No Easy Way Out Of The Dilemma
It seems incredible that the Fed is creating the third bubble within 11 years, but that is what is underway. In the late 1990s the Fed kept the pedal on the gas and helped engender the dot-com bubble that collapsed with a 75% decline in the Nasdaq and 50% in the S&P 500. To prevent the economy from correcting the imbalances created in that era, the Fed kept the funds rate at 1% for an extraordinarily long time, thereby fostering the backdrop for the historic housing boom that also collapsed and came dangerously close to bringing down the global economic and financial system.
The initial gargantuan efforts by the Fed and the Administration and Congress to keep the economy from collapsing were necessary and effective. Since then, however, further stimulative programs have resulted in only a tepid economic recovery along with the addition of dangerous amounts of new debt and a soaring stock market that seems doomed to disappointment once again as in 2000-to-2002 and 2008-2009.
The Fed jump-started the stock market with two rounds of massive easing commonly known as QE1 and QE2. Not coincidentally, the market bottomed in March 2009 just as QE1 got underway. When that program, consisting of the Fed’s purchase of $1.5 trillion of Treasury Bonds and mortgages, ended in April 2010, stocks dropped 17% in a few months. When stocks declined and the economy faltered Chairman Bernanke, at a late August meeting in Jackson Hole, announced the Fed’s intentions to institute QE2, a program to buy $600 billion of 2-to10-year Treasury notes by June 30, 2011. Since that time the market began rising and hasn’t stopped since. Notably the program, which actually began in October is pumping about $3.4 billion into the economy and assets every workday of the week.