Some of the senators yesterday questioned Bernake on why mortgage rates did not decrease even though the fed cut rates. What they don’t seem to realize is the Federal Reserves rate cuts were never aimed at lowering rates for personal loans like mortgages. It is all about making it cheaper for desperate banks to borrow money more cheaply from the Fed’s discount window. If not for the liquidity being provided by the central banks and investment from sovereign wealth funds in all likelihood many major banks would be out of business today. So to recover losses they have kept rates higher or actually jacked them up while they borrow money from the Fed at much lower rates than they are charging. The banks deserved what they had coming, no one should be bailing them out. That is like rewarding a child that has been naughty. As the old saying goes spare the rod and spoil the child. Now those banks who survive will be less inclined to scrutinize their loans and other business deals since they know that the Fed will bail them out if they start taking on water. Meanwhile the little guy takes it right in the rear as inflation spirals out of control and more of their wealth is eroded more quickly than usual. I thought Bernake stuttered a lot but when I saw Paulson speak last night all of a sudden Bernake seemed like the smoothest talker in Washington. Where did they find this guy? You would think he was the lowliest street urchin they could find but in fact was the former head of Goldman Sachs. It probably helps that Goldman is one of the top contributors to all but Ron Paul’s presidential campaigns. Kind of funny how all three of his predecessors ended up in government too, no wonder Goldman is the golden boy of banking, is the largest in it’s field and is never in trouble. This must be what gives them the right to pretend they did not take losses in the sub prime crisis and cook their books. In any case his comments did not help out the case for the dollar with his talk of globalization (code for wealth redistribution ala communism) and this coupled with good data from Japan conspired to sink the dollar and bolter the yen considerably last night and today. Just hearing the man speak and stutter while answering scripted questions which were right in front of him on the podium made me want to sell the dollar. Well, so much for the strong dollar policy. Carry traders are living in fear after the jobless rate fell to 3.8% year on year and household spending soared. This is all very bullish and I see USD/JPY going to 101.50 and GBP/JPY going to 200 in the near future. Meanwhile German retail sales beat expectations and helped lift the euro and Swiss franc to new all time highs. US core PCE (the Fed’s favorite measure of inflation) was higher than economists forecast but don’t expect the bankers at the Fed to do anything about it. Not while the private banks they represent are near collapse. I don’t see any reason for the dollar to rally next week.
