The BawldGuy Jeff Brown wrote an excellent post today about Fed Chairman Ben Bernanke and what might happen with interest rates. Jeff’s analysis has lead him to coin the term “Bernanke Judo” for the actions of the current Fed Chair. I’m going to add my own twist and call it, “Judo Economics.” Either way, Jeff describes it thusly:
Bernanke has, in my opinion, played this whole melodrama out while hiding in plain sight, instead of behind a curtain. He’s using what I’m now calling Bernanke Judo. That is, he’s using the other guy’s energy against him, which keeps them off balance. Nobody is paying attention to what he’s really been doing the last few weeks, because he’s got everyone watching his interest rate hand. Meanwhile, he’s been free to play out his real agenda with the other hand.
Jeff goes on to give a masterful analysis of Bernanke’s economic philosophy and how it has lead him to increase the national money supply exponentially in recent weeks. In case you think the San Diego sunshine has gone to the head of the BawldGuy, what he says jives with a recent article from the Telegraph, a British paper. From the article:
How many times has Bernanke had to re-read his own words from 2002 when he spouted off as a junior Fed governor, forgetting he was no longer in the lecture hall? “The US government has a technology called a printing press that allows it to produce as many US dollars as it wished at essentially no cost,” he said, adding with flourish that the bank could even drop banks notes from helicopters.
His point was that the deflation scare was less dangerous than it looked because a collapse of the money supply could always be averted. A disciple of Milton Friedman, he believes that the Fed turned a routine recession in 1930 into a cataclysm by failing to use all instruments available. (He also believes that it made a mistake pricking the asset bubble in 1928).
The telegraph article also raises another possibility, however; the possibility that Bernanke and the Fed will not advocate a rate cut at all this week, and leave rates exactly where they are. Wouldn’t that be interesting?
The real question here, as usual, is “so what?” As in, “so what if the Fed does cut interest rates?” or “so what i
f the Fed doesn’t cut interest rates?”
As far as the real estate market is concerned, I don’t think either scenario is likely to make much difference in our current market situation. Rates are still at historical lows, so lowering them another 1/4 point or even 1/2 point isn’t going to do a lot for many people. One of the main reasons there has been a drop in mortgage originations is that the exotic products and 100% financing products that existed a few years are ago have now mostly vanished. Banks have also become much more stringent in their underwriting and credit approval processes. Lowering interest rates isn’t going to change that. It will just be a bonus for people who are already able to get mortgages. The interest rate also has no direct effect on housing prices or inventories– two major factors in the current market.
The effects of the Fed’s actions this week will have much larger consequences on Wall Street. Investors are the ones who have so heavily invested themselves in the actions of the Fed. They are the ones who are assuming a cut is a foregone conclusion. They are the ones counting those eggs as chickens.
The point is that I don’t think Dr. Bernanke gives a damn about what they think. Well, I guess he does, but it isn’t exactly keeping him up at night. His job is to pay attention to the national economy. Wall Street and the housing market are just two components of the overall whole. That is why his most significant action has been the increase in the money supply. Doing so is a macro-solution, designed to affect the overall economy, not just affecting one or two sectors. What everyone is talking about is the interest rates. Talking about interest rates is much sexier than talking about money supply; but it may not be as important. Ben Bernanke knows this; and Judo Economics is born.
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