The stock market isn’t happy with the prospect of the Federal Reserve backing off its stimulus of $85 billion a month in purchases of mortgage-backed securities. The hot money from the Fed, along with the rock-bottom borrowing rates for its member banks to get money for “trading,” has been one of the big drivers behind the market’s remarkable post-recession run. Bernanke apparently made things worse with a press conference aimed at transparency, as opposed to former Chairman Alan “Bubbles” Greenspan’s Yoda-like pronouncements.
Greenspan rarely followed the advice of his legendary predecessor William McChesney Martin, who ran the central bank from 1951 to 1970. Martin famously said it was the role of the Fed “to take away the punch bowl just as the party gets going,” Bernanke hinted that his Fed is going to do just that, albeit slowly. The markets are mindful of one Greenspan attempt in 1994, which shocked the system and led to widespread losses and slowing. The difference is that the ’94 move involved raising interest rates from a then record-low 3 percent to 6 percent. Bernanke has pledged that rates will remain at essentially zero until unemployment falls below 6.5 percent. But pulling back on the bond buying, and presumably shrinking the huge money supply, is enough to spook big investors. Or at least cause a period of rebalancing with plenty of instability.
But there’s a back story. The markets are also worried about China, where growth is slowing and the banks and shadow banking system are showing signs of serious trouble. China’s central bank is failing to infuse capital into the system and inter-bank funding is freezing up.More