Monday, January 11, 2010

The Greenspan "put" is still in force

Astute financial types recognize the Greenspan "put", now renamed the Bernanke "put", remains as Fed under Bernanke reassures the market that higher interest rates are now in the cards any time soon, as far as the Fed is concerned. But as John Cassidy observes...

"Unlike his predecessor, Mr Bernanke recognises the problem of excessive speculation and the massive externalities its sudden reversal can impose. In that sense, intellectual progress has been made. But he and his deputy, Donald Kohn, still refuse to acknowledge the Fed’s role in motivating reckless behaviour.

Take its current commitment to maintaining rock bottom rates for “an extended period”. Hedge funds and Wall Street dealing desks view this as an open invitation to borrow as much as they can and invest it in risky assets. As former Citigroup chief executive Chuck Prince might have put it, the music is playing, and it is time to dance. (The danger of being left without a chair when the music stops is greatly mitigated by the Fed’s promise to provide ample warning of it unplugging the sound system.)"...

Cassidy's full report is here.

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