An Imminent Financial Crisis? Find Out What Fed Chairman Ben Bernanke Is Saying
by Dr. Mark Skousen, Advisory Panelist, Investment U
Thursday, January 11, 2007: Issue #627
"Ben Bernanke is my first choice as Fed chairman because he has the temperament to be Fed chairman. He is careful and deliberative, and not prone to panic." - Arthur B. Laffer, Laffer Associates
This past weekend, I attended the American Economic Association meetings in Chicago. And I was fortunate to have lunch with Fed chairman Ben Bernanke He wouldn't take questions about current Fed policy, including interest rates, but he spoke volumes when he gave his formal talk to us at the luncheon.
Ostensibly, the topic was "Central Banking and Bank Supervision in the United States," but reading between the lines, it is clear that Bernanke is worried about a financial storm ahead...
In his speech, he used the terms "crisis," "risk," "panic," "threats," "stress," and similar words 36 times.
We know from the last Fed meeting that Fed governors are worried about the slumping housing market. And worried they should be, after encouraging the "irrational exuberance" in real estate by lowering rates to 1% in 2004. But given last Friday's strong employment report, I doubt if the Fed will cut rates unless there is in fact an imminent financial crisis of some sort, which will require more liquidity and lower rates.
Build Your Own "Financial Crisis Center"
Bernanke told us at the lunch that the Fed has set up a "crisis center" to handle potential global financial problems - to anticipate them, and to deal with them if they occur. What are the possibilities?
- A dollar crisis, like the one Paul Volcker suggested in the early 2000s.
- A non-dollar currency crisis in Asia, Europe or Latin America (shades of the 1997 Asian currency crisis).
- A housing crash.
- A major terrorist attack on a financial center, such as New York, London or Tokyo.
- A sharp rise in inflation.
After Bernanke's talk, I spoke with Yale professor Robert Shiller, author of Irrational Exuberance, about the Fed chairman's speech, and Bob said it was an important one. It shows that the Fed is living up to its job, he said, protecting us from future financial crises.
Neither Bernanke nor Shiller think a crisis is "imminent," but we must be prepared for the unexpected. Bernanke himself revealed the various policy measures the Fed might take in response to a crisis: buying government bonds, providing overdrafts and other short-term credits to banks, currency swaps (to boost the dollar), and "securities lending," that is, lending money to institutions to buy stocks.
How should investors prepare for another financial panic? The sharp selloff in oil, gold and commodities in general is a positive sign that inflation fears are overblown. But I suggest each of us have our own form of "financial crisis center." Invest in some gold and silver coins, commodity ETFs and mutual funds and cash. But don't go overboard. Insurance is worth having, but too much insurance is costly and unnecessary. Currently, I'm recommending that you invest no more than 10% in natural resources.
Today's Investment U Crib Sheet
- How's the U.S. dollar doing? Since February, it's down 8% against the euro. And based on the U.S. Dollar Index, the greenback's value is actually 15% lower than it was in March of 1973. The U.S. Dollar Index is a general indicator of the international value of the dollar, calculated by factoring in the exchange rates of six major world currencies - the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. The Index was created in 1973, with a base of 100. This morning, it was at 85.05.