Greenbacks from the blue

July 20, 2013 

The Federal Reserve System operates the dams and spillways that control the river of U.S. dollars around the globe. Its job by law is to keep unemployment and inflation low. Its job by expectation is to keep the economy strong.

The Fed's two-item tool kit includes the price of a gallon of dollars (interest rates) and the number of dollars in the river (the money supply).

Paul Volcker (Fed chairman 1979-1986) and Alan Greenspan (Fed chairman 1987-2006) were masters of this complex craft. Ben Bernanke (Fed chairman 2006-present) has kept interest rates low but has failed to lower unemployment or revive business expansion since the 2008 Great Recession. Now he's seeding clouds. Better get the Ark out.

The first financial bubble to burst this century was the dot com stock market crash of 2000. The second resulted from the 2008 collapse of U.S. housing prices. Now Bernanke -- who spent his life studying the mistakes of the Great Depression -- is repeating this century's. The Bernanke Bubble is today's overvalued stock market created by the Fed's unprecedented buying of $2.5 trillion of assorted financial assets since 2008.

Called "quantitative easing" by the obfuscationally gifted, for financial markets this is raining greenbacks. With few other attractive places to go, this flood of cash has driven the stock market almost straight up since February 2009. This is irrational exuberance, the sequel.

Didn't see it coming? Nonsense.

Eric Weidmann


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