Page 2 of 2 Bad times get worse for Ben
By Julian Delasantellis
might not be too bad. After all, there were all those better-than-expected
economic reports; some of the other, less broad, private sector compilations of
the employment picture were looking brighter too. Surely, there was light at
the end of the tunnel.
Nope. Not even close. What was thought to be the tunnel's warm sunlight was, as
the cliche always warns, the bright shining headlamp of a speeding oncoming
train, which slammed into the American markets head on as they opened in the
hour following the release of the report.
The actual job losses in May - 49,000 - were not all that bad (although it was
the fifth consecutive month of job losses in a row, something that has never
happened without a recession soon
following), but, due to continuing growth in the labor force that the economy
cannot now provide jobs for, the unemployment rate itself increased by 0.5%,
its biggest single month's rise since 1986, to a headline grabbing 5.5%, the
most since 2004.
Like a domino board set up by a sadist, one bad thing after another followed
upon the doleful NFP. The US dollar, up until that moment supported by
Bernanke's comments and the general perception that the end of subprime crisis
would mean no more rate cuts, perhaps even an upcoming rate rise, turned around
on a dime and headed south. This, and anti-Iran sabre-rattling from Israeli
Transport Minister Shaul Mofaz, (threatening other countries is not as much fun
for neo-conservatives if they have to pay for it) was all the baying bulls in
the oil pits needed to stage a truly remarkable, record breaking rally, up
almost $11 on the day to close at $138.54.
When the stock market opened at 9:30, it was definitely not a situation where
bad employment news would, due to the possibility of it being the rationale for
an upcoming Fed rate cut, be interpreted as good news. The Dow Jones Industrial
Average lost 140 points in the first five minutes of trading, closing down just
under 400 points.
One could understand if Bernanke on Friday, instead of talking about his days
in an economics classroom in the mid 1970s, then actually wished he could
return to one of those classrooms, and, in doing so, ditch all the terrible
responsibilities and burdens that his actions have foisted upon himself.
The chairman's rapid rate cuts were always a gamble, risking that the economy
would recover before he ran out of rate cutting room (see
Bernanke hits the joy button, Asia Times Online, February 1, 2008).
This bet has been lost - if only for psychological support, the NFP report is
showing that the US economy probably needs more rate-cutting help. I had
thought that the Fed would have been able to cut down to a 1% Federal Funds
rate, the benchmark set by Greenspan in 2003-04, but the subprime crisis has
discredited Greenspan’s final aggressive cuts of that cycle, and the global
commodity inflation threat has essentially put a "Caution-Extreme Danger" road
sign on rate cuts down past today’s 2% rate floor.
OK, so what's he going to do? He could travel down the traditional and
time-honored path of all bureaucrats since their first use of papyrus to
produce government gobbledygook in Egypt's First Dynasty 5,000 years ago; he
could try to weasel out of his words. He could say that the media has
misinterpreted all the things he obviously said; he could say that what he
really meant to say when he said that he was through cutting rates was that he
wasn’t.
Credibility on the line
He might, but I do not think he will do that. Critical to the effectiveness of
any central banker, even more than being able to befuddle undereducated
faux-populist freshmen solons with lugubriously incomprehensible jargon, is
credibility. It is the inflation-fighting credibility of the central banker
that persuades the speculator to hold wealth in paper money, instead of
converting it to commodities such as gold, oil, wheat or any other non-paper
asset whose purchases are fueling the continuing commodity boom. Reverse course
on rates now, and it would have much the same effect as if Bernanke was seen
being in line with all the French tourists shopping in Tiffany's and paying in
euros.
If he's not going to cut rates to support the economy, then the only conclusion
you can make regarding Bernanke's policy intentions is that he is going to cut
the sinking economy free. The chairman and the board apparently intend to row
away in their comfortable lifeboat as the economy around them screams and
drowns.
If you think that no society could be so callous as to let millions of its most
vulnerable citizens suffer the harsh gales of casino capitalism's vicissitudes,
you haven't been watching much American social and political debate recently.
Rapidly, the subprime mortgage crisis, and the misery and heartache it is
delivering to hundreds of thousands of struggling American homeowners every
month, is falling from the American public's all too brief attention spans -
the only endangered homeowner who gets media attention these days for his
housing woes is former Johnny Carson sidekick Ed McMahon, facing imminent
foreclosure on his $6 million Beverly Hills mansion.
The Congressional housing foreclosure relief bill sponsored by Senator
Christopher Dodd of Connecticut and Representative Barney Frank of
Massachusetts is, like most Democratic Party initiatives since the party's
takeover of Congress early in 2007, stalling under the weight of well-worn
Republican legerdemain and obfuscation, not to mention the likely veto that
awaits it from President George W Bush. Republican Senator Jim Bunning of
Kentucky held up the bill to make sure that no government monies in it would go
to illegal aliens, drug offenders, or sex offenders (and definitely not to
someone who was simultaneously all three). Obviously, public demands for relief
from the housing crisis have not yet reached a level sufficiently insistent
that Republicans are going to stop pitching raw red meat into the foaming
mouths of their political base, the so-called "values voters".
Publicity over the housing crisis has been replaced by impotent panic over
sky-high gas prices (not that the bitterly polarized Congress is going to do
anything about that, either) and a new particularly American phenomenon; the
abundant amount of hate, venom and vitriol pouring out from the men of God in
the pulpits of the nation’s most popular and well-attended houses of worship.
If I owned a business that needed a rapid US economic recovery to remain
solvent, or a house that needed some price appreciation real soon to be able to
be refinanced, or even a stock portfolio insufficiently hedged with ether
foreign currency or foreign stock and gold holdings, I’d be looking at the
events of late last week with the highest possible levels of trepidation.
No salvation to these problems is likely to be seen by looking east to the
Potomac, to the nation’s dysfunctional seat of government in Washington. I’d
look the other way, over the Pacific, to China and the other newly and rapidly
industrializing economies. Export demand from these nations is now just about
the only thing keeping the American economy away from the abyss.
At the end of Love Story, after Jenny's death, Oliver reconciles with
his aloof, patrician father by saying that "Love means never having to say
you're sorry". For Bernanke, being a Fed chairman apparently means never having
to say you're sorry for being a Fed official and Greenspan lickspittle during
the early years of this decade when the subprime crisis was engendered and
stoked, then, during his own term, cutting rates so quickly and imprudently as
to leave the economy with no real options to deal with its doleful implications
of simultaneous inflation and unemployment.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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