The Federal Reserve doesn’t see much chance of an equity bubble, as they continue to buy up equity pools to the tune of over $2.5 trillion thus far. “Inflation is currently subdued, and inflation expectations appear well anchored,” states Mr. Bernanke in his testimony to the Senate Banking Committee. It’s difficult not to focus on the grey haired gentlemen positioned not far behind him during his testimony. The man in a room full of suits, laughing to himself as Bernanke comments, “Equity holders are still being somewhat risk adverse.” (BloombergTV, 2013)
Throughout his entire term, interest rates have remained near zero to spur growth. Inflation can’t happen until the monetary system tightens its’ belts. When questioned about concerns of inflation, the Chairman quips, “My inflation record is the best of any Federal Reserve Chairman in the post-war period.” (Bull, 2013) That may remain a fact if Mr. Bernanke doesn’t run for a second term, as inflation isn’t expected to hit for 4-5 more years, and his term is up in 2014. The man who follows Mr. Chairman will likely have a very bad record with inflation, but he didn’t start fire.
When the housing bubble burst, the average day Joe said, “you can’t blame me, the bank knew I couldn’t make the payments of a second mortgage.” The bank said, “Don’t blame us; we thought it was ok to give everyone the opportunity of home ownership. Besides, they were only on our balance sheets for a couple months before Fannie and Freddie stepped in.” Fannie and Freddie said, “We’re done, the FAA needs to share in this great fortune.” The FAA said, “As long as their insured.” Here comes AIG, “We can insure anything.” As long as the Federal Reserve can spare a few dollars, let’s just hope they’re not too big to fail once they pull on them lending reigns. Maybe Federal Chairman Bernanke isn’t fully to blame, he’s just putting out fires. You have to feel a little pain for the man who follows.
He’d better be a hell of a salesman. The Federal Reserve sees no reason to stop buying asset bonds now. They continue their bond purchasing at approximately $85 billion a month. (Bull, 2013) Ben Bernanke’s predecessor will need to unload a few trillion dollars in assets once he gains power. These packages were once referred to as toxic assets, and since have become a bit more appealing when given the term mortgage-backed securities.
The central bank is in charge of making money; they didn’t get where they are without doing a little laundry. There was the “Mark to Market” accounting rule that once benefited financial institutions prior to the mortgage crisis. (Knowledge@Wharton, 2009) This accounting rule would have made bank profits high when the assets price was high, and depleted those profits when prices feel. But if they had been basing their profits on what the amount of the loan was, as opposed to the price of the real estate, it really makes one question if the losses would have been as devastating. Our central bank has a new accounting rule that suits them perfectly for this crisis. An accounting rule may be the key to unloading the trillions of dollars in packaged assets they purchased. This new rule will allow them to defer losses, use credit for interest, then take on the payments once their books become profitable again. (Kurtz, 2013)
To quote Callahan, “You want to play the game, you better know the rules, luv.” Nobody knows the rules’ better than Dirty Harry playing the “The Dead Pool” game. (Horn, 1988)
BloombergTV. (2013, 02 26). Bernanke: I Don't See Evidence of Equity Bubble. Retrieved 02 26, 2013, from Bloomberg.com: http://www.bloomberg.com/video/bernanke-i-don-t-see-evidence-of-equity-bubble-1ECUuKK5TheYLOdKUN8s0g.html
Bull, P. d. (2013, 02 26). Bernanke says Fed stimulaus benefits clear, downplays risks. Retrieved 02 26, 2013, from Reuters : http://www.reuters.com/article/2013/02/26/us-usa-fed-idUSBRE91P03T20130226
Horn, B. V. (Director). (1988). The Dead Pool [Motion Picture].
Knowledge@Wharton. (2009, 04 01). Are 'Mark-to-market' Accounting Rules on the Mark. Retrieved 02 27, 2013, from Knowledge@Wharton: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2195
Kurtz, A. (2013, 02 22). Fed officials: Don't worry if we lose money. Retrieved 02 27, 2013, from CNNMoney: http://money.cnn.com/2013/02/22/news/economy/fed-future-losses/index.html?section=money_topstories