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EScroogeJr (< 20)

understanding Bernanke

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January 24, 2008 – Comments (2)

Bernanke's decision to cut rates by 0.75% is very noteworthy, in a way. Indeed, think of this: cutting rates to inflate housing is nothing new. Cutting rates in response to a 1987-style market crash is also a common practice. But announcing a huge rate cut in an urgent meating one week ahead of schedule in response to a most ordinary stock market correction should raise eyebrows. The last emergency meeting was seven years ago. Not even the Dow 7000 by the end of 2002 was deemed critical enough to call up people in the dead of the night with the message that Asian stocks are falling and then summon the sleepy board members for an emergency meating before markets opened. No big news from housing were hitting the wires. The macroeconomic environment was about the save as six weeks ago, when Bernanke thought that inflation was too high to choose a 0.5% cut over 0.25%. So what has changed? Is the Fed now in the business of protecting shereholders against the most ordinary volatility? There is only one possible answer: the correlation between stocks and housing has become so important for this market that the Fed sees no way to inflate the one bubble if the other is allowed to deflate. Stock equity has become such a major part of financing a home purchase that even when housing is well able to recover on its own, any serious setback when the Dow retraces 10,000 would twart that recovery and make both asset classes collapse at once. Has the Fed studied the situation and concluded that the system will fall apart unless stock investors are given the same guarantee of steady appreciation and protection from rough patches that until now was the exclusive priviledge of homeowners? If this was indeed the case, the implications will be serious. Do you see ahead of us a government-controlled stock market run on the basis of an implicit social contract where one invests with the understanding that the Fed's job is to keep the floor under the market a few points below the current price?

2 Comments – Post Your Own

#1) On January 24, 2008 at 10:11 PM, QualityPicks (54.81) wrote:

I think you are right. It has been very obvious that Bernanke hates stock market drops and is trying to manipulate the markets.

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#2) On January 24, 2008 at 10:11 PM, QualityPicks (54.81) wrote:

by "the markets" I meant the stock market.

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