“Irrational Exuberance,” All Over Again.

What a joke! Headlined in the Financial Times Weekend edition, May 11/12 2013-“Bernanke Warns Against Risk Taking.” Really? Well if he hasn’t been the conduit for ‘risk taking’ then who has it been? He’s got interest rates at zero and is feeding a trillion dollars into the banks each year. Now there is talk that that might not be enough and he needs to do more. In April St. Louis Fed President James Bullard said on several occasions that inflationary pressures were growing too weakly and that the Fed might have to increase its asset buying.

All that money going into the banks has not translated into increased lending, but instead the banks have used it to speculate in various markets; principally, the stock market. This suits the Fed just fine. Both Ben Bernanke and his predecessor, Alan Greenspan, place great store in healthy stock prices. I have quoted them extensively in this vein in previous writings. So the banks are the principal market risk takers, but of course they don’t have to worry about a stock market crash, because they are ‘too big to fail.’

With interest rates essentially at zero, savers are being punished and in many cases are seeking yield outside their normal comfort zone. “The average yield on lowly rated corporate debt, or junk bonds, this week dipped below 5 per cent to a record low that is less than treasury bonds yielded in 2007, while the S&P 500 yesterday closed at a record high of 1.633.70.” Financial Times, May 11 and 12/ 2013.

Yes, Mr. Bernanke, you are speaking out of both sides of your mouth and when things in the markets get ugly again as they surely will, you will have a lot to answer for. Perhaps that is why you are considering not extending your position as Fed Chairman beyond January 2014.

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