This week the Denver Post ran an item, "Bernanke stalwart on inflation, the Fed chairman has been unmoved by recent volatility in the stock market caused by trouble with subprime loans."
The Wall Street Journal headline ran, "Impact of Mortgage Crisis Spreads."
That of the Financial Times read, "ECB injects 95 billion euros to aid markets."
It now appears clear that the crisis we have long warned of is now erupting. Now, we must look to containment.
[Editor's Note:Why the dollar could crash this year.]
But it appears that the crisis is not limited to subprime.
It has become a crisis of confidence and a credit crunch that has effectively frozen the credit markets that are crucial to our general economic well being.
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In the face of this growing crisis of confidence, the Fed has stayed frozen in its anti-inflation stance, seemingly unaffected by the turmoil that has gripped world markets.
Strength and determination are admirable qualities, particularly in the maintenance of strategic goals. But sometimes, tactical actions have to be tempered and adapted to changing conditions.
Never, for a single moment, did Sir Winston Churchill lose sight of his goal of defeating Germany.
However, following the collapse of France and, facing the annihilation of the British army in Europe, Churchill ordered not only a total retreat but a wholesale and rapid evacuation of that army from Dunkirk.
Churchill not only salvaged the army, but allowed the vital flame of hope to remain burning in British hearts.
Hitler on the other hand, lacked Churchill's flexibility and stubbornly ordered "no retreat" from Stalingrad. The result was that he lost over a quarter of a million of his best troops and, worse still, ignited the fire of hope in Russian breasts.
Ben Bernanke is a good man and we would in no way liken him to Hitler. But he should note the lessons of Stalingrad.
As our readers know, we support his anti-inflationary stance. Indeed, our only criticism has been that he should have been stronger.
We think he should have raised the Fed rate to reflect the real "stealth" rate of inflation (now, we believe running at some 7 percent plus) as opposed to the officially "cooked" CPI rate of some 2 percent.
[Editor's Note:Bernanke Reveals `Fiscal Crisis` Ahead]
We acknowledge that our economic patient needs an operation (higher interest rates) to cure the ills that now threaten its well being.
But we believe that the current credit crunch has so weakened us that the long-term goal of cure must now be put aside, in the short term, while we concentrate upon the short-term survival of our economic patient.
Something decisive has to be done and fast.
The first thing to realize is that more of the old medicine, under which our economic patient has floundered, is not appropriate.
Indeed, our present credit crisis has its very seeds in excessive liquidity, combined with grossly lax lending and underwriting practices.
It is hard for us to understand that more of the same medicine, the side effects of which caused our economic patient to flounder, can be good for survival.
And yet, yesterday, our President said, amongst other amazing claims, that he felt the subprime situation was heading for "a soft landing." Well, we know he was a pilot, but surely not for fee paying passengers!
The President also assured us that there would be plenty of "liquidity" — the very medicine that caused the problem!
The rising prices of Treasuries illustrates that there is still plenty of liquidity. Indeed, one problem now facing investors is to find a good, secure home for excessive liquidity.
Liquidity has now reached the point that the Fed funds futures index is indicating a Fed rate cut.
But, rather than cut rates, both our Fed and the ECB have today pumped yet more massive liquidity into the system.
To us, this strategy illustrates vividly that our government is out of touch with reality.
The reality is that we face not a lack of liquidity but a lack of confidence!
In short, the banks are awash with cash, but are afraid to lend.
Restricting liquidity to restrain banks from excessive lending is one thing.
But pushing yet more liquidity at banks that are unwilling to lend is like pushing on a string — most ineffective.
What is needed is a cut in interest rates and soon!
The longer this is delayed; the greater the eventual cut in rates will have to be and the lower our dollar will sink in the foreign exchange markets.
As we have said before, now is the time for bold, decisive leadership, not the inflexibility born of fear.
Some critics will ask why we should lower rates to salvage the reckless greed and irresponsibility of Wall Street and those who were suckered into certain hedge funds.
Our reply is that the first priority should be to salvage our economy.
Once that has been done, we can look to assess blame and act or punish, where appropriate.
Of course, our government may decide that, under the cover of merely providing liquidity, the Fed is already surreptitiously getting the American taxpayer to bail out the mess, by getting the Fed informally to effectively buy the unmarketable mortgage backed securities. Or even to guarantee to buy the securities as a lender of last resort.
Using our Fed to rescue reckless Wall Street gamblers would herald a whole new game and set a very serious precedent for the mandate of a central bank and for ultimate taxpayer legal liability.
In the meantime, we feel that, despite the massive intervention by central banks, the problem is far from over.
We feel our most conservative readers are well advised to continue accumulating cash and gold and to hedge any equity allocations by considering holdings of ETFs that are short the equity markets, with appropriate stop orders.
Editor's note:
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