Fed Chairman Ben Bernanke gave a speech in London today on the current credit crisis. He detailed the nature of the current financial situation and the steps that the Fed has taken to stabilize the situation.
He clearly laid out that the credit markets are not working properly, and the Federal Reserve is now assuming the role of lender of last report to alleviate the problem. This has taken multiple forms thus far:
- Extension of credits to banks
- Extension of credit through commercial paper purchases
- Planned purchases of other short-term assets
- Purchases of high-quality long-term assets
He acknowledged that the Fed has not only become the lender of last report but, in fact, the lender of only resort.
In essence, Chairman Bernanke said that he will do anything necessary to repair the credit situation. However, this appears to be something that monetary policy alone cannot accomplish. He acknowledged that confidence is the key to repairing credit and lending.
I believe that fiscal stimulus will also be required on a large scale. Until people feel confident that the economic situation stabilizes, there is unlikely to be an extension of private credit. This is a problem when unemployment is rising and housing prices are falling.
In other words, this crisis will take much longer to resolve than most are anticipating, with additional pain along the way.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com and author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street.
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