We take a moment to look at the big, wide world of money every day. And when we look today what we see is a monumental, soothing hallucination settling over investors, like a giant cloud of nitrous oxygen.
On Friday, of course, the market bounced – up more than 200 points. A neighbour interpreted this move for us at a party Saturday night:
“Did you see what happened on Friday? Stocks went up everywhere. It’s over. The crisis is over. Because the central banks can always put in more money and credit. That’s what happened. The US Fed cut lending rates and markets came back. I’m not worried. I think we’re going to see higher prices.”
The man speaking was a retired French banker. Like everyone else with any money, he has been watching recent events and wondering what was going on. And like almost everyone else, he has come to the wrong conclusion. As to where stock prices are headed, we are as dumb as everyone else. Many times we have tried to look into the future – even when we were on vacation. But we’ve never gotten the hang of it. It just isn’t possible to know what will happen.
But it seems probable that a clear majority of the world’s investors now believe in two great delusions: one, that central banking has taken the risk out of investing…and its corollary; that market prices are now on the rebound. Again, they may be right – by accident – about the latter point. But it will prove to be an expensive triumph, in our view, because they are surely wrong about the former one. Central banking has not taken the risk out of investing; it has magnified it.
On Friday, the Bernanke Fed looked a lot like the old Greenspan Fed…riding out to rescue speculators like the cavalry to the aid of desperate pioneers. The trumpet sounded…the rifles fired…and the savages were beaten back.
“Thank god for the boys in blue,” said the pilgrims. “They come along just when you need them. Now, we can go and settle that rich bottomland across the river. They’ll always protect us.”
If only running an economy were so easy! We’re on vacation, so we’re not going to think about it too much. But it was only a week or so ago that the Fed told us that inflation was the real enemy. Now, Ben Bernanke has cut the discount rate by half of a percentage point in order to counter the deflationary effects of a credit crisis.
Banks – and other financiers – got themselves into trouble because they had too much money on their hands. They lent it out much too freely. So Bernanke comes to their rescue. And with what? More money of course.
Markets and Money