A recession the Fed can't easily fix

By Bill Fleckenstein

For more than a month now, I have not wanted to be short stocks.

To begin with, I've felt it was too dangerous due to all the volatility. Second, I've understood how the market could trade higher for a while -- as folks' belief in the power of massive fiscal stimuli to contain our economic problems, combined with additional massive monetary stimuli, could lead them to conclude that perhaps we've seen the worst.

The third factor that (perversely) helps some people maintain a bullish outlook: The recession is now a year old. Conventional wisdom has it that by the time the National Bureau of Economic Research finally decides that we've been in recession -- as it announced Dec. 11 -- the slowdown is almost over.

That's because in the past, for the most part, recessions have been of the 12- to 18-month variety. By the time bureau identified them, and, given the market's tendency to discount events six months to a year down the road, we were near the end. So investors have come to associate the bureau's recession proclamations with the market lows.

Why this recession is different

Most of the recessions in this country over the past 50 years were caused by the Federal Reserve raising interest rates to battle inflation. The two most recent recessions, though, were created not by Fed tightening but as a consequence of its reckless easy-money policies followed by the exhaustion of, first, the tech-stock bubble and, later, the housing bubble.

• Play the video on the right to hear Steve Forbes' views.

Thus, this is not a recession that can be easily stopped by the Fed simply relaxing monetary policy, as might have occurred in the old days. (Of course, the Fed hasn't just relaxed policy -- it has moved the monetary equivalent of heaven and earth.)

I have been predicting for a few years that the bursting of the housing bubble, in combination with the unwinding of the epic credit binge, was going to lead to extreme carnage on the downside, as consumers and financial institutions would both be impaired. That is where we are today.

Now the Fed has done what it's done and will promise to do more. At last week's meeting of the its Open Market Committee, the Fed essentially said it might as well hold future meetings at Strategic Air Command headquarters outside Omaha, Neb., so as to be closer to the B-52s it will need to deliver money to the country posthaste.

For any doubters out there, please note the last paragraph of the committee's communiqué: "The Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities . . . and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. . . . The committee is also evaluating the potential benefits of purchasing longer-term Treasury securities."

In other words, the Fed went for it, corroborating the view that many of us have held for some time: that when push came to shove, the central bank would let nothing stand in the way of printing any amount of money and monetizing anything required to fend off the ill effects of the collapsing bubble.

Continued: The current rally will end soon

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