Can't the Fed promote savings, instead of risk?
It’s been a bad month for Ben Bernanke.
So far, the beleaguered central banker has failed in his primary mission as Fed head -- to keep stock prices up so we’ll think we’re actually rich.
Market indices have plummeted.
He can be proud, however, of one achievement -- that Treasury yields have dropped as well.
Only in Bernanke’s America could this have followed a downgrading of the credit rating on U.S. debt.
Before Standard and Poor's cut our country’s debt rating Aug. 5, the reported Constant Maturity Treasury rate (CMT) for 10-year Treasury notes was 2.58%. On Aug. 8, it was 2.40%.
Similarly, the CMT for 5-year Treasury Notes on Aug. 5 was 1.23%. On Aug. 8, it was 1.11%.
By the end of the week (Aug. 12), the 10-year and 5-year CMT rates had further sunk to 2.24% and 0.96%, respectively.
Probably never in recorded financial history has the downgrading of a debt security by a major rating agency actually lowered its yield.
Is this, like an inverted yield curve, an Alan Greenspan-style conundrum?
Hardly. Remember, we’re talking about a financial ship with Bernanke at the helm.
Markets now lunge and lurch daily, depending upon whether participants receive "risk-on" or "risk-off" signals.
Bernanke, of course, is always transmitting "risk-on" signals, so stocks will stay high.
But even when the market isn’t listening and gets "risk-off" signals instead, Bernanke has the satisfaction of knowing interest rates will continue to fall.
It’s the "flight to safety" at work again.
A "flight to safety" occurs when investors panic, sell stocks and put their money into "riskless" assets, like Treasury securities.
They do this even when a rating agency declares Treasuries to be no longer "riskless."
This is stomach-churning stuff. I get seasick just thinking about it.
Maybe -- just maybe -- it’s time all of us (particularly the Fed chairman) to step back and consider whether something is seriously amiss -- even, may I suggest, fundamentally rotten -- in how our current financial markets are functioning.
Given that Bernanke seems to be in denial, I’d even be willing to concede -- with fingers crossed, of course -- that his policy blunders have had nothing to do with the situation we face.
If only he’d right the ship and change course....
Focusing more on promoting savings and stemming inflation and less on stock market averages would be a good start.
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