My read on the speech

I went to play golf this morning rather than listen to the Bernankster. After all, I knew what he was going to say. I read about the speech in the Wall Street Journal a day before.

I (and many others) have made note of the fact that the WSJ’s crack reporter, Jon Hilsenrath, is the mouthpiece for Big Ben. This is what Jon said had to say last night. Do you think he talked to Bernanke before he wrote this? (15 hours before speech time)

Federal Reserve Chairman Ben Bernanke isn’t likely to break much new monetary-policy ground in his Jackson Hole speech Friday

To be sure, a number of others who have a public view on Fed policy also commented that the speech from the Chairman would bring nothing new. But the consistency of Hilsenrath’s words and Bernanke's actions is no coincidence.

If you believe that Hilsenrath gets the whisper from Ben, then you might want to consider what Jon had to say after the speech was delivered:

Fed policy makers will be discussing their options at a September policy meeting which has been expanded to two days instead of one to explore whether the Fed should do more.

Jon then quotes from the speech:

“The committee is prepared to employ its tools as appropriate to promote a stronger economic recovery.”

Then Jon tips Bernanke’s next move:

it is worth remembering, when the Fed has said it is prepared to act during this long-running economic crisis, it generally has acted.

Bernanke is tipping his hand (via Jon) in order to prepare the market for what is to come in a few weeks. This is a heads up to the insiders that more monetary gas is in the works. The stock market’s first reaction to today’s non-event was to sell off hard. But after the word got around that this was just a delay (and a short one at that) stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked.

I think there are two reasons that Bernanke chose not to announce policy changes at Jackson Hole:

I) He wants it to look to the world (and a few Republican politicians) as if the Fed’s actions are being done only after deep deliberation and discussion. That is why the next meeting has been changed to a two-day format.

There will be a two-day circus of Fed Governors looking very serious. But that is just for the TV audience. This is Ben’s show. He has the votes. He is steering the ship. The decisions have already been made. Ben’s going to do something on 9/21.

II) Ben had to put off announcing more monetary oomph today because there is something that has to happen first. There has to be something that comes out of the EU before Bernanke makes his next move.

I’m not sure what happens next in Europe. I’m of the opinion that something needs to be done, and it needs to be done quickly.

There are a number of things that the ECB could do. They could (1) significantly expand their effort at QE (the number starts at E 1 trillion). They could (2) drop official lending rates close to zero. They could (3) agree to issue E bonds.

Some combination of those actions would buy some more time. The problem is that all of those steps have been discussed and pretty much firmly rejected. There is a fourth option. The strong hands in the EU could give in to the markets and let some of the PIIGS (starting with Greece) float on their own. This option has also been previously rejected.

I think it is time for serious consideration for this. I can’t think of a single person who has a voice in these matters that actually believes that Greece can be saved with more debt. We shall see, possibly as soon as Sunday night.

Yet another option is to get the US Fed into the picture with dramatic draw-downs on existing USD swap lines (Starts with $500 Billion). This is another possibility for this weekend or next.

My last point is one that I have made many times before, but feel obligated to repeat.
 

I flat out hate that this Fed is conducting monetary policy through leaks, a wink and a nod and innuendo. 

There is far too much at stake to make a circus out of the process. It feels like we should just put up a tent, because a three-ring circus is what we are getting non-stop. And Bernanke is the strong man in the middle ring.

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