The Fed - Armed and Dangerous??
From the speculativeinvestor site>
"The cutting of official interest rates may or may not work to support the
stock market and prolong the US expansion (or, at least, help sidestep a
severe recession). However, contrary to popular opinion, interest rate cuts
are not the Fed's main weapon - they are its first weapon. Another weapon
in the Fed's arsenal is the power to reduce the reserve requirements of
private banks - all the way to zero if deemed necessary. But this, once
again, is not its most potent weapon.
The Fed's most effective weapon, should all else fail and it finds itself
fighting a losing battle against the forces of deflation, is its power to
purchase loans and other assets from private financial institutions. The
following passage, taken from Bob Woodward's book "Maestro", discusses the
tactics contemplated by Greenspan and the Fed in the immediate aftermath of
the 1987 stock market crash and highlights the extraordinary power of the
US central bank.
"They [the Fed] had the legal power to buy up the entire national and
private debt, theoretically infusing the system with billions, even
trillions, of dollars, more than would ever be necessary to restore
liquidity and credit. Of course, the result of that would be Latin
American-style inflation.
In addition, there was an ambiguous provision in Section 13 of the Federal
Reserve Act, the lawyers told Greenspan, that could allow the Fed, with the
agreement of five out of seven members of its board, to loan to
institutions - brokerage houses and the like - other than banks. Greenspan
was prepared to go further over the line. The Fed might loan money, but
only if those institutions agreed to do what the Fed wanted them to do. He
was prepared to make deals. It wasn't legal, but he was willing to do it,
if necessary. There was that much at stake. At that moment, his job was to
do almost anything to keep the system righted, even the previously
inconceivable." [emphasis added]
When the US credit bubble eventually unravels, the major risk faced by the
US will not be deflation - it will be hyper-inflation."
Hmm, makes one wonder...
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From todays Barron's>
"It's not at all clear, for one thing, that priming the pump like mad and slashing
interest rates will quite do the trick against a downturn that's rooted in huge
overcapacity brought on by a reckless capital-spending boom and a vastly
overleveraged economy. None of us has been witness to the strange and
more than a little unnerving sight of the Fed pushing on a string, but stick
around and keep your eyes open."
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"The stock market seemed too preoccupied with bad earnings to worry about
sending Saddam a belated Valentine's Day greeting, which shows how mature
and rational the market has become. Next thing you know, the market will
yawn and go soberly about its business every time an analyst announces a
change in his rating on a stock from "buy hysterically" to "accumulate with
great abandon," or a company forecasts a 50% drop in quarterly earnings and
gleefully reports only a 49.5% drop."
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This is where the market guru's come in, people are lost>
The U.S. economic slowdown continued, leaving investors uncertain where to put their money. As a result, the average diversified U.S. stock fund was little changed, gaining a scant 0.1% the week ended Feb. 15, according to Lipper, the fund trackers. |
