Bear sale, Fed moves send dollar tumbling

Rome is burning.

To everyone reading this — just remember what’s important in your lives, and that’s your families, your friends, and you communities. Once Bernanke’s done sabotaging the economy, and destroying your savings, you’ll still have the ones you care about. The b-st-rds in Washington, and in OPEC, and on Wall Street won’t matter a damn in the end. Your family, friends, and those you care about will still be there though.

This is in reply to the 10th post (by Sudosai Entist)…

(A small suggestion to FORTUNE for a simple improvement — maybe your system could just NUMBER the individual posts?)

I don’t know what good it would do to know how bad this might all become. Other than to scare a lot of us. For what could we do at this point in the Big Cycle? Other than letting time heal the economic system.

I suppose that if things turn out worse than some of us expect, one “good” thing that might come out of this is to have the academics and intellectuals write more papers at the FED to rationalize why this mess is not the FED’s fault.

The Austrian School the writer is referring to has been saying for a century, that for every joyful artificial boom created by so-called easy credit, there will be an equally painful bust, as the credit artificially injected into the financial system is unwound, that is, liquidated.

I agree in principle with the writers below that perhaps this time, easier and looser credit standards will not help, and may make things materially worse. As Colin Barr’s article suggests “the message isn’t comforting traders in the foreign exchange markets, who sent the dollar plunging again Sunday night after markets opened in Asia.”

This time it may really be different. This time, only TIME and not any of the Fed’s short-term interest cuts, nor any of its other interventions, may be what will help.

The allusion to drugs is appropriate. In the 1920’s when Benjamin Strong of the Federal Reserve, boasted to a French central banker that he had goosed the U.S. economy with a “Coup de Whiskey” (of easy credit) he thought he had done a good thing. That was part of the Roaring Twenties and its mentality. It led directly to the Great Depression.

Today, easy money seems to be the only drug the FED can administer. It is the only “weapon” in its arsenal. Of course the FED can apply this first-aid in many ways, some quite “unconventional” by its own admission. These include the direct purchase of “assets” — where otherwise such assets are not worth much to anyone, like the now gone-bad MBS’s (mortgage-backed securities) and other types of credit “paper”.

What all these methods have in common is exactly what got us here in the first place — more easy (paper) money. The bailout of Bear Stearns will be followed by many more such bailouts “as circumstances dictate”. What the FED has many times in the last decade encouraged all of us to think — and it has changed popular mentality in so doing — is that the FED stands ready like some Super Hero, a Zorro or a Superman, to create ‘liquidity’ when and where it is needed. The ultimate financial moral hazard.

The FED says it will never bust a growing asset bubble, but it will “mop up” after the bubble explodes. This is because it believes that “no one can recognize an asset bubble in the making”. But it says the asset bubble can be recognized once it blows up and blows a lot of the rest of us up with it.

The FED’s policy is ludicrous. The Economist magazine has written many cover stories over the last decade from the Technology bubble through to the Housing bubble warning of the perilous state of such bubbles and the likely, very damaging, outcomes from the eventual natural bursting of such bubbles.

As many have indicated in this web log, the last thing the consumer needs to be encouraged to do is to take on even more personal debt. In the “good old days” bankers and governments would encourage us to save. What went so horribly wrong?

For a Central Banker, Mr. Bernanke has said some really bizarre things. The European Central Bankers for example are probably too polite to say it in public, but for them Ben Bernanke is not a bona fide Central Banker. When Mr. Bernanke wrote in 2002 for his now famous (or infamous) “Helicopter Ben” speech that any determined government and central bank can force the people to spend more of their money, he did not sound like any bona fide central banker that the Europeans could recognize.

Please see the link for the full text of his fascinating speech: http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

Ben Bernanke in essence said that, in a situation of deflation, if the American people were not prepared to spend enough of their own money — or other people’s money, in the case of that part of the population who had no money to spend and would have to borrow — he could force them to do so. That he had at his disposal an invention called the ‘printing press’. Mr. Bernanke was prepared [in my words] to destroy the currency to save the economy, but in so doing, IMHO he would of course destroy them both.

He claimed in his speech that by threatening to so debase the American Greenback, no one would want to hold it. That everyone would naturally spend it ASAP for anything they could buy. Thus came to be born the “Bernanke Machine to Increase Aggregate Demand at Any Cost and By Any Means”. This is part of our Modern World and its morals.

And this guy is the head Central Banker of the leading nation in our world. I hope what he said is a bad joke. Time will tell, since I think Time will test the FED on this.

Sad to say, Bernanke is reflecting popular attitudes. Who created those attitudes is a subject for sociologists, but let’s just say that this type of thinking is exactly what prevailed in the Roaring Twenties. And we know how and what changed those attitudes. That may be what it takes this time — although this is a ‘lesson’ that I would not wish on my worst enemy.

