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Nobody Behind the Curtain — Cookies and Milk — Judo — And NOT Repeating History

What went on with the speculation about the Fed Funds Rate all last week, and will surely intensify today and tomorrow, has been almost, but not quite analogous to the scene in The Wizard of Oz, when we discovered there was a man behind thehide in plain sight curtain. The characters were told to ignore him — by the guy behind the curtain.

Dr. Bernanke is not in any way analogous to that guy.

Bernanke has, in my opinion, played this whole melodrama out while hiding in plain sight, instead of behind a curtain. He’s using what I’m now calling Bernanke Judo. That is, he’s using the other guy’s energy against him, which keeps them off balance. Nobody is paying attention to what he’s really been doing the last few weeks, because he’s got everyone watching his interest rate hand. Meanwhile, he’s been free to play out his real agenda with the other hand.

The almost humorous part of his plan is how simple it’s been to execute — again — in plain sight.

First he treated all the whiners on Wall Street like petulant children by giving them all cookies and milk. It came in the form of a cut in the Fed Discount Rate. Everyone smiled, and the warm and milk and cookiesfuzzies returned to the land of bulls and bears. Confidence was bolstered.

Then they all took a nap — as he knew they would. He knew exactly how to manage their fears and frustrations. Sure, they kept complaining, but they kept it down to a low, manageable roar. They figured they’d finally thrown enough tantrums to get their way.

Bernanke also knew that beyond everything technical and debatable, the one thing he couldn’t let fall below the critical floor, was confidence in the economy as a whole. He cut the discount rate.

So, what’s he been doing you haven’t heard much if anything about the last few weeks? Making history, that’s what.

I can’t find a two week period in the last 40 years where the Fed has increased money supply by over $110Billion — can’t find it. That doesn’t mean it hasn’t happened, but you have to agree, that’s a monster increase in our money supply. (That’s M2 for the econo-nerds.)

up arrow

This move will, (I theorize) spur the stock market — and please believe me, I don’t say this lightly — to heights we haven’t dreamed of. That kind of added liquidity in this set of circumstances relegates whatever Bernanke chooses to do with interest rates tomorrow — anticlimactic. The only argument that makes rate cuts more likely than not, is the absolute requirement of — confidence.

Bernanke has already applied what he believes is the primary medicine, which is to massively inflate the money supply. Bet you haven’t been reading about Demon-Inflation have you? Of course you haven’t.

Like I said, he’s hiding in plain sight.

He’s studied the Great Depression like no other Fed Chairman before him. He believes in his DNA the Real Estate market’s fall in 1927 was the first domino to tip over — which he believes lead directly to the crash of 1929. What’s worse, he says the Depression was probably caused, and made much worse by the actions of the Federal Reserve, only about 16 years old at that point.

broken arm

They simultaneously raised interest rates while contracting the money supply!

That’s akin to treating a broken bone with a sledge hammer. Just stupid — or to be kinder — economically naive.

The tipping point for me came when I saw the report on the massive money supply increases last week. Bernanke, while hiding in plain site, has been executing his solution right in front of us. Meanwhile, everyone is running around worried about the Fed Funds Rate. The only reason we’re probably gonna see that rate cut tomorrow, is because Bernanke wishes to boost confidence. In other words?

Another round of cookies and milk for everyone!

As far as he’s concerned, he’s given our economy the primary medicine it needed so badly. He did it first, and with no real discernible fanfare.

Are there other very sound arguments for cutting the Fed Funds Rate? Of course there are. I’m sure Bernanke can make all of them — pro and con. But if you’re waiting for him to go all Greenspan on us with interest rates, you should order out, cuz you might have a long wait.

Also, with the supply of money increased this much, which way would you expect the various interest rates to go — all by themselves? This will plausibly result in downward pressure on rates, avoiding the need to cut the Fed Fund Rate to 1%. Remember, in large part, that’s why we’re where we are today.

