The Fed is in control of almost nothing.
Those that think the Fed will not allow such and such a thing to happen might wish to read this.
hussman.net
Personally, I feel a little bad for Bernanke – though as I noted in the October 31, 2005 comment, he more or less invited all of this criticism by focusing on an inflation target which can't, in fact, be controlled by the Fed, and can only be measured effectively with a lag. Remember that the Fed does nothing except determine whether government liabilities will be held by the public in the form of bonds or in the form of cash (currency and bank reserves). The actual quantity of those government liabilities is not under the Fed's control, but is controlled by Congress through its fiscal policies. If fiscal policy makers insist on creating a flood of government liabilities (as they currently are), the Fed's decisions will have extremely little importance or impact in avoiding the resulting inflation. The Fed's policies are important when there is a panic for liquidity, such as bank runs and financial crises, but unless bank liquidity is actually constrained (and it doesn't appear to be presently), the Fed's moves are largely irrelevant.
So it's important to recognize that the economy just isn't that sensitive to little moves in a short-term, Fed controlled interest rate on bank reserves that back an insignificant portion of total lending activity (see Why the Fed is Irrelevant). The economy may very well be in for trouble (credit spreads are just starting to widen, consumer confidence spreads show sudden weakness in future versus present conditions, aggregate weekly hours are stalling, etc.), but though Bernanke may be used as an excuse, he really isn't going to be the cause, regardless of what the Fed does next.
In any event, this sight of nervous investors hammering on Ben Bernanke could be an important signal – maybe the next best thing to actually ringing a bell at the top.
What?!! How can I even mention the notion of stocks being vulnerable when we're so “clearly” oversold and close to a bottom? Well, the S&P 500 is only down about 5.5% from its peak of a few weeks ago, and it's precisely the “fast, furious, prone-to-failure” rallies that keep investors holding on until an enormous amount of damage is done. As I've noted before, bear market psychology typically evolves something like this:
"This is my retirement money. I can't afford to be out of the market anymore!"
"I don't care about the price, just get me in!!"
"It's a healthy correction"
"See, it's already coming back, better buy more before the new highs"
"Alright, a retest. Add to the position - buy the dip"
"What a great move! Am I a genius or what?"
"Uh oh, another selloff. Well, we're probably close to a bottom"
"New low? What's going on?!!"
"Alright, it's too late to sell here, I'll get out on the next rally"
"Hey!! It's coming back. Glad that's over!"
"Another new low. But how much lower can it go?"
"No, really, how much lower can it go?"
"Sweet Mother of Joseph! How much lower can it go?!?"
"There's no way I'll ever make this back!"
"This is my retirement money. I can't afford to be in the market anymore!"
"I don't care about the price, just get me out!!" |