The other thing is that Bernanke operates within a system that is frail and faulty. The paper money system is open to abuse, and in a way that is far, far too easy. It has few checks and balances. It is man-made and can be man-unmade. The fiat money and fractional-reserve banking system, along with our ‘modern’ financial system, with its creative ‘geniuses’ who strive for ever-newer financial instruments and techniques, with little or no oversight from regulators and regulations, have to take their share of the blame. Any paper money system is open to just so much such abuse and artificial manipulation. The incentives are just too obvious to resist.

If we could just recognize, as an example, that huge money is made from Foreign Currency Trading, or Bond Trading, activities that at their core add nothing to our mutual lives, and employ people who could actually be doing useful things with their lives and helping to solve society’s pressing problems. Why do these activities (and many more like them) need to happen today? Because we use paper money and different national governments choose to inflate their currencies (that is, debase them) at different rates. Thus is born a multitude of ways to arbitrage the system and make oodles of money.

As far as injecting easy-money into the system goes, in order to “fix” it, if that were the answer to our current problems, then Zimbabwe would be the poster child of how to solve one’s economic problems with its “printing presses” running “red-hot” as the writer below mentions.

One defense that should be made for the FED is that it has an almost impossible, dual, mandate. The European Central Bank does not have its hands tied by such a mandate. Whereas the FED has not only the value of the U.S. currency to defend as one of its primary mandates, it also has as an equal and polar-opposite objective — namely, to keep the American economy humming to ensure full employment. This is laudatory as far as the statement of such goals could be faulted by no one. But these conflicting goals may be unachievable in reality by a single institution. The other Central Banks in the developed world do not shackle their Central Banks with these two conflicting “job descriptions”.

Modern economic experience has shown that a Central Bank operating with a paper currency can only realistically hope to achieve the maintenance of its currency’s purchasing power, and even that, probably not very well. When the FED is asked to both ensure that the economy operates at full employment and then is also asked to maintain the purchasing power of the U.S. currency, it will at times, be in conflict with itself. It cannot achieve one goal without jeopardizing the achievement of the other. It may even be reluctant to burst obvious economic bubbles, because then it will be going against one of its mandated objectives.

As well, in ensuring that a bubble is maintained over a long period of time, it can be setting itself up for future failure. That is the situation we appear to be in at the present time in history. The FED does not know what to do. If it puts the pedal to the metal it can ignite inflation; if it doesn’t it will prolong the mess we are in. My personal take on it, at this time, is in agreement with the writer below — we’re really in it, and it is going to take a long time to clean off our collective boots.

The other more germane question to be asked, is whether a Central Bank, can realistically even achieve the modest single goal of monetary stability. Milton Friedman argued that it could not. He would have used a mechanical rule (a computer in essence) to control the money supply. He saw that no human alive could ever be free of the conflicting emotions and incongruous reasoning, and free from the political interference, that would make the job virtually impossible. He felt therefore no human or group of people could do the job better than the application of a Rule of Calculation.

Over the last century and a half, we first abused and ultimately, over time, destroyed and threw away a good, but not perfect system, under the gold standard. Return to that regime is not going to happen. In the long run we might be stuck with our Central Bankers.

“Where have you gone, America, a world turns its lonely eyes to you.”

(with apologies to Simon and Garfunkel and to Joe DiMaggio)

like jim roger said the fed should resign

they are dangereous and donot know what they are doing.

they are bailing out some hedge fund groups on wall street and have no regard for the dollar

papper money has no value anymore

prepare for doomsday!!!

The Fed cut the emergency lending rate it charges at its discount window to 3.25% from 3.5%. The Fed also created another lending facility for big investment banks to secure short-term loans - its second such move in as many weeks.

If only it were that simple.

One of the reasons we cannot begin to comprehend the small impediments that block our return to normal economic times is the passage of time since something similar happened. Human perception does not easily absorb and understand historical events that happened before one’s birth. The current situation last happened before the lifetimes of most of us. Our frame of reference fails us. We think this is a normal downturn.

So we sanguinely and calmly recall that such interventions have “worked” over the last 68 years, or so, for other downturns — although those “interventions” were likely adding to the long-run problems and deluding us into overestimating the power of the FED to “save” us — the final manifestation of which we are now dealing with. But this is most likely not your Father’s or even your Grandfather’s historical cyclical downturn. This is an inflection point of unimaginable severity IMHO [in my humble opinion]. It will have worldwide consequences before it is over. This may be the end of the Big Cycle.

At what point does a system create too much debt? And is there even such a thing? I would suggest we are in such a situation with the present conundrum. Once anything expands beyond its ability to hold onto its bloated size it will begin to contract. Thus it is with the Credit Bubble. The Expansion Phase of Debt is replaced with the Implosion or Contraction Phase.

The current situation is atypical in every way we, who are alive today, can possibly imagine — except perhaps for those few still-living Children of the Great Depression. The sooner the Fed and everyone else come to grips with this fatal analytical flaw, the better we will begin to comprehend what we are dealing with.

Before this is all over — and I think it might be 2020 before we “dig out” — we may all turn to the numerous analyses done by the so-called Austrian School to try to appreciate what is really going on.

We have broken the whole money system. It can no longer properly function to send the correct signals for decision-making and resource allocation. This is a problem 30 or more years in the making. It will not go away overnight.

