Jim Cramer was wrong - Ben Bernanke does not "know nothing". He does know how to throw free money in every direction at a pace that would make Greenspan blush so therefore I understand his hero status on Wall Street. But if you are looking to him for guidance on where we are headed I have 2 words for you: track record. If you strip away his title and met him at a random
Yesterday the market reversed on a rumor of an imminent change coming in policy in regards to paying interest on banks reserves held at the Fed. The idea here is if you give the banks 0% interest they will indeed be forced to lend money to make money.... and the economy will once more return to a happy place. The minor problem with this is lack of end demand of money from an overindebted U.S. consumer. [Dec 3, 2009: Debt to Income Ratio Essentially Doubles for all American Households in Past 2 Decades] She has years of develeraging to go... and frankly the U.S. economy has become so dependent on free and easy credit when you return to ANY form of risk based credit pricing (i.e. people with good credit get good terms, people with bad credit get bad terms or are locked out) you have what we have today. It is not banks not willing to lend.... it is those who wish to borrow generally having poor risk outlooks. [Feb 9, 2010: It's Not about a Lack of Financing, It's About Lack of End Demand]
As for Quantitative Easing 2.0, I heard a great comment on CNBC about a month ago... right now we have 10 apples on the shelf and they are not selling. That was QE 1.0. Now the market is urging Ben to put another 10 apples on the shelf. What will that accomplish? Without end demand you just have 20 apples sitting there staring at you. Yes, the market will knee jerk up when this time comes (which will mark ever more desperation by the Fed) and most of the new money will flow into capital markets just as it did in 2009 and early 2010. So I guess as speculators we should be giddy on what is surely coming in the next year. But having 20 or 10 apples on the shelf really is not going to change one darn thing.
What will change things? Maybe when the Fed does the truly outrageous like let banks make loans to anybody with a heartbeat circa 2005-2007, and then offers to take those securitizations on their balance sheet. Outrageous? Impossible? Think about what you once assumed was outrageous and impossible 3-4 years ago. Desperation is a great motivator for "innovation". It's going to take that level of stoopid to avoid the mess we have; Fannie and Freddie are basically doing it in the housing market - our new de facto subprime lenders, so the Fed has to do it for the non housing economy.
I can imagine the 3 AM informercial right now. Ben sitting next to a fireplace with pipe in mouth... "no money? bad credit? no problem! The Fed says yes to everyone. Have a heartbeat? Bring us your 520 FICO score, your $18,000 in debt and you'll walk out with whatever you wish. It's 2005 redux."
[Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]