Tuesday, December 27, 2005

Good Luck Ben Bernanke


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What should Chairman Bernanke do with short term interest rates? What will he do? Lower them? Raise them?

He really is walking a tightrope. Tough situation.

6 comments:

  1. I think Ben will raise short term interest rates to 4.5% then stop raising them. If I missed significant factors on either side then please let me know, as I will add them to the cartoon.

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  2. I think it's interesting that both Greenspan and Bernake proclaim that a primary purpose of the Federal Reserve is to stave off inflation and that interest rates should be managed accordingly. But isn't inflation simply a reflection of the dollar's value as measured against the Consumer Price Index. No question Greenspan has done a good job in keeping the dollar's value steady as it relates to the ability of the American consumer to buy durable goods. The problem is that the dollar's value has not been held steady in relation to home prices these last five years. While a pack of gum bought today might have the same impact on our pocketbook that it had 10 years ago, there is no question that buying a house today has a much more significant impact on the pocketbook (in term's of today's dollars) than at any other time in this country's history. The Fed has managed to hold one type of inflation in check but it has fanned the flames of another type of inflation--one that it possibly much more dangerous to the fabric of our society and our country's economy.

    Because I think Beranke knows that he needs to keep raising rates to bring home price inflation into check, he will continue to raise rates once he takes the helm. But I see him taking some breaks in rate hikes after the first 2-3 1/4 point increases that he is sure to implement.

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  3. Seems most likely there will be a recession 2006-2007
    at this point no one knows how severe it will be- 2 more rate hikes are likely- that will be enough.

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  4. I like the "Flying Willenda" tightrope reference. You could also use the scylla and charybdis analogy too. He is stepping into a minefield because Greenspan has left him no more options. It is crash and burn time!

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  5. I, too, think there will be two more quarter-point increases -- one by AG on 1/31 and the next by BB at his first meeting. Protecting the dollar will trump everything else.

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  6. While AG and BB are high accomplished economists and have great insight to the complex equations that interest rates are part of, they both are subject to political influences - and that is probably the thing we need to worry about more than anything. They will be influenced left and right by politicians looking to protect their constituents housing values - they will bow to some pressure, and that's when the equations will no longer be of any use. The Feds will be pressured by politicians to minimize impact on housing values - even the cost of long term health of the economy. The politicians need to get re-elected next year - they don't care as much what kind of housing collapse they may cause a couple years down the road.

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