Putting The Fear Of God Back Into Reckless "Investors"?

I can only hope so. I can only hope that Ben Bernanke is serious about undoing the wretched "we're the Fed and we're your FRIEND!" performance of Alan Greenspan, which has given us the distorted, bubble-ridden, false economy we have today. In an ideal world, investors should be afraid and worried about what the Fed might do. The Fed should be known to be responsible for either kicking ass or chewing gum, with no one exactly sure when it will be all outta gum. People need to be exceedingly prudent with these things they are calling "investments".

If your "investment" is going to tank (whether it be real estate, stocks, gold, or anything else) because the Fed is going to raise rates to the "extreme" (ha-ha) level of 5.5% or 6.0% or even 7.0%, then maybe there's something wrong with your investment.

Anyway, Stephen Roach:

After years of excess accommodation, the US central bank may be trying to reclaim the "tough-guy" image that a credible monetary authority needs.

It’s been a long time since I said something positive about the Fed. That saddens me. The Board -- as insiders call the Washington-based Board of Governors of the Federal Reserve System -- was my first place of gainful employment after grad school. I spent seven wonderful years there in the 1970s, and there will always be a soft spot in my heart for this great institution. It has pained me no end to write of a Fed that lost its way in the bubble-infested waters of the past seven years. But now, for the first time in a long time, America seems about to get a meaningful dose of monetary discipline. Ironically, it could be tougher on the markets than on the economy. For investors, that’s a painful wake-up call, to be sure. But in the end, it’s absolutely essential in order to put an unbalanced, asset-dependent US economy on a sounder and more sustainable course. Three cheers for Ben Bernanke!

Of course, he hasn’t really done anything just yet. The Fed could disappoint -- and end up being all bluster and no action. Or there is always a chance it’s too late -- that America’s imbalances are so advanced, the only way out is the dreaded hard landing. But in my new role as the optimistic pessimist, I am willing to give Bernanke & Co. the benefit of the doubt. By talking tough in the context of only a fractional overshoot of inflation -- an overshoot that may be more statistical than real -- the Fed is sending an unmistakably clear message of a move to policy restraint. And by delivering that message in the context of down markets, the rhetoric of monetary discipline has an even stronger ring. If there’s ever been a time for America’s central bank to take on the markets, this must surely be it. Former Fed Chairman William McChesney Martin put it best in his legendary quip: "The job of the Federal Reserve is to take away the punchbowl just when the party is getting good." For years, the Fed has provided more than its share of refreshments at the biggest party of them all. Those days could now be drawing to an end.

[a couple of paragraphs which take bogus gov't inflation statistics at face value, in which Roach generously credits Bernanke with "striking early in the inflation game" rather than grotesquely late]

Maybe I’m reading too much into this, but I think there is an important implication of the Fed’s hair-trigger response to an arguable inflation scare: After years of excess accommodation, the US central bank may be trying to reclaim the "tough-guy" image that a credible monetary authority needs. And there is good reason to believe this sentiment is global in scope. Recent monetary tightenings by the ECB and by central banks in India, Korea, Turkey, South Africa, and even Iceland all speak to a similar disciplined mindset. And these actions all have comparable implications for the global liquidity cycle and world financial markets -- reducing the flow of high-octane fuel that has fed the multiple asset bubble syndrome of the past seven years. I am not saying that central banks are united in their views in targeting asset markets. But I do believe that a strict adherence to inflation targeting may have become a foil that now enables the authorities to turn their attention to other important issues -- namely, the increasingly dangerous excesses of a very powerful liquidity cycle.

This sudden outbreak of monetary discipline around the world very much fits the script of my newfound optimism on global rebalancing. The world’s biggest imbalance -- America’s current account deficit -- is a direct outgrowth of a property-bubble-induced shortfall of income-based saving. Lacking in domestic saving, the US must import surplus saving from abroad in order to grow -- and run massive current account and trade deficits in order to attract foreign capital. To the extent central banks have promoted asset-bubble-related global imbalances by overly accommodative monetary policies, an emerging bias toward monetary discipline is a very encouraging development on the road to global rebalancing. While it’s "tough love" for bruised investors, this may well end up being the requisite correction that clears the decks for the next upleg in the markets. Thank you, again, Ben Bernanke.