Heard in the Village: September 2009
The villagers talked about whether it could happen. Some comments on perpetual uncertainty caused by Washington. and the banks in the media: From the book In the Fed We Trust:Ben Bernanke’s War on the Great Panic review in Business Week; “As Wessel (the author) shows, Bernanke’s predecessor vastly underestimated the effects of keeping interest rates as low as he did for as long as he did. … That easy money, we now know, fueled an epic housing and credit bubble whose bursting took down the global economy.” The villagers wondered what bubbles Bernanke will have since he lowered rates to almost 0% and threw more money supply and credit than Greenspan did with no end in sight.
A BARRON’S editorial on August 31,2009 says Bernanke wants to concentrate systemic risk even more than it was by having the FED as the paramount financial regulator rather than spreading the regulation around. He doesn’t want full disclosure for the FED. The villagers thought FED policies could cause recurring problems for the economy. The August 17, 2009 issue of BUSINESS WEEK reported on the latest innovation of dangerous loans. Lenders are linking lines of credit to both short term rates AND credit default swaps to act as “insurance”. The villagers called it loan insurance and remembered portfolio insurance in 1987. There are $40 billion worth of these loans-about 70% of the total loans in credit lines this year.
The villagers became fairly convinced again that the markets will be like a roller coaster with a downward bias for the next few years. They wondered what to do. Somebody said to do what Prudential’s variable annunities do:When the markets drop 7%, they reduce their stock allocations and when the markets rise 3%, they increase their stock allocations. Many thought something like that should be considered.
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