Because of the dilapidated state of the banking system, Chairman Bernanke’s rate cuts have done nothing to stimulate the economy. Bernanke has injected money, but the banks have refused to, in turn, inject it into the economy.
The Fed’s own Senior Loan Officer Opinion Survey provides direct proof that banks are tightening instead of loosening.
And we can see the lack of stimulus directly by looking at the money supply. On the chart below, I plot the Fed Funds interest rate (blue dots) along with the True Money Supply (red dots). Notice that money supply growth has not changed at all since Bernanke began slashing rates (click chart to enlarge):
Even scarier: look back to the previous recession on the chart. After the money supply began to soar in early 2001 (red dots), the stock market didn’t bottom until a year-and-a-half later (October 2002).
What has become of the money that Bernanke has injected into the system? Some was obviously used to indulge in a little gambling in commodities – especially oil. But the bulk of it has gone to fill a small part of the giant holes left in banks’ balance sheets left by the massive losses created by the sub-prime mortgage Ponzi scheme and its fallout.
“Easy Al” Greenspan was able to end the last recession by taking rates down to 1% in 2003, but he had a functioning banking system to work with. Bernanke only has a smoking crater where the banking system used to be.
The moral of the story is that the Fed can only stimulate the economy through the banking system. Clearly, that is not happening. One day, the banks will loosen their lending and the money will flow. And a year or so after that we can start looking for a bottom in the stock market.
Jim “The Prophet” Cramer thinks the market put in its final bottom in July. Here is what he said about Friday’s low-volume rally:
“I think today’s a real rally. I expect more. The more time we keep ourselves from the July 15 lows the more obvious it will be that my position that those lows will hold will be true.
It was a radical proposition when I said it then. It will soon be gospel.”
“Gospel” indeed! He’s been calling a bottom in housing for two years now! I know that Cramer is aware of the business cycle, but I’m wondering exactly how deep his knowledge of the subject might be. Maybe an inch or two?
So why has the economy only weakened and not gone over a cliff? Because of the massive federal spending on the regime-change project in Iraq. Investment bankers may be flipping burgers, but military personnel and defense contractors have money in their pockets.
Nonetheless, despite the Fed’s low interest rates and the federal government’s massive spending, the economy is still rolling over. Job losses are mounting and I’m afraid that there will be no easy way out of this particular recession.
