Jeremy Grantham Skewers the Fed….Again

By on October 27, 2010

Jeremy Grantham has released his latest quarterly commentary and it’s excellent as usual. He spends much of it in a diatribe against the deserving pair of rogues Greenspan and Bernanke.

Unfortunately for us, as the economy recovers and the artificially stimulated market gets up a nice head of steam, the Greenspan-Bernanke team officially loses interest, emphatically and repeatedly denying any interest in, or responsibility for, curtailing their latest experiment in market manipulation. And manipulation is exactly what it is. They express uncertainty that a bubble could even exist. Who am I, argued Greenspan, to disagree with the opinions “of tens of thousands of well informed investors?” They both imply or state outright that markets are overwhelmingly efficient, yet they themselves manipulate the prices to help in the recovery from a recession! How are we to interpret these contradictions? As distortions of their true beliefs, or as sloppy thinking revealed? Whichever it is, we have discovered twice in a decade, and may discover again in a year or two, that this asymmetric policy of stimulating stock moves by setting artificially low rates and then leaving the bull markets, when overstimulated, to bubble over, is dangerous. It is probably the most dangerous thing to inflict on a peacetime economy with two possible exceptions – runaway inflation and a housing bubble. So, not only have these two Fed bosses been almost criminally inept in ignoring stock bubbles, they have also deliberately instigated them as a policy tool! Since we continue to be at Bernanke’s mercy and Greenspan’s spirit is still alive and well, could things be much worse?

Grantham answers that question with a yes. It is a typically long letter, but worth reading in its entirety. For those who don’t like reading there are several excellent charts and graphs included. Just click on the source link “GMO” directly below.

Source: GMO

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