"We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
-- Ben Bernanke, May 17, 2007.
Wow, how's that for a gaffe!
As I pen this column, housing/real estate is tanking, the subprime/structured finance market is in shambles, the entire banking system is seized, consumer confidence is plunging, initial unemployment claims are rising, banks are begging for capital and durable-goods orders are fading fast.
No spillover, huh? I'd hate to see an economy with spillover.
Yet, from recent
Fed governor speeches, you'd think the biggest threat to the economy was commodity prices and inflation. Those concerns are as ill-founded as Uncle Ben's May statement. Unfortunately, the Fed is driving with its eyes firmly fixed on the rearview mirror.
I am not as certain of economic Armageddon as many bears are. And I have reasonable stock market exposure to economically sensitive sectors of the market, like energy, machinery, retail, consumer soft goods and technology.
But I do believe that recession risks have risen enough to warrant a much more aggressive easing from the Fed. I am very worried that we are close to the point of recessionary no return.
As much as I loathe writing this, the Fed needs to cut rates. Soon. And repeatedly.
You see, I vehemently criticized Greenspan's Fed for his 1% rate deflation hoax. On the cusp of the biggest global infrastructure/commodity boom ever, Easy Al dropped rates to 1% and held them there, in my opinion, to fuel a powerful bull market in risk-taking and cement a strong economy through his retirement.
Many of our problems today, such as the real estate bear market, the great debt unwind and the repricing of risk can all be traced to chasing returns in response to Easy Al's 1% blunder.
And yet here I am, calling for Uncle Ben to do more of the same. Unfortunately, part of the solution to the problem happens to have been the source of the problem -- easy money.
To avoid a general economic recession triggered by a financial-market seizure, we need much lower short-term interest rates.
Robert Marcin
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