At 10:15AM the market appeared ready to continue its dive into oblivion. But a white knight came to the rescue. Ben Bernanke told congress that the credit markets were improving and that the recession could end this year. The market quickly popped 100+ points over the following 30 minutes and is up 150 points as I write.
The Oracle of Augusta is also credited with this stupendous quote in March of 2007:
“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”
Or this one in May of 2007:
“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”
Not to mention Bernanke was very concerned about inflation in 2007-2008 as the greatest deflationary threat of the last 75 years was directly in front of us. His lack of prescience at every twist and turn of this crisis has undoutbtedly added fuel to the fire. I have a feeling Nouriel Roubini and Nassim Taleb are having a good laugh over this testimony.
Update (1:40PM) : Bernanke has reiterated that the government will not nationalize the banks. The financial sector is ramping on the news – up 8%+. This is more of the same. We can put the surgery off as long as we want, but the cancer will have to be dealt with at some point in the coming 6 months. After AIG’s preannounced $60B loss yesterday I think it’s safe to say that the bank issues are FAR from over. As Ken Lewis said, “we need the economy to recovery”. The cancer might cure itself, but at this point we risk a much more severe outcome by delaying action….The market likes this news in the short-term, but reality is a tough pill to swallow. Some form of nationalization/reorganization will be back on the table for these banks soon enough….The government is playing a very dangerous game of chicken by refusing to confront these issues head on.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.