Bernanke and interest rates

While the printing of dollars may prove to be our economy's undoing, one of the charters of the Fed is to avert an economic disaster. So dropping interest rates was something Bernanke had to do (at least politically). The economy was tanking, and dropping interest rates is usually the right prescription.

The problem is that the economy is fractured already, and the Fed faces a conundrum--increase rates to stave off inflation, which puts us into the black hole of deep recession, or drop rates and run the risk of runaway inflation. Volker took the more prudent but less popular route in the early 80's, and willed us into a deep recession in doing so, but it allowed us to recover structurally stronger (excesses were drained out in the process). We had to take our medicine, much like we have to pay today for our penance in the aftermath of the subprime gluttonous orgy.

Bernanke doesn't have the will to do that--mainly because he doesn't have Bush's blessing to drive us deeper into recession. But, it does look like cronyism, as he is saving a few of his buddies on Wall St., by bailing out big banks, and temporarily staving off a deep recession. He's only delaying the inevitable, which may heighten the severity of an economic downturn. But in doing so, he may have induced a stagflation type scenario which hasn't been seen since the Carter years. Either way, we are looking at at least a few years of real damage. Stay liquid and pounce on oversold opportunities.

In other words, Bernanke is screwed if he does, and he's screwed if he doesn't. He inherited an economy that was based on smoke and mirrors, and whose structural cracks were masked by easy money, but now the truth is coming out, albeit way too late. A strong economy can withstand financial shocks, but ours was too weak to survive the magnitude of the subprime earthquake. Frankly, Bernanke may be a weak steward of our fiscal ship, but I'm not sure the best captain in the world could do much better. We are so screwed that only time will get us out of this mess.