The market farce has reached new heights this week as concerns surrounding the Italian election and the growing risks of the Federal Reserve extreme monetary policy stimulus were saved by the congressional testimony of Fed Chairman Ben Bernanke.
By Anthony Mirhaydari
2/28/13 MSN Money
The market farce has reached new heights this week -- with the Dow Jones Industrial Average ($INDU +0.21%) zooming to new post-recession highs -- as concerns surrounding the Italian election and the growing risks of the Federal Reserve's extreme monetary policy stimulus were salved by congressional testimony by Fed Chairman Ben Bernanke.
Bernanke told Congress he saw no reason to stop QE3/QE4 because the benefits are clear and the risks low (we know different, however). A better explanation is that the Federal Reserve's meddling has messed up the normal relationships between the business cycle and interest rates, and he is becoming increasingly desperate to justify his downright reckless efforts.
So while, on the surface, things appear to be just peachy, Wall Street insiders are beginning to worry as evidence builds they're already moving toward the exits.
The truth is, there are deep structural problems with the economy that cannot be solved by more cheap money. Wall Street knows this. Washington knows this. And above all, Bernanke knows this.
But he can't admit that. And he feels he can't stop flooding the financial system with cheap cash until higher inflation -- via energy and food prices -- forces him to. Thus, despite rising skepticism and nervousness amongst other Fed policymakers, Bernanke remains steadfast in his commitment that an open-ended commitment to pump $85 billion into the economy each month is a good idea.
His logic became so twisted that, in response to a question from California Representative Miller concerning the impact QE3/QE4 has had on mortgage rates (not much) and whether it was time to pull the plug, he deployed circular logic.
Bernanke replied, oddly, that the best way to get interest rates up is to have low interest rates.
In essence, he is saying that by holding rates low, economic growth will follow and interest rates will rise.
Of course, despite six-years of 0% interest rates and five distinct balance sheet stimulus efforts, 10-year Treasury yields are trading below their financial crisis low of 2.1% -- moving below 1.9% earlier this week. And this is despite the economy has been growing since 2009 and has already moved beyond its 2007 pre-recession high.
So while monetary policy had to a role to play back in late 2008 and early 2009, it's done all it can do. The Fed is just risking another asset bubble and other unknowable risks from its unprecedentedly aggressive actions.
Why continue? Washington is paralyzed by the fear of what would happen if A) we fall into a new recession with unemployment already near 8%; B) the stock market, one of the only bright spots of the current recovery, turns lower and drags down household wealth with it; and C) interest rates start pushing higher, forcing Democrats and Republicans to find a solution to the debt/deficit problem as the cost to finance our $16.6 trillion national debt explodes.
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