In my mind, the Bernanke years at the Fed can be divided up into two parts. After the Alan Greenspan Fed (of which Mr. Bernanke was a part), in an effort to combat the possibility of deflation, kept interest rates so low for so long that it created asset bubbles, the Bernanke Fed, now afraid of inflation created the environment for a financial collapse. This was the first part.
After fighting the fear of inflation for too long, Mr. Bernanke and the Fed threw everything they could against the wall in an effort to avoid another Great Depression. (See for example, "Bernanke's Next Round of Spaghetti Tossing" from November 10, 2010.) The battle continues!
As America and other developed nations struggle to recover from the financial crisis, the ongoing challenge now starts to claim casualties in multiple asset classes around the world.
Buying into the market now at these valuations could result in a very painful affair, he said. What value investors should be doing is putting together a shopping list for when stocks go on sale.
As if it wasn’t bad enough for the millions of Americans scraping by on paltry interest payments, now they face another threat: the loss of principal on their bonds and other fixed-income assets.
The sell-off in fixed income began slowly on May 10, an otherwise uneventful day with no obvious catalyst for any change in sentiment. It picked up steam when Fed sources didn’t step forward to calm markets. Then, in comments to Congress on May 22, Mr. Bernanke said, “We could in the next few meetings take a step down in our pace of purchases.”
Fitch Ratings warned last Tuesday that prices for single-family homes in the regions with the biggest housing rebounds had been outpacing the growth rate in the local economies and “could stall or possibly reverse” if big investors start selling.
The Hindenburg—the stock market version, of course—may not have crashed into Wall Street Friday, but it certainly appeared to be circling.