Chasing Beta: Bernanke & Greenspan

Here is a very well-written article about the current US market scenario. Despite my recent bullishness, I have to concede that the Fed's 50 b.p. cut in interest rates was sheer lunacy. The only defense I can think of to support such a cut is that it is just so completely mad that it might actually work. As several commentators have pointed out already, the Fed now has nowhere to go if the going gets tough again. While it's still too early to tell whether this will be the case, it is impossible not to agree with the logic behind Peter Bookvar's (Miller Tabak) statement :

'You don't have a multi-year credit bubble that is over in a couple of months; why the market thinks that is beyond me.'

It's also interesting to see everyone hammering Greenspan right now for having kept rates so low for so long in the 1990's -- as if he is personally responsible for the current volatility. If Greenspan was foolish, then Ben Bernanke looks like a circus jester: giving markets not only a multi-billion cash-fuel throughout the summer, but then topping it all off with a giant, unprecedented rate cut. This is not to criticize Bernanke per se; in many cases he has helped stimulate markets out of a recession which could have been especially difficult to shake off. However, the fact remains, there is always a cost where there is a benefit, and when you stimulate an economy so quickly out of a recession, you get lot of hasty money.

On a further note, it will be interesting to see the consequences if the market does hold up. As I pointed out recently, one potential effect is that speculators increasingly look overseas to the heady emerging markets for record gains:

This recent action in South Asia's derivatives markets looks interesting alongside the ruminations of the supposed global credit crunch. For if there really is a shortage of global liquidity, then why are funds buying ultra high-risk emerging market equity derivatives?

... What appears to be the case is that given the European and U.S. authorities' enormous cash fuels to domestic banks, these banks and funds have started to look for the same kind of gains they were getting from speculating on sub-prime. After all, there is still demand from the hundreds of event-driven funds out there. An obvious contender is emerging market derivatives, which are volatile, but extremely high return. And with emerging market growth soaring this year, the equities possibly look like a good bet.

This would give us almost a mirror-image picture of the 1990's again -- where funds couldn't resist over buying emerging market securities and in turn over-stimulating their currencies, until the whole global system temporarily collapsed. In that instance, it will be much easier to draw parallels between Bernanke and Greenspan than critics of the former chairman of the Federal Reserve may like to admit.