Bernanke: No Bail Out for Lenders or Investors

Friday, August 31, 2007

Federal Reserve chairman Ben Bernanke delivered a clear message. There will be no bail out of lenders or investors.
Markets had rather hoped that Bernanke would indicate he has an interest rate cut up his sleeve but went nevertheless northwards, brushing away a message from president George W. Bush who announced measures to help debtors in preventing a foreclosure, but ruled out assistance to speculators. Except for bonds everything else went up too: oil, foods, the Federal Reserve Dollar and precious metals.
In his speech at the Fed's annual equivalent of a summer picknick in Jackson Hole Bernanke briefly touched the Fed's short term agenda before entertaining high calibre guests with a historical timeline of the US housing market.
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.
The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country. Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.
What is still left is a clear perspective of the Fed's view on the housing mess. Instead we are left with sentences as such:
As you know, the downturn in the housing market, which began in the summer of 2005, has been sharp.
As you know, the financial stress has not been confined to mortgage markets.
Concur, but what does that mean for monetary policy that turned from fighting inflation to solving the credit crunch in 10 days in August?
Only a few weeks in the crisis the magical touch of central banks has vanished in the smoke of billions burned in CDO hell.
Easy monetary policy won't help as it is the root of the problem in the first case. The mortgage excess has not created an ownership society but a nation of debtors and is the direct consequence of Alan Greenspan's wide open liquidity tap.
It is not liquidity. It is money=debt.
In the past 35 years central banks have countered markets' seizures with ever more debt, propelling debt on all levels to staggering amounts.
All debts have always been called at one point of time in history.


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