Bernanke: Inflation could be a problem

Now that all the damage has been done. Bernanke is starting to talk about inflation.

The key points are:

– More thought needed on the Feds approach to asset bubbles
– Dollar has had a modest impact on commodity prices
– There is little indication of 70s style wage-price spiral
– Inflation expectations are a ‘significant concern’ for the fed

Comment: It is just a little on the late side to start talking about it now. The Fed knows better than anyone else that once inflation is in, it is very tough to shake it out. While I respect the fact that the Fed was eager to act in the face of crisis, it seems like they would have been more forward thinking about the implications of their actions. The dollar took a major hit as they were transmitting a message of panic and insecurity, and drastic rate cuts with no end in sight. It’s great that he wants to now telegraph the signal for no further rate cuts, but it is a little late isn’t it?

After all this time, Bernanke is going to think about defending the dollar? The mistake in not defending the dollar from being sold to no end, by being more firm about rates, is going to be costly over the medium term. We will now be waiting to see if the commodity bubbles deflate and to see if energy is ever going to come back down to earth. While I am not blaming Bernanke for all the problems out there, he certainly had the power to promote more stability. I have been somewhat disappointed in the Fed and its seesaw movement of rates, and drastic measures taken after the fact because of a lack of forward thinking.

The subprime thing was obviously going to be a disaster and there should have been more oversight being pushed into those markets far earlier. Since there wasn’t, why would our federal monetary system aim to bail out a bunch of lenders that shouldn’t be trusted to tie their shoes without supervision? To the same token, why would we write legislation and put together public “stimulus packages” to comfort homeowners that bought houses that they couldn’t afford? Why would we spend billions of dollars to keep them in that house that they can’t afford? You really have to wonder if ANYONE in the goverment ever took an economics class!

The markets are designed to balance out these inefficiencies. When the time came for the balance to be returned, the fed tipped the scales by giving banks a sweetheart deal of borrowing at ultra low rates and continuing to lend at the same rates. So basically, those of us that made sound financial decisions, should be getting a break right now, but instead, we are footing the bill for the “dumb money”.

I honestly hope that the Fed takes a step back and gets LESS involved with holding the hands of banks. It really isn’t fair for the rest of us.