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January 31, 2013
Bernanke's cattle drives
Ben Bernanke is arguably the most powerful man in the world. He controls the cost of money. When you control the cost of money, i.e. interest rates, you control the evaluation of all assets measured by that currency.
He has furthered his powers ala the emergency in the crisis of 2008. He has ignored portions of the Federal Reserve mandate and created his own, all without concern or oversight from the elected representatives of the country.
What is often referred to as the "dual mandate" is actually three parts.
Mr. Bernanke has chosen to ignore the third mandate of moderate interest rates. That mandate was included in the mission statement for specific purposes. The wisdom of this guidance seems to have been ignored. Moderate interest rates give value to the currency thus defending its stature. Moderate interest rates encourage savings and thus buffer against bad times. A nation is not healthy when the majority of citizens are two pay checks away from broke.
Moderate rates also deter irresponsible borrowing and in the case of government, irresponsible spending.
His new self authored mandate is to encourage inflation. 2.5% is the target. Nowhere in the Federal Reserve mission statement is there a mention of inflation as a goal of the Federal Reserve.
Ronald Reagan once said " there is nothing more permanent than a temporary government program." Well Bernanke has added some weight to that observation. Apparently there is nothing so permanent as a temporary monetary emergency action. Ask the Japanese. That which was first seen by the Fed as an emergency response to a financial crisis in '08 has now somehow become the fountain of wealth for the Wall Street crowd and a necessity. They have the nod and the wink from the Fed that the punch bowl will stay full.
Bernanke's fake rates have created fake evaluations and misallocations of capital. The cattle drive of the previous decade into real estate is vaguely similar to this stock market rise. The new cattle drive is to run to the market and secure that 2% dividend in lieu of lending money to the government at .015% short term and 2% for ten years. The folly here is that people and trading models will risk $100 in capital to secure $2 a year in return.
We now have computer models throwing money at the stock market to capture that modicum of dividend income. Bernanke has inadvertently set the trap. With interest rate artificially set via Fed support of weekly auctions and by monthly purchases of unwanted mortgage paper, interest rate levels are arguably 2.5% below historically market driven levels.
Record low interest rates. Record high stock prices
If rates revert back to reality, the dividend players will pay dearly.
Bernanke seems to intentionally disregard his mandate of moderate interest rates. Zero and record lows are not moderate by any definition. He is mandated, just as he is to maximize employment, to also maintain moderate (read fair) return on money.
When the cost of money is artificial, all that is measured by that money is also artificial. A few more down ticks in the dollar and Bernanke will be seen in a different light.
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