What Will the Fed Do Today? A Reader's Perspective

Editor's note: The following is the last email in an exchange between myself and a reader on what the Fed will do at today's FOMC meeting. Leslie writes:

Michael,

I think Bernanke leaves interest rates alone and continues with the theme of remaining vigilant about inflation. And I think they follow through with the theme of not bailing out lenders who made loans they knew couldn't be repaid. He and other Fed members have stated many times, and very clearly that this is their position. His and Paulson's comments that 'readjustments in pricing risk are necessary' are the jawboning part. Their actions will show they're serious about it.

In 1998, when LTCM was coming unglued, LTCM contacted the Fed on a Sunday and opened up their books. It is possible that multiple large hedge funds and/or bankers have already tried to contact the Fed and been refused an audience. Maybe this is what has allegedly prompted so many to call Cramer resulting in his desperate theatrics last Friday, and after that, his article pronouncing a staggering number of hedge funds will fail by November.

Cramer's friends have worked on Wall Street for 25 years, which you point out was under Greenspan. They bet wrong. They want to have their cake and eat it too.

There have been a a lot of articles about "Helicopter Ben" with the assumptions he would open the floodgates of liquidity. I assumed at first that Bernanke would react this way. Yet once you cut through some of the double speak, he's fairly clear about remaining vigilant on inflation. This is consistent with his 2002 M. Friedman speech you linked. Which means the link to his helicopter comments are premature, and Bernanke doesn't see depression on the horizon - at least not at the moment. His helicopter comment was made in a speech before he became Fed Chairman. I think it is possible that he got some eye openers once he was on the inside. (Since economists can do their own assessments outside of the Fed, the only figure they might not know is how much monetization of debt is going on.)

I think he realizes that he risks triggering a depression if he raises, yet doesn't want to lower rates and have the "speculative investments" resume, since he links speculative investments to the period leading into the depression. He will take action (of an unspecified type) only if there is some real concern about systemic risk to the banking/credit system.

If it is true that Greenspan has been running around the globe getting other Central Bankers to raise rates in order to devalue the USD, that is a pretty cleaver move. Paulson, I think, pointed out that our exports are increasing. Are they repeating the Japanese experiment with cheap money? Maybe we should be thinking about scraping the YEN carry trade and getting reading for the USD carry trade.

He stands pat.