Will it prove to be the catalyst to a very solid recovery? Will the stock market move to heights not yet said out loud in public? (Over the next 3-4 years.) In my opinion, yes to both. heavy liftingWill many give the credit to rate cuts? Did the sun set in the west yesterday? In my opinion, they’ll be incorrect. That said, I don’t mean to imply rates aren’t a crucial factor in the big picture of where we find ourselves. I simply believe they’re secondary to money supply. Rate cuts will of course prove to be crucially important to overall confidence, and the market, but increasing the money supply spectacularly is what will have done the heavy lifting.

Bernanke isn’t afraid of the ghost of Inflation Past.

There’s room enough for an 18-wheeler to disagree with me here. However, given Bernanke’s apparent belief in what caused the Great Depression, and his moves so far, I’ll stick with this scenario.

Again — just my opinion.

That, and my heavily armed Starbuck’s card will get us some coffee (no milk, please) and a big cookie.

17 comments

17 Comments so far

  1. Daniel Rothamel September 17th, 2007 10:44 am

    That post is the equivalent of a nasty 3-2 curve ball.

    Or for those who don’t like baseball, perhaps it is best summed up by the guys on the Guiness commercials. . .BRILLIANT!

    The BawldGuy does it again.

  2. Judo Economics– Well Done, Dr. Bernanke September 17th, 2007 11:43 am

    […] The BawldGuy Jeff Brown wrote an excellent post today about Fed Chairman Ben Bernanke and what might happen with interest rates. Jeff’s analysis has lead him to coin the term “Bernanke Judo” for the actions of the current Fed Chair. I’m going to add my own twist and call it, “Judo Economics.” Either way, Jeff describes it thusly: Bernanke has, in my opinion, played this whole melodrama out while hiding in plain sight, instead of behind a curtain. He’s using what I’m now calling Bernanke Judo. That is, he’s using the other guy’s energy against him, which keeps them off balance. Nobody is paying attention to what he’s really been doing the last few weeks, because he’s got everyone watching his interest rate hand. Meanwhile, he’s been free to play out his real agenda with the other hand. […]

  3. Robert Kerr September 17th, 2007 11:53 am

    Caveat: I’m not prescient; this is just my opinion.

    A fed funds rate cut seems in the bag. Bernanke has shown that he can be bullied and he’ll cave tomorrow.

    Will a funds rate cut help housing? I don’t see how. The housing problem isn’t mortgage rates are too high, it’s the fundamentals which are still badly distorted.

    Income:price, price:rent, PITI:income … none of these work anymore at these prices.

    Will a funds rate cut help the stock markets? Perhaps. Some believe the rate cut is already priced in. I find myself agreeing with that position because ignoring the assumed rate cut, the last few weeks make no sense in the shadow of the jobs and retail sales reports.

    It seems obvious to me that we’re racing head-first into a recession. If the first negative quarter isn’t Q4 ’07, then it’ll be Q1 ’08.

    I agree with your assessment that Bernanke is inflating the money supply and that worries me. We could end up in a stagflationary period if the Fed is not very careful.

    I would be thrilled to be wrong about any or all of this and have the economy roar back to life in the next 12 mos.

  4. Apella September 17th, 2007 12:33 pm

    Jeff,

    I like this and have been wondering about all this “new” cash as the billions just keep racking up. I am glad that you touch on this. This is a great post. I think that the fed went to the same magic school as the Citi crew. Now with Greenspan in the press pumping more hype in the interest rate issue who needs to hide with a distraction like that.

  5. Bob in San Diego September 17th, 2007 2:02 pm

    I don’t believe Bernanke has been bullied. IMO he is much more the car dealer, letting you bask in arrogance as you drive away from the dealership in your new car thinking you just out foxed and out negotiaed him, all the while he got just what he wanted in the deal.

    Jeff got it right. Nice post.

  6. Tom September 17th, 2007 2:09 pm

    Interesting…. that amount of 110 Billion is the same price tag that Hilliary Clinton is putting on her Health Care Plan – Redux

    Great Article, I like the Milk & Cookies analogy, I think the 110 Billion could equate to some rather Lascivious Brownies though.

