is out of the bag and the early signs of panic are starting to spread. Where it ends and if it ends soon, no one really knows. Expect more of the “no big deal” kinds of comments out of Wall Street and, ultimately, the U.S. government. What other choice do they have? One hint at real trouble, and the rush for the exits begins.