Of Immediate Concern: Does the Taper Follow the Fed's 2007-2008 Pattern?
Bernanke left us with another taper in Fed bond buying, with that program now down to $65 billion per month from $75 billion which was down from $85 billion. As he steps away, some sing his praises for not giving in to the demand by Christine LaGarde, head of the IMF, that the Fed not taper, in order to help the struggling Emerging Markets, which as we see are in a tailspin. LaGarde wants the Fed to signal its willingness to loosen up, as it has done in the past, and keep injecting liquidity into world markets. But what sound like voices of moderation call Bernanke's sticking to the Fed's stated plan to keep tapering the proper action for the Fed to be taking: stop supporting the rest of the world and do what's good for the U.S. At least that's what they would have us think.
But is that true? Or are we witnessing a Fed doing exactly what it did in the face of the accelerating crisis that began in 2007 and hit with such ferocity in 2008?
It took the Fed a while to respond to the gathering storm in 2007-2008. They simply didn't understand that a credit crisis was brewing that would result in a freezing of credit markets. And by the time they did, most of the damage was done, and credit markets did indeed freeze up with the unhappy result that not a Great Recession, but another Great Depression threatened to drag the world into financial ruin.
Okay, so my inclination at the time was just let the thing go and let natural liquidation purge the system of the outrageously leveraged condition that the banks and Wall Street had created. It would be a healthy re-start for the rest of us, after a period of pain. But now I'm not so sure. Now I wonder whether it would be madness to court something like the Great Depression. Maybe that would have been like letting the patient heal himself, even as we watch him die.
In any case, if we are entering the initial stages of another credit crisis, this one sourced in China, as opposed to the last one having been sourced here with our sub-prime crisis precipitated by a collapse of the U.S. real estate bubble, then it seems the Fed shouldn't be tightening up on credit. It should be looking to provide the liquidity needed to avoid a freezing up of credit markets.
Then again, should we be surprised that the Fed might repeat the same mistakes they made in 2007-2008? They didn't understand what was happening then; why should be expect them to understand what's happening now?
Meanwhile, as we warned a few days ago, and despite the recent trumpeting of a stronger economy based on fourth quarter GDP coming in at 3.1%, the declines in the stock markets around the world are beginning to look more like the first innings of a crisis, rather than a simple, needed and expected correction in prices after a big run-up. The jury is out, but the evidence now builds for something worse than a mere correction.
But is that true? Or are we witnessing a Fed doing exactly what it did in the face of the accelerating crisis that began in 2007 and hit with such ferocity in 2008?
It took the Fed a while to respond to the gathering storm in 2007-2008. They simply didn't understand that a credit crisis was brewing that would result in a freezing of credit markets. And by the time they did, most of the damage was done, and credit markets did indeed freeze up with the unhappy result that not a Great Recession, but another Great Depression threatened to drag the world into financial ruin.
Okay, so my inclination at the time was just let the thing go and let natural liquidation purge the system of the outrageously leveraged condition that the banks and Wall Street had created. It would be a healthy re-start for the rest of us, after a period of pain. But now I'm not so sure. Now I wonder whether it would be madness to court something like the Great Depression. Maybe that would have been like letting the patient heal himself, even as we watch him die.
In any case, if we are entering the initial stages of another credit crisis, this one sourced in China, as opposed to the last one having been sourced here with our sub-prime crisis precipitated by a collapse of the U.S. real estate bubble, then it seems the Fed shouldn't be tightening up on credit. It should be looking to provide the liquidity needed to avoid a freezing up of credit markets.
Then again, should we be surprised that the Fed might repeat the same mistakes they made in 2007-2008? They didn't understand what was happening then; why should be expect them to understand what's happening now?
Meanwhile, as we warned a few days ago, and despite the recent trumpeting of a stronger economy based on fourth quarter GDP coming in at 3.1%, the declines in the stock markets around the world are beginning to look more like the first innings of a crisis, rather than a simple, needed and expected correction in prices after a big run-up. The jury is out, but the evidence now builds for something worse than a mere correction.
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