Economy Sagging
Research for Online Investors

by John Dalt

3/01/11

Ben Bernanke, Fed Chairman, testified before the Senate Banking Committee this morning.  He doesn’t thing present commodity prices are endangering the economic recovery and said the spike in oil prices does not shake his commitment to QE2.  Bernanke characterized inflation as “modest.”

The GLD and SLV etfs hit new highs.  Crude oil and cotton spiked.  The market turned down.  You just have to love watching a guy defending a position in the face of mounting evidence it is backfiring.  If the Ben Bernanke was a trader he would have his limits reduced!

The best exchange came under questioning about the mechanics of buying Treasuries.  I learned this morning that it is illegal for the Federal Reserve to directly buy Treasuries.  I have done multiple searches on the internet and can’t find anything on this.  To get around this rule, the Fed buys treasuries from banks.  What happened to, “if it smells like a skunk, it’s probably a skunk”?  How far would a bank get with regulators with an explanation like this?

The Associated Press’s coverage of the Bernanke’s testimony covered the danger to the U.S. economy as QE2 winds down in June.  What happens when the Fed stops buying $75 billion dollars worth of treasuries every month?  Jack Albin, chief investment officer at Harris Private Bank is concerned the U.S. may follow the path of Japan.  Their central bank pushed down interest rates through quantitative easing starting in 2001.  As the central bank pulled back from the market, the benefits “evaporated.”  Albin said, “Once they took the quantitative easing programs off, the economy just sagged back to where it was before.”

In the House, Treasury Secretary Tim Geithner testified before the Financial Services panel.  He presented the administration’s plan to gradually dissolve Fannie Mae and Freddie Mac.  Republicans embraced this suggestion.  The administration wants legislation within the next two years.  One congressman suggested it could be done in the next two months and gradually get the government out of the mortgage business.

Democrats on the panel were aghast that Uncle Sugar wouldn’t guarantee mortgages; fearing low income home buyers would be hurt with private mortgage financing.  Short memory.  Didn’t we just go through a credit crisis because mortgage money was too easy?

One of the dangers of following news and politics closely is remembering past actions.  On Christmas Eve 2009, the Obama administration gave Fannie and Freddie “UNLIMITED” coverage to their balance sheets.  Previous to this the GSEs were supposed to wind down their balance sheets.  You can read our comments at the time, Are You Going to believe Me...Or your Lyin' Eyes?

To the mailbag:
I will mail a check tomorrow for renewal of my subscription to the Long-Term Portfolio. I’m looking forward to continuing to receive your updates and daily e-mails. I’m very pleased with the investment results so far.---Long-Term subscriber J.M.

John's reply:  Tell your friends.  Do them a favor!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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