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June 7 2011  / Opinion Article

Thank You Ben Bernanke


Economics Lesson From Ben Bernanke

Today the market was finally seeing a bounce. It wasn't a big bounce but a cautious bounce. After so many bad days the positive bounce was most welcomed. The technicals have for a few sessions now indicated a bounce should happen and indeed looking at the SPX chart below for today June 7, the bounce started right at the open. Investors carefully picked up some stocks that they felt were undervalued and good for a bounce.

In late afternoon, Federal Reserve Chairman Ben Bernanke began speaking

The market basically "tanked", ending up pretty well where it started. Perhaps investors were anticipating that Mr. Bernanke would announce a third quantitative easing strategy. Why he would do this when QE2 is not even finished is obviously beyond my retail investor's aptitude.


But it would seem to me that the scope of QE2 has not really accomplished a great deal other than pushing risk assets higher and possibly even creating a commodity bubble. However what really caught my attention was the "fighting words" between Bernanke and J P Morgan Chase Chief Executive Jamie Dimon. Dimon suggested that a lot of the regulatory changes to the financial sector by the Federal Reserve were responsible for the sluggish US economic performance. Bernanke shot back a denial indicating that no study has yet been done to look at the changes to credit regulations and how they have impacted banks, let alone the economy. Just a question, but when I run a business, usually I do the study to determine its impact BEFORE implementing them. But alas I guess with my small retail investor brain, such big events as financial reform are beyond my comprehension.

Personally I just don't get it. Bernanke blamed much of the "woes" on the Japanese earthquake - tsunami and indicated he in upcoming months this will dissipate and the US economy and unemployment will improve. But wasn't this earthquake - tsunami written off by most economists as a short term "blip" on the economic front or simply nothing to be too concerned about? While to give him his dues, I don't recall Bernanke indicating anything about the Japanese earthquake - tsunami economic impact, however, shouldn't something have been said about this earlier in the year? I mean, after all I just have a small retail investors aptitude, so I suppose these "big picture" items are again beyond my comprehension, but after investing for 35 years I know that events like major earthquakes in Japan can have long lasting results. The Kobe earthquake of 1995 saw a rise in US unemployment and dip in GDP and it took more than a year for unemployment to decline.

But what I thought was even worse was Mr. Bernanke's economics lesson which comprised more than half of his speech. I won't bore you with the details as you can read them on yourself, but it is painfully obvious that Mr. Bernanke is beginning to feel the lash of critics around the world, not just in the USA. But to be fair let's look at what were the three main goals of quantitative easing.

1) Lower unemployment - this has failed to work.

2) Lower mortgage rates to almost zero in a effort to stop the decline in housing and put a floor under the US Economy. This has failed to happen.

3) Create some inflation in order to reduce any chance of deflation. Personally I realize that food prices are up, gasoline prices, insurance and a lot more, but truly I still believe down the road you will see the fear of deflation return yet again. What seems to be missed by economists around the world is that the baby boom generation which is in just about every world country, is retiring and this means a change in spending habits, saving habits, traveling habits, downsizing of homes, automobiles, and much, much more. There is no way to stem the tied of baby boomers retiring around the world. This will change living standards, GDP, tax levels, pension payouts, world trade imbalances between many nations and a lot more. This isn't rocket economics 101, but just plain knowledge.

So did QE2 do anything? Well it allowed the major US financial industry to re-capitalize their balance sheets thanks to Fed Funds, but short of that the banks refused to lend at next to nothing interest rates, Fannie Mae and Freddie Mac are basically bankrupt, Canadian homeowners can still get a mortgage within Canada for less than their American cousins, which by the way is really weird, and USA unemployment is still stuck at around 10% and truthfully is probably more than 15%. On top of this no one seems to have been "brought to task" for the credit crisis mess, banks world wide still have hundreds of billions of bad debt, non-performing mortgages, trillions in derivative products that no one, even the Federal Reserve seems to understand and mountains of debt, at all levels of government both in the United States and around the world. Is it any wonder that there are so many calls for a rethinking to the Federal Reserve.

On top of all of is the seemingly strange part of Congress, the Whitehouse and the Senate to grapple effectively and realistically with any of the issues. Even the arguing about the debt ceiling is, when you contemplate it, almost insanity itself.

So thank you Mr. Bernanke for the economics lesson. But honestly no one needs an economics lesson because everyone knows the problems with the US economy - it's all about unemployment and housing and yes it is that simple and maybe, its time to think outside the box.

The views expressed in the above article are mine and mine alone. That's why it is called an "opinion article".




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