Thursday, June 05, 2008

Thanks, Bernanke, but I'll Take What You Do Over What You Say

Bernanke has taken up the Volcker challenge and has decided to change tactics.

He is now going to defend the dollar, if we can believe his latest declarations.

Apparently he thinks talking about it will do the trick, i.e. shape market expectations and prevent inflation from taking hold over the longer term. In other words, he's learning how to jawbone, like any self-respecting Federal Reserve Governor should.

jawbone
[Thanks to 24hourmuseum.org.uk for the picture.]

Jawboning is the Fed representatives' technique of influencing speculators and other market participants so that markets move in the direction the Fed desires.

But this will not be enough this time around.

As this excellent editorial in the Wall Street Journal points out so clearly, words alone will not do the trick at this stage in the game. The world has lived through too much political mirror-speak to believe everything our government or its representatives say.

We have seen nothing but dollar trashing over the last several years. Nothing in the Fed's actions to date confirms that the Board has any intention whatsoever of doing what is necessary to stop the decline of the dollar's exchange value and purchasing power. Quite the contrary.

There has been a loosening of the credit spigot and an assumption of moral hazard to an extent never before seen in history. The road backward is a long, exhausting haul that no political animal would undertake without extreme force.

So what do we learn from all of this jawboning? Markets learn; but Fed officials apparently don't.

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