Thursday, January 31, 2008

Unexpected Fed Consequences

"High finance, like some unreliable common stock, goes lower and lower. How did so many experts misjudge so badly? ... Economic growth was no longer spasmodic but smooth and almost predictable. The name [Ben Bernanke] gave to these manifold blessings was the Great Moderation, and he thanked the Fed, in which he then served as a governor under Alan Greenspan, for helping to bring them about. But it was actually the Great Complacency that Mr. Bernanke had put his finger on. In finance, to borrow from the economist Hyman Minsky, nothing is so destabilizing as stability. The paradox is easily explained. Profit-seeking people will take more financial risk when they believe the coast is clear. By taking bigger chances, however, they unwittingly make the world unsafe all over again. ... And nothing builds confidence like the magic belief that a greater power has conquered the business cycle and laid inflation low. ... As for the crackup in complex mortgage-backed securities, now at the center of the debt predicament, the global bank UBS has justly called it 'the biggest failure of ratings and risk management ever.' ... Yet inflation was almost an afterthought in the press release in which the [FOMC], the central bank's policy-making arm, explained its surprise intervention: 'The committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.' ... Bernanke ... is likely to keep the Fed's rate low--lower, even, than the measured inflation rate. ... The trouble is that, while the Fed is America's central bank, the dollar is the world's currency. It lines the vaults of central banks of America's creditors", James Grant (JG) at, 27 January 2008.

I agree with JG. JG is saying: the capital market line's slope decreases when people are optimistic. Amen. That the FOMC "expects inflation to moderate in the coming quarters" is interesting. Does it?


Tom Stone said...


Independent Accountant said...

Are we back to Barron's 1979 comment about the Chairman of the Fed?