More Bernake Musings

So will Bernanke cut The Fed Fund Rate .25 or .50? Maybe… neither?

Bernanke has shown that unlike his predecessor, Alan Greenspan, he is not going to bail out those in business who make poor decisions. While this may cause a bit of pain now and make for some splashy headlines, once people finally get this, in the long run we will all be better off. Greenspan’s antics (and enormous miscalculations) cause excessive risk to enter the system. This risk now has us where we are today. Hoping the Fed steps in to help lenders who made loans to people who could not pay them back, to home owners who bought homes they could not afford, and for home builders who built more homes that they could sell just will not happen.

Here is the thing. Every party, no matter how good it is or how bad you want it to continue, eventually ends. They all do, it is just a fact. The housing party is ending and like all parties, those who are the last to arrive wish they got there much earlier. Too bad.

When money is virtually free (Greenspan had rates to 1%), people will do very dumb things with it. Bernanke is under no obligation or “moral” dictate to bail these folks out. None. Despite what Democrats trying to win publicity points in congress may say, he has to this point correctly refused. He has no desire to bail out the Countrywide’s (CFC), Washington Mutual’s (WM) of the world who made billions in bad loans. He will, however, provide liquidity to the system so that the Citi’s (C), Bank of America’s (BAC) or Wells Fargo’s (WFC) can keep the wheels greased though and isn’t that what his job is?

What will he do then? I for one think he may actually do nothing at all. If he does give the street a bone, it will only be 1/4 point. Now, it should be noted that based on the bond market’s recent activity currently the effective Fed Funds Rate has been below 5% for some time now. So even is Bernanke does do a 1/4 point drop, it’s reality is meaningless. Bernanke should be given credit for essentially making the meetings rate decision meaningless and creating an situation where the market is setting the rate. Obviously the Fed will guide the markets by capping it but when you have the effective rate below the actual rate, what are people clamoring for a cut for?

What is more important that the Fed’s actions next week is what they say. Bernanke has been very transparent as to his goals to this point has stuck to them despite the market trying to read something else into them. What he says his priority is should determine the market’s reaction to the meeting. That, and only that will determine the Fed’s next move, if any.