  7. Jeff Brown September 17th, 2007 3:27 pm

    Robert – The background music that seems to be playing in all the WSJ reports and articles, along with the cable shows, is, We Need Liquidity. The $110Billion retired that song for at least awhile.

    Recession is always on the menu in these circumstances. Like we all do, I like what UCLA, heck, even Greenspan says about recession, which is we’re probably not headed there. Where do they shop for crystal balls? :)

    Many believe Greenspan helped cause the tech crash of a few years ago. Bernanke isn’t doing what he did, and more importantly, he’s doing what Greenspan did way too late.

    Even if we do hit a recession, which I think is less than 50/50, let’s keep our fingers crossed it has same weak effect of our last one.

    And yes, Fed Funds rate isn’t gonna do that much for home rates. And you’re also right, in my opinion, about interest rates not being the culprit today.

  8. Jeff Brown September 17th, 2007 3:39 pm

    Apella – Greenspan is acting as a great decoy for Bernanke, as you’ve so adroitly pointed out. Heck, if he was still in charge, tomorrow would be his second or third rate cut, and we’d be down to at least 4% already.

    Thanks for the complement, and come back.

  9. Jeff Brown September 17th, 2007 3:43 pm

    Geez Tom, Lascivious Brownies and Hilary in one comment. A bit redundant aren’t we? :)

    I wonder if she’s invited Ben to lunch yet. :)

  10. Jeff Brown September 17th, 2007 3:48 pm

    Thanks Bob – The Dr.’s biggest edge is the combination of his brilliance and the wealth of actual applicable knowledge he has in his head. The Senate dog & pony show doesn’t know what to do with his straightforward answers – especially since they’re backed by so much empirical evidence.

    Their go-to card of bullying those in the hot seat doesn’t even get drawn when it comes to Bernanke. It’s fun to watch. The only mystery is which senators play dogs, and which ponies. :)

  11. Jeff Brown September 17th, 2007 3:50 pm

    Daniel – Thanks a million, er, ah, a billion. :)

    I liked the way you documented Bernanke’s writings on the subject at hand.

  12. Charleston real estate blog September 17th, 2007 5:30 pm

    Jeff, I think you’ve got it exactly right, it’s the perception rather than the reality that is most important. Now I’m going to grab a glass of milk and a few cookies and watch Maria interview Alan.

  13. Jeff Brown September 17th, 2007 6:49 pm

    Charleston – I’ll listen to Alan’s answers, but I’ll be watching Maria. :)

  14. Michael Cook September 18th, 2007 7:32 am

    Jeff,

    Can I first say great article. I think you did a good job summing up the feds actions; however, I do disagree slightly with your interpetation. Perhaps because I am in the investment banking and see the extreme need for liquidity right now, I think more than anything this was a reactionary move to stave off major problems in the banking industry (and believe me, they are major).

    Consider the amount of paper and dollar losses amounting from the subprime/alt-a disaster. The two Bear Stearns funds that closed represented over $4 Billion. At least half of that money is gone, evaporated into thin air. Extrapolate that across the industry and you might actually get quite close to the Bernanke number you mentioned. Adding in losses from other Mortgage Backed Securities and a variety of commerical paper losses and you get a real need for liquidity.

    My interpetation of the move is that it will stave off what was amounting to a serious disaster. I don’t see the future boost to the stock market that you see, but, positively, I dont see a major crash coming either.

  15. Jeff Brown September 18th, 2007 8:51 am

    Michael – I really don’t think we disagree on interpretation. The reasons you give for Benanke’s infusion of so much cash, is why, A) he did it in the first place and B) why I said it wasn’t inflationary.

    Your point about so much cash evaporating is probably the scariest fact of the current scenario, don’t you think?

    We’ll just have to wait and see about what the market does.

  16. […] I know Jeff’s working on a whopper of an article to follow up on his last gem; what do YOU think of the rate cuts? […]

  17. Jeff Brown September 18th, 2007 1:19 pm

    No pressure, right? :)