Bernanke's Fateful Decision

The Stock Market is on an unusual rise, the dollar is on an up swing, and gas prices are in decline. Furthermore, we just recently learned that the economy grew in the last quarter, which means we are not in a recession (regardless of how it "feels"). All of these examples of good news should lead to better news today when Federal Reserve Chairman Ben Bernanke discusses the future of interest rates.

Bernanke has, of course, three options. He could raise rates to further curtail concerns about inflation, lower them to make sure that there is enough stimulus to keep the economy growing, or keep them the same as a reasonable response of not pouring fuel on inflation or stalling an apparent economic turn around. Bernanke's decision is very important.

If Bernanke lowers the rates, expect a continued decline in the value of the dollar, serious concerns being raised about the economy's future health in the minds of those on Wall Street (because lowering rates would be seen as the Fed still being concerned about a recession), and the simple fact that interest rates will be getting too close to zero for its own good. After all, rates can't go below zero. If Bernanke raises rates, an idea being suggested by some as a way of saying the economy is now on the mend and to stop potential inflation, the short term impact would likely be devastating. It would be seen as the pouring of cold water on an economy that is only now beginning to warm up.

The best approach, according to most economists, is to simply do nothing. This sends a message that the economy has begun to rebound and it doesn't need further stimulus. The psychological boost on Wall Street to such an approach will be very powerful. It could be argued that there is too much money in the market today any way. Doing nothing would be an excellent way to let productivity catch up with the many dollars that are floating around in the economy today. Since too much money chasing too few goods creates inflation, restraint is helpful. It will be the first time in a very long time that the Fed has shown such restraint. The physicians motto of "do no harm" should be Dr. Bernanke's as well. Let's just hope he is a good physician.

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Declaring a Recession to End a Recession

It appears that virtually every major player in politics and government are now declaring a recession. Republicans and Democrats, Members of Congress and senior Executive Branch officials, and now, senior leaders of the Federal Reserve. They are all declaring a recession.

The academic definition of a recession is economic decline over two quarters -- that's six months for those of us who don't like calendars -- of economic decline. We barely have had two months, but virtually everyone is surrendering to the "R" word.

So the question is why? Why are we so anxious to enter a recession? Charles Payne of Wall Street Strategies and a regular feature on Fox Business and Fox News as well as the Houston Business Show, has said that although it may be too soon to declare a weaker economy, there are specific strategies we can take in event of such. It seems to me that we are pursuing such policies (e.g., pumping money into the economy to encourage growth) and it actually seems to be making matters worse. Payne agrees as do most sensible economic analysts. If we keep these inflationary policies up, we will be looking at the bad old 1970s again.

There seems to be a consensus that, if we declare a recession, that we can move on to greater economic heights. So far it isn't working and, if anything, it is actually making matters worse. We will have to wait and see whether the negative rhetoric produces economic growth.

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Waiting on the Fed

Everyone from Wall Street to Main Street seems to be holding their collective breath in anticipation of the Fed's decision on interest rates. Will it be a quarter or a half? We know it will be something, but will it be enough?

Theory has it, less than a half will be an absolute disaster and the market will return to its recent dumping ways. Wall Street desires a major impetus to get the market going again and the economy moving in the right direction.

The trouble is, Wall Street doesn't operate in such a black and white manner. In spite of how "big" the Stock Market seems and how "important" Wall Street projects itself, it is really like any small neighborhood where people spend a great deal of time simply talking. Once the euphoria of the half a point settles in, people will start asking questions. "Wow, one-half, does that mean that the economy is in worse shape than we initially thought?" This kind of discussion could put them back on the roller coaster.

Still, the market wants it and, short of one-half, it is likely to go back to its ugly ways we have seen over the last month. But people should not be fooled in thinking that there is a simple panacea to stock market problems.

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Christopher Dodd's Bold Move for Exposure

Christopher Dodd (D-CT) is considered an also ran in the race for the Democratic nomination in 2008. He lacks money, he lacks supporters, he lacks political base, but he keeps on running. Desperate times call for desperate measures and he is certainly in that situation. However, this week he has been one of the most mentioned names on the news, often eclipsing Clinton and Obama.

Why the sudden interest in Dodd? Well, the Connecticut Senator is the Chairman of the influential Senate Banking Committee and he is taking the Federal Reserve Chairman, Ben Bernanke to task for doing too little, too late in the current mortgage crisis.

There is a great deal of speculation as to his objectives. Some say that he is trying to look like the champion of the lower income individuals who have been harmed by the mortgages they obtained. Others think that he is trying to curtail the independence of the Federal Reserve. I'm cynical, I think the low profile candidate of the high profile race is looking for a little media attention. He isn't going to seriously influence our monetary system. Furthermore, he won't even intimidate Bernanke in rescuing home owners (although I won't be surprise if Congress does such a bail out). He simply is trying to develop an affordable way to get his face on the evening news. This week, it worked.

Perceptions About the Economy: What are People Thinking?

This weekend I watched my favorite groups of business news programs on Fox News on Saturday. During the program I was astonished to hear that a recent poll showed that six out of ten Americans believe we are worse off now economically than we were five years ago.

Five years ago? Are we talking about the summer of 2002? Give me a break. At that time:

* We were still recovering from the effects of September 11th as people were emotionally and economically devastated.

* The Federal Reserve were still cutting interest rates in order to spur confidence in the economy.

* Headlines in publications said things like "Terrorist Attacks, Interest-Rate Cuts, Recession Set Stage for Interesting 2007."

* Unemployment rates were roughly an entire percent point higher than it is today (4.8 percent today versus 5.7 in 2002, approximately 16 percent higher than today).

So why does such a negative view of the economy exists? Because the media makes a living off of bad news, which is a phenomenon I have discussed here, here, and else where. With all of the criticisms people can have for George Bush, a weak economy isn't one of them. But that won't matter when the elections come in 2008, because voters won't be told about the real economy that exists.