Monday, March 31, 2008

Fed's Actions Inflationary?

I think the Fed has been the suitable punching bag to blame all financial and economic ills on. Much like the role of Tung Chee Hwa for HK during Asian financial implosion. Bernanke will get it left right and center no matter what he does as there will always be somebody who doesn't like what he does to bring up their own points. Hear the experts on CNBC or Bloomberg and you will find all kinds getting in their two minutes of fame.

I will try in this posting to be as fair as possible to Bernanke. Regard me for the next few minutes as Bernanke's best friend. The sub prime and credit implosion, well he wasn't there long enough to create the mess. Much of the mess should be attributed to two main sources: one, Greenspan keeping interest rates too low for far too long in 2001-2003; two, the fucked up ratings agencies, well there are the 3 main ones really - they really have a license to print money, they get to rate all kinds of debts and investors base their decisions largely on their ratings. Much of the sub prime mess now can be traced to papers rated as AAA by these agencies. By virtue of their rating, the banks are then happy to leverage up to package them as prime low risk instrumets. If they are AAA and low risk, well it should be ok to leverage on them. Of course banks have to do their own due diligence, risk assessment and research, but aren't these rating agencies paid to do a certain task. If they get paid to do the rating, why shouldn't people who pay them be able to rely on them. Why are the investors or banks then have to do their own research on these papers again? Why then aren't any of them being sued to the hilt by the banks???

Fed's been pumping too much money into the system, to the tune of US$400bn so far and also standing for US$30bn for the Bear Stearns-JPMorgan deal. Well, Fed has to do it as the situation was looking to be turning into a banking confidence crisis, and you cannot have the entire credit market totally shut down - the ramifications which will be very hard to undo later. As for pumping liquidity - the Fed has also been simultaneously selling a lot of Treasury securities while pumping in the US$400bn, this shows that the Fed is also trying very hard to neutralise the extra liquidity in the system.

Bernanke also knows that with a credit bubble imploding, that is likely to be highly deflationary. Property prices have been correcting rapidly, another deflationary factor. Hence the pumping in of liquidity by Ben is thought out to some extent.

The one factor which will be affected by Ben's recent moves is the dollar outlook. The dollar will continue to weaken as the liquidity being pumped in is to sustain questionable debt. The US deficit while being lowered in recent times, still has a long way to go. Though Ben and Paulson might not say so, they both want a weaker dollar, if that's what it takes to reduce the trade deficit, maintain confidence in the financial system and ride out the credit crisis. I think the fact that Ben did not come up with the Super Fund which was to buy all these questionable debt from the baks (though they were heavily favoured by the affected banks) indicate that both he and Paulson wants the correction to play itself out and the bad decisions made by banks be punished on its own accord by market forces. Having said that, they also do not want to see confidence being eroded substantially, which prompted the heavy handed rate cuts and the US$400bn injection.

In actual fact, Ben and Paulson are smartly exporting away their problems to other countries whose currencies have strengthened - but in reality shouldn't have. Its ok for the ringgit, OZ dollar, Canadian dollar and the yuan to strengthen against the dollar. But the ones like the Euro and yen and pound are headed for future grave problems - they don't have the trade surplus nor can they compete effectively with such artificially strong currency vis-a-vis their lifestyle, consumption patterns and labour pricing effectiveness. Those "not deserving" of the current currency gains against the dollar will suffer over the next 12-18 months.

Be a friend, give Bernanke a hug.

p/s I know many will not even know the girl in the photo... she is a model, Joyce Sialni from Klang


Encik Wan said...

Yes, I can give Ben a hug since he is in a difficult position. At the same time, I will convert a portion of my retirement money to gold coins. Main reason is to reduce possibilities of my retirement money being used against my retirement portfolio. Some of reasons for converting some of my retirement money to gold coins are
1. Remove intermediaries, e.g. banks, brokers. Banks cannot use my retirement money to improve yields at the expense of my retirement portfolio, e.g. reckless lending. Brokers cannot use my retirement portfolio for short selling.
2. Reduce demand for paper currencies. Central banks can do whatever to their currencies for whatever reasons. Leave my retirement net worth alone.

etienne said...

Encik Wan,
I don't beleive it. A goldbug! A bonafide Malaysian gold bug! Of all the things to find here, this is the rarest of the rare. Great piece as usual, Dali. But the point here is - What do we do about it? I have no doubt about the bullishness of gold, with some calling tops at US1650, US2300, US5000 and yes, even US10,000+ but what would the USD be worth? Their monetary policy now match the hyperinflationary route taken by Wiemar Republic in the 1920's and as the whole world holds dollars in reserve, we will not be immune when TSHTF. In fact it's already starting now.

etienne said...

Just one more thing, a quote from Thomas Jefferson during the drafting of the American constitution:

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

The americans are now paying for disregarding the advice of their founding fathers. In fact, in light of current happanings, this is a true blue prophecy. We will be next if we don't take steps to protect ourselves.

xatomic said...

Its a prettier sight to look at your fresh set of models everyday than the ugly market :P

Von Siong said...

Haha . ..

The model look ok and sweet wo ..but do you post the guy pic ? haha . ..

what are u view with the subprime >
what is the level of bottom?