What more can the Fed do? Quantitative easing is next, I guess. As if the Fed's balance sheet didn't look bad enough. The only good news about the Fed rate cut is the weakening of the dollar. This should bolster commodities a bit, plus it will quiet the deflationary spiral panic monkeys.
See:
http://www.thebigmoney.com/articles/explainer/2008/12/16/bernanke-s-blowout
What can't the Fed do? Fix the economy. The problems are now systemic. The spread between the corporate bond (Baa) and 10-year Treasuries is around 6 percentage points (http://www.treas.gov/offices/economic-policy/macroecon/monthly_economic_data.pdf), which means the perception that corporations will fail is extremely high. Think of it another way, corporate bonds are now giving much greater returns than shares of equity. I thought several months ago that there might be a bit of a bond bubble. Looks like it has arrived. The good thing about a bond bubble is that it can only burst with widespread corporate defaults. If that happens, get a gun because chaos will reign when unemployment hits 20% or so.
Thursday, December 18, 2008
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