Get Ready for a Massive Stock Market Selloff

via: TheIntelHub
by: M.N. Gordon
July 19, 2012

On Tuesday, Federal Reserve Chairman Ben Bernanke’s made his semiannual monetary policy testimony before the Senate Banking Committee.  Washington and Wall Street wanted QE3.  Bernanke demurred.

Following the testimony, Senator Chuck Schumer told Federal Reserve Chairman Ben Bernanke to “get to work.”  Schumer, like most Senators, is under the illusion that Bernanke can actually do something to improve the economy.  Those days are gone.

“The question in my mind is, is he [Bernanke] not stepping up with another program in any quick fashion because they’re [The Fed] starting to wonder if it’s going to have any impact?  Alternatively, are they not stepping up because when they look at the data they think, ‘It’s not that bad,’?” said Jim Paulsen, chief market strategist at Wells Capital Management in Minneapolis, following Bernanke’s testimony.  “Maybe it’s some of both.  But does anyone need any more excess bank reserves?”

Obviously, Paulson’s last question was intended to make the point that there’s already too much credit available to banks.  The problem is, there’s nowhere for the banks to put the credit to use.  When banks gaze out upon the economic landscape they don’t see anything worthy of extending the credit to…especially when they can borrow money from the Fed at practically zero percent and lend it back to the government with purchases of 10-Year Treasury notes yielding 1.5 percent.

What this means is the financial system currently has no use for the Fed’s one and only product – bank credit.

Price Distortions

Banks don’t believe loaning money to businesses will turn a consistent profit.  This means the Fed can no longer juice the economy with cheap money.  Like repeated applications of fertilizer, or a second helping of chocolate cake, QE has reached a state of diminishing marginal returns.

Nonetheless, Schumer, like Wall Street and Washington, want Bernanke to do something more.  Here at the Economic Prism we believe Bernanke has already done far too much.  The federal funds rate is at effectively zero, banks are flooded with credit, and the Fed’s balance sheet is at nearly $3 trillion.  Still the economy lumbers along like an old Plymouth down a dusty dirt road.

At this point, the Fed’s monetary efforts won’t do a lick for the economy.  Adding another $1 trillion to the Fed’s balance sheet won’t do anything for business.  Instead, all it will do is inflate asset prices.

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  1. #1 by nonviolentconflict on July 20, 2012 - 5:08 pm

    Reblogged this on NonviolentConflict.

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