By Jeff Diamond - So, the improbable stock rally of 2009 continues… Kudos go to the Federal Reserve and their global cohorts. They have implemented all kinds of previously unimaginable liquidity facilities and other monetary props so as to once again levitate global stock markets. The rally has been parabolic in nature, and alas, unsustainable in the long run. In the meantime, however, the financial media is closing ranks in order to spread Ben Bernanke’s and Wall Street’s message far and wide: “The recession is over!” The only problem is that the recession may be ending for the ivory tower economists who devour government economic statistics with little doubt to their accuracy, but for the rest of us who live in the real world all we can see is the economic ruin left by the bursting of the last central bank induced bubble(s)…
If we set aside the smoke and mirrors of Ben Bernanke’s green shoots for a moment, then it is apparent that credit is still contracting, retail sales are still weakening, global trade is still declining, real estate foreclosures are still rising (though not as much as they should since banks are reluctant to swallow the costs and admit the losses associated with foreclosure these days), and sadly, unemployment is still worsening… All this is occurring in the face of the largest global fiscal and monetary money-pump in the history of mankind.
The recent history of cheap money and bubbles seems completely lost on central bankers. Their only answer to one burst bubble is to create a new bubble that is even bigger than the last. I must admit that I lack the imagination (and the chutzpah) to ever succeed at the current game of central banking. Back when Greenspan was chairman, he started off modestly when he engineered the bailout of Long Term Capital, but then cranked things up when his Y2K money pump induced the dotcom bubble. I didn’t foresee the real estate and credit bubble that he was going to foment back in 2002 as the stock market was bottoming in October . It wasn’t long, however, before I realized that the securitization markets were removing risk (supposedly) from lenders and freeing them to pursue business with little concern for the borrowers’ ability to ever repay. What baffles me is central bankers’ complete inability to foresee the consequences of their reckless behavior. So, here we stand in 2009 as the Jackson Hole powwow concludes with these same men patting themselves on the back for acting decisively in averting financial meltdown over the last 12 months while refusing to admit their role in creating it in the first place.
Again, I did not foresee a new global initiative among these men to once again bail themselves out with something even bigger than the housing and credit bubbles. Not only do we have the central bankers creating money at warp speed and shoveling it into what should be failed financial institutions, but we have deficit spending by politicians around the world hellbent on saving their own behinds from the wrath of their economically displaced constituents. But, a funny thing happened on the way to economic recovery. All this newly minted money was highjacked by the same gang of market operators who brought us the last asset bubbles in stocks, bonds, real estate, commodities, artwork, etc., etc… No wonder the real economy isn’t recovering!
So, just in case a central banker or high government official cares, let me say this as clearly as possible… We cannot print and deficit spend ourselves to prosperity. So why would anyone think that zero percent interest rates, government monetization of debt, “too big to fail” bailouts, and government stimulus might work this time? I do not know when the current rally will collapse. It may continue for weeks or months to come. Heck, maybe it could continue longer! It will, however, end in tears just as the last one and the one before that ended, because it is not based on a healthy, wealth-producing economy, but rather a game of financial Jenga that grows ever taller even while the building blocks are disappearing from the foundation.
Update 8/25: It's official... President Obama does not blame central bankers for the current financial crisis. Otherwise, why else would he nominate Ben Bernanke, one of the main architects of easy money since 2002, for a second term as Chairman of the Federal Reserve? It's the safe move politically for the President today, but I guess we'll just have to see how it plays out...
