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Noronha: Hey Bernanke, Stand Aside and Let the Adults Take Over!

Pedro Noronha|Fund Manager, Noster Capital LLP
Wednesday, 21 Sep 2011 | 4:37 PM ET
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I have to confess that I had very little hope left on what our academics would do at today’s Fed meeting.

Numerous rumors were circulating around saying that the Fed was going to lower long term interest rates by doing some kind of “Operation Twist” (which in theory means selling short term treasuries and use those proceeds to buy longer term bonds, hence pushing longer term yields lower).

Now, the reality of having an economy managed by academics is that they lack the understanding of the private sector and the needs of the real economy.

Effectively what the Fed did todaywas nothing more than a punch in the face of their constituents (the banks) as banks make money by lending long term and paying for that money on the short term. Hence, why they say that a steep yield curve turns idiots into banking geniuses. The steeper the yield curve, the more money banks make on their loans, and the faster they repair their troubled balance sheets.

Helicopter Ben announced a measure whose intent is to lower long term rates. What he fails to understand is that he is tackling the wrong issue (doesn’t he read the papers?), the impact of lower long term rates on the economy is marginal. What we need is to restructure the balance sheets of consumers and of governments. What they achieved with operation twist is that the banks will be even less likely to lend money to the real economy or that they will demand higher spreads in order to make the same profit margin that they used to make when the curve was steeper.

None of which is good for the economy.

It’s not too late to remove Mr. Bernanke and to put in his place someone who understands what they are doing, before the damage done so far becomes irreversible.

Mr. Bernanke your experiments are costing real people their jobs and retirees their pensions and livelihoods for no practical result whatsoever. Remove the moral hazard that you helped create. Stand aside and let the system work through the needed restructuring of bad debts and the essential transfer of those debts from weak hands into strong hands at the appropriate price, which is effectively what a capitalistic system does when the Fed leaves it alone.

It is not too late to create an advisory board of proper businessmen to help the Fed understand what goes on outside the classroom. What Mr. Bernanke did in 2008 was heroic, he saved the financial system from collapse. But that’s where his intervention should’ve stopped. Instead, he tripled the Fed balance sheet since then with very little to show for it (other than an enlarged finance sector who welcomed yet another artificial bull market).

Time to let the adults take over Mr. Bernanke. Please.

The author is Pedro Noronha, Fund Manager at Noster Capital.

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