Fed chief still doesn't get it

Furthermore, if discouraged workers were included (a category of people who had stopped looking for work, defined away during the Clinton administration), the unemployment rate rose to 13.7%.

I cannot overemphasize the point that I've made many times and which lies at the heart of my book "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve": We bailed out an equity bubble with a real-estate bubble. The bulk of gross domestic product growth in the 2003-07 up-cycle was a function of mortgage-equity extraction, and 30% to 40% of new jobs were created in real-estate-related industries. Now that's all gone.

What's left are debts that people can't service (due to living beyond their means), further exacerbated by the inflation that's squeezing everyone's paychecks.

Curses be to the curve

Pain has also been meted out among what folks think of as a prosperous society -- leveraged operators, financial institutions and hedge funds -- given how many of them "trade the curve," using Treasury positions to profit from interest-rate trends. That trade has gone against them. Participants who had steepeners on have been crushed, with the short end enduring the worst of the damage.

It's very important for people to understand that the world's financial system is deleveraging, a process that's starting to affect a lot of different markets. The price of credit will continue to rise (due to said deleveraging and inflation), even as global economies weaken.

Trillions of dollars of financial instruments will need to find homes. With supply outpacing demand, buyers of those instruments will be in a position of requiring lower prices (i.e., higher interest rates), causing more dislocations down the road.

Hiking . . . only on the Potomac Trail

Given that backdrop, I believe the chance of Bernanke raising interest rates is essentially zero. I think the Fed's next move will be to ease rates, though I don't know if that will be three months or six months from now.

What I do know is that Bernanke is not really serious about containing inflation, as is obvious by how far the Fed has let it climb. He cares only about avoiding a downturn. So, when it looks like push has come to shove, Bernanke will ease again.

Push is coming to shove, and there's nothing he can do to stop that.

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