On December 1, more people tuned into Federal Reserve chairman Ben Bernanke's speech at the Austin, Texas Chamber of Commerce than watched Britney Spears' comeback video. As scantily clad as the pop princess was, Bernanke's "naked" candor about the current state of the U.S. economy was even more provocative.
In a nutshell: Bernanke insisted today's economic slump "bears no comparison to the much deeper crisis of the Great Depression." The main difference being -- well -- him. Says Bernanke: "Policymakers in the 1930's essentially allowed the financial system to collapse and they didn't do anything about it."
More like "couldn't" do anything about it: In the 1930s, the Fed's spigot-loosening powers were limited to rate cuts (6% to 2.5% between 1929 and 1932), and any increase in the money supply had to be backed by gold.
VERSUS now: The Federal Reserve has fired more rounds on its bailout bazooka than Rambo in hopes of keeping the leading pillars of the U.S. economy afloat. This extension of virtually unlimited credit, says Bernanke, will stave off another Great Depression.
Is he right?
(Bailouts WON'T Save The Day: At the start of the year, our team of analysts warned: The giants of finance were NOT "too big to fail." Now, our 2008 Financial Forecast Service publications reveal where the bear will go from here. Act Now)
Throughout U.S. history, there has been only ONE requirement for a financial bailout to pull off a meaningful recovery: A bull market in social mood, as reflected by a rising stock market. Here, the September 2008 Elliott Wave Financial Forecast’s close-up of major government bailouts versus the “Real” Dow (i.e. measured in terms of gold ounces) since 1966 speaks volumes.
One look at this spellbinding picture and there’s no going back: During the sustained bear market of 1966-1982, bailouts that coincided with apparent stock market lows were always ultimately followed by lowerlows.
Conversely, each government-backed rescue beginning in 1982 to the 1999 peak overlapped with higher stock market highs, reflecting the raging bull market.
Flash ahead to October 2007: The nominal Dow (as measured in U.S. dollars) catches up to the Real Dow on the downside. And, the Fed's previously cautious stance on bailouts becomes one of reckless abandon -- culminating in the October 3, 2008 passage of the $700 billion "Emergency Economic Stabilization Act."
On the same exact day, the October 3, 2008 Short Term Update warned: equities would keep their bearish promise. In STU’s words:
“All the ‘uncertainty’ over the government’s rescue plan has been removed with today’s passage. Now all we have is the ‘certainty’ of the stock market’s cycle. The ‘bill’ that just passed is thought to somehow address the market’s problems. It won’t, nor can it.” The Dow will “decisively break down from current levels.”
Since then, the Federal Reserve has approved the allocation of $8 T-T-Trillion in bailout money, to every fledgling industry from banking to brokerage firms. Not to mention a temporary (maybe?) ban on short selling for over 900 companies listed on the NASDAQ -- AND -- NINE interest rate cuts (425 basis points) to a five-year low of 1%.
YET -- the share price of nearly every "rescued" company has continued to plummet, as has the Dow Jones Industrial Average, which is down more than 40% from its October '07 peak.
In the words of the October 2008 Elliott Wave Financial Forecast:
“Bernanke is trying to calm the waves by raising up sunken ships. Any instrument at his disposal still rests upon the sand we call social mood, which is simply too powerful to be nudged in the direction desired by any central banker.”