It's Confidence, Stupid! - Eurocentric - Silvia Wadhwa

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Mar.18

7:07 PM ET

Tuesday, 18 Mar 2008

It's Confidence, Stupid!

Posted By:Silvia Wadhwa

Well, not altogether true, of course. Or rather: It´s not so much confidence, but the notable lack thereof.

Ben Bernanke
Pablo Martinez Monsivais / ASSOCIATED PRESS
Federal Reserve Bank Chairman Ben Bernanke

Now ... I don´t know about you. But when I hear the words "central bank" and "emergency rate cut (or HIKE for that matter)" in one sentence, the word "confidence" does not pop into my mind. In fact I´d rather not hear the word "emergency" from or in connection with central banks or central bankers at all.

I guess I don´t have to tell you that I might pass for the journalistic (and female) equivalent of the Knight Templar, always ready to break a lance or two for that maid ECB. I´m sorry but I have at best, raised a Spockian eyebrow at the Fed's strategy - if you can call it that!?!?! - so far.

And it seems I am not ALL alone in that. In fact, one of my blog readers went as far as to say, with a certain degree of exasperation, that it was all quite simple because, "Ben Bernanke has completely lost his bearings. The enormous liquidity he is pumping into the economy will create double-digit inflation in six months, just as the dawn follows the night. The European Central Bank is doing the job of a central bank. The Federal Reserve is acting like a bank in a banana republic."

Well ... I wouldn´t go THAT far. Maybe more along the lines of Deutsche Bank chief economist Norbert Walter, who put it this way: "Weekend emergency rate moves don´t help ... Right from the start, the Fed has been part of panic in the markets - both fed from it and added to it ... The Fed is not, was never on top of the situation ..."

Yep. My feelings entirely. Misguided Euro-patriotism? I think not. Let´s just look at the facts:

Since last September, the Fed cut rates no less than six times, all but halving them. REAL interest rates in the US are already practically at zero. And on top of that, we´ve had no less than two "emergency" discount rate cuts (one even over the weekend!)

"The Fed is doing everything it can to put confidence back into the markets", is a comment I keep hearing, chanted like a pious mantra, from many a market participant - mainly in the U.S. or the UK, mind. Six Fed fund rate cuts, two discount rate cuts, generous extensions of discount loans, more than lenient collateral requirements AND massive liquidity injections via temporary money market operations in half a year ... In other words, ample "confidence-restoring" measures, right? To use a military phrase, one might call this a monetary shock and awe campaign.

And? Did it work? Mission accomplished? Confidence restored? - Well .... you tell me!

I´d say - Nope. Mission NOT accomplished. Confidence in markets these days is harder to find than an abandoned pint of Guinness in an Irish pub on St. Patrick´s Day.

One rate cut by the good ol´ Fed after the other, and the ink on the FOMC decision isn´t quite dry, when the markets are baying for more monetary blood. Where can this lead? Or, maybe more to the point: Who is deciding monetary policy in the U.S. these days - the markets or the Fed? ... My money´s on the markets.

And the markets want more rate cuts. Should they get them? - No. N-O.

Why? - Well, maybe because this crisis is far from over. In fact, if recent sentiment polls are anything to go by, even more optimistic punters reckon that we´ll have to ride out the waves of this particular tempest for at least another three months, maybe even until the the end of the year. What IS the Fed going to do another two, three, six months down the road? Hand out a bag of sweets with every Fed fund loan? Because rates to cut, there shall be no longer. Hmmmmm ....

Ok, Ms Know-it-all, you might say, "How DO you get confidence back into the markets?"

Sorry, but I´m almost inclined to quote ECB President Jean-Claude Trichet on this one: "The best way to restore confidence to the markets is to keep your monetary policy solidly anchored in price stability."

Well ... yes. But no matter how much U.S. central bankers and politicians might talk about "vigilance" on inflation and about a "strong dollar" policy, it ain´t gonna happen. No, seems we´re just gonna bumble along, hoping, praying that this little thing that started as a supbrime mis-speculation and is fast turning into a financial crisis will NOT, repeat, NOT turn into a global economic meltdown.