Brilliant or Stupid Ben?

market 's 300 point down.

“I think the greater risks are to the downside," Ben Bernanke reiterated in his second day of congressional testimony yesterday, “that is, to growth and to financial markets.”

We heard hints in his testimony Wednesday that more rate cuts might be on the way. Yesterday, the Fed chairman made it quite clear that he means to cut rates again, noting that inflation expectations have remained “pretty stable” and that “inflation will moderate this year as oil and food prices don't rise as much this year as they did last year.”

From the cheap seats, it’s sure looking like every food and energy commodity is at or near an all-time high and U.S. inflation is growing at a rate far from “pretty stable.” Regardless, gamblers in Chicago were emboldened by Bernanke’s remarks… futures there now price in a 100% chance for a 50 point rate cut in March, a 62% shot for 75 points.


Following Bernanke’s testimony, the dollar reached new lows across the globe. The dollar index has given up two full points since the Fed chairman began his testimony on Wednesday, and now sits at an all-time low of 73.

Likewise, the euro shot up to $1.52 yesterday, an all-time high of its own. The yen gained all the way to 104, a three-year high versus the greenback. The Canadian dollar and British pound stood still at about $1.02 and $1.98.

This is starting to surprise even us. We remember predicting the euro would go to $1.50 just after parity was reached… and getting roundly criticized for it. Now that we’re inching even higher, we suspect it’s going to have to gain some sympathy votes sooner or later.


“There will probably be some bank failures,” Bernanke suggested, saying that many overexposed small financial institutions in the U.S. are still at risk. While we respect Bernanke’s candor on the matter, markets didn’t care for his speculation.

Traders sold down financials in style yesterday, and the whole market followed… nearly1% losses for the Dow, S&P 500 and Nasdaq yesterday.


Neither Fannie Mae nor Freddie Mac helped in the matter much. Both banks reported big losses this week, writing down $3.6 billion and $2.5 billion in their respective fourth-quarter earnings announcements. Both losses were greater than Wall Street expected.

Naturally, as the U.S. two largest buyers and backers of American mortgages disclose a basket of bad subprime bets, the U.S. government has chosen to ease regulations on their investment capabilities.

Within hours of Freddie revealing its multibillion loss, the Office of Federal Housing Enterprise Oversight proudly announced that it will be removing limits to the amounts of loans and securities Fannie and Freddie can own. The two companies’ investment pools were formerly capped at a fixed level because of a few accounting “lapses” in 2004.

But now, Fannie and Freddie can invest in as many subprime-backed securities and risky mortgages as they can stomach, potential losses be damned. Brilliant.