Wednesday, April 7, 2010

The Fed's Faux War on Asset Bubbles

Today, the AP reported the Federal Reserve is keeping its eyes open to prevent potential asset bubbles from forming.

Federal Reserve officials at their March meeting stressed the need to make sure record-low interest rates don't feed new speculative bubbles in stocks or other assets.

At the same time, some officials said the Fed's pledge to keep rates low for an "extended period" doesn't mean a fixed period of time.

One cannot help but laugh at the Fed's newfound "hawkish" stance on fighting asset bubbles. How can Ben Bernanke or the Fed board members make this declaration sincerely all while keeping the easy money credit spigot open, uber interest rates (0% to 0.25%), and an unprecedented $2 trillion dollar balance sheet. All of this liquidity has to stick to something. So, where does it go? Doesn't it go into places like bonds, stocks, real estate, commodities? Of course it does. Thus, the policies are fueling bubbles the Fed is supposedly trying to prevent. This scenario is a bit like a habitual alcoholic saying he is going to be on cautious so as to regulate himself from getting drunk while simultaneously sitting at a bar with 10 shots lined up ready to go. The Fed cannot have it both ways.

Read the rest of the article here.

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