Equity markets had a bad case of agita last Monday over the Italian elections and the thought of Silvio Berlusconi bringing his bunga-bunga party back into power.
After the Dow Jones industrial average was pared by 216 points, investors looked on Friday’s sequester deadline with dread.
They needn’t have feared, because Tuesday and Wednesday brought Fed chief Ben Bernanke to Capitol Hill.
Bernanke did make several strong points during his congressional hearings about the crisis-filled days four years ago, and the need for Quantitative Easing in the crisis. He chose to champion today’s ongoing central bank QE program as a “buy now, pay later” program that has helped the stock market and the economy.
And the Fed certainly has helped equities, despite it not being one of the Fed’s mandates, which in fact are: one, to control inflation, and two, to help maintain maximum sustainable employment.
Nevertheless, Bernanke wasn’t shy about boasting of his performance throughout the two days of hearings.
The Fed did do yeoman’s work during the crisis, but we are now at the stage where it’s time for it to call the problem what it actually is: structural.
Washington is responsible for the credit-formation crisis, by overtightening through thousands of pages of overly restrictive legislation. Most of the natural market buyers of debt were eliminated.
That’s why the Fed has elected to continue buying up trillions in Treasuries and mortgages: to replace the buyers that were essentially written out of the markets. And that’s also the reason it’s next to impossible for middle-class families to get a mortgage.
Meanwhile, the economy is stalled out. The revised fourth-quarter gross domestic product figure came in at a feeble 0.1 percent.
But the band plays on. Bernanke reassured the markets, and they responded by hitting close to their all-time highs.
But unlike past highs in the market, this rally isn’t based on economic growth or recovery. Instead, it is grounded in low interest rates, backed by trillions of liquidity injections.
The Fed is the raging bull of the capital markets.