We have been running the system red-hot for a long time. It will cool us and itself before it can be stimulated back to life. What we are doing is not jump-starting anything. If anything we are electrocuting a dying patient.

When any system — whether it be a social, economic, or biological system, or even an individual human organism — has been entropically so mismanaged for so long, it will completely fail before it can recover. When crack-cocaine finally kills, the same individual patient will not recover.

But our crack-cocaine of easy money has not yet entirely killed the patient. Let’s not be fooled into thinking that the FED can “calm markets by showing it will act as the lender of last resort to a financial system in crisis”.

It can instead kill us, if we follow the typical — and sad-to-say, only — prescription the Fed, and the rest of us, seem to know — more easy money.

We need to learn from this experience so that we never allow it to happen again. Then at least we can take some small solace in knowing that a great good has come from this needless tragedy and the needless coming suffering of so many.

Good Luck America, our world’s economic health depends on yours!

This is so very important as the sad history of the 20th century showed us. From our economic health we derive so much of our physical, mental, and cultural health — we don’t acknowledge this because, in our lifetimes at least, it has been like the air we breathe — always there to breathe and thus completely unnoticed by most of us.

Good, I hope that we soon see the yen trading at 80/$1, and a similar deterioration in the value of the dollar elsewhere.

Of course it will be somewhat painful to take our dose of inflation that comes with it, but perhaps for the first time in 20 years since the Reagonomics “deficits don’t matter” bull that began all of this, our manufacturing sector may finally gain a bit without our ridiculously over-valued dollar.

For how long exactly did you believe that the 6% current account surplus would continue, and where exactly did you think all of those petro-dollars and all of the other recycled currencies were going? Into keeping out bond yields low, our currency overvalued, and our manufacturing shriveling, just so long enough as we dumb Americans would remain fat and lazy enough to keep on borrowing.

Let the good times roll. . .

All we need to do is filter our dollars through some currency crosses, maybe the Pound/Yen. By doing this we extract a profit from the exchange and then pay our debt’s with the profits. If we could do this on a large scale, we could start rebuilding the dollar. A simple dollar extraction program.

O.k., Asia? Ha! They don’t need us! The whole world will keep on after a short term problem in their economic markets. The problem is US!!! The dollar is being allowed to collapse by the multi-national corporations (mostly foreign owned) in order to destroy our middle class, which stands in the way of their aims. When greedy people get rich, they don’t get less greedy. And they want it all! And they will have it. Barney Frank and other economic morons are making it worse by using the government to “slow” the economic recession, thereby making it worse for most Americans, but allowing the super rich bankers, et al, to escape like bandits.

The US dollar has to be devalued in order to implement Amero. ‘nuf said.

With one brilliant stroke America owes the world billions less. China holding hundreds of billions in T-bills must be feeling the pain, which will only increase as the full effects of a lower dollar value come into play.

It’s not Asia that’s running the dollar down! It’s 8 years or relentless budget deficits and corruption at the mortgage business. Perpetrated by people like you and me: Americans!

okay, lets see if if the US can live with $200.00 / barrel oil by El Cid/ Christmas. I am sure that it will not change the spirit or souls of the american consumer.

As the dollar falls it will be time for the average american to get a raise so we can buy Milk and bread.

“**** the exchange rates , the US ecomnomy is Strong enough to fight wars, change the face of the earth and Still put people to the ends of the space just becouse we belive in freedrom as we focus on the really big picture show, the beliefs of human rights, free trade and the opportunity to excel and believe that the world will change despite terrorists, anarchists, and the old school communist.

if the world would step up and face the issues as an adult, perhaps, the thoughts of freedom, and space travel along wiht the development of arts, science and love and happiness will over shadow the tarrany and stupidity that overtakes a weak mind and dissenchanted soul.

Good luck all you foriegn people as your countries fail to reighn in and educate people about the benifits of education and the freedoms of discussion, congregations and organized politics that continue to fail in the second and third world nations.

name and address with held for security purposes

Marcos clearly has a problem.

The rest of the world is busy working to create value, but the U.S. is quickly spending everything it has accumulated over the past few generations, while saving nothing.

If the current trends continue, the only thing an american dollar will buy is air. Every year it is worth less, how much longer before it is worthless?

I would rather own an ‘Asian’ Automobile than American (not just Japanese), even though many ‘American’ and ‘Asian’ autos are made (assembled) in Canada.

The current crisis was not made in Asian, so you should not blame Asia. It was made in America.

Remember though, that you are correct. If the (U.S.) dollar falls, you will not be buying as much from Asia. However, that would be because you can’t AFFORD it!

It used to be that gold underlayed a currency. Now manufacturing capacity and energy capacity (ie, oil reserves) backstop a currency. Given that America has surrendered manufacturing, has meager energy reserves and massive debt, the dollar is due for serious, sustained plunge.

Ok Asia, run the dollar down and see how much of your tin crap, fake brand names and low thread count cotton products we will be buying in the future and then we’ll see who will be sucking air.