Ben Bernanke Helicopter In Action

Wall Street has to love Federal Reserve Chairman Ben Bernanke. With a serious liquidity crisis developing Helicopter Ben showered the markets with money.  Perhaps the investment bank and hedge fund managers won’t have to sell their yachts after all. At least not yet.

As for the almost immediate result of a huge cash injection? The stock market put in an impressive performance for the week, closing well about the closely watched technical resistance level of 13,300.

Bernanke earned his “helicopter” nickname as a result of a speech he made in 2002. Helicopter Ben said that if interest rates fell to zero in a weak economy, if need be he would drop money from helicopters into the banking system to keep it going. This was in reference to the price deflation plaguing Japan at the time, which sparked concerns that slowing inflation in the US could lead to the same situation.

In response to the liquidity crisis sparked by the meltdown of the sub prime housing loan lending market, the Federal Reserve and the European Central Bank have collectively added at least $350 billion of temporary reserves into the banking system. They didn’t use the helicopters favoring more traditional ways of providing liquidity.

Maybe next time the helicopter air force will be placed in action.  Another round of crisis is sure to follow within a few months.  

The Federal Reserve was not the only central bank to open the cash flood gates as the European Central Bank, Bank of Japan, Reserve Bank of Australia, and the Bank of Canada all enacted similar measures. This is the largest amount of liquidity injection since September 11, 2001. This injection brought interest rates down significantly, helping to give banks a cheap source of funding to meet their financial obligations.

Overnight Federal funds rates have traded as high as 6 percent to below 1 percent in late afternoon trading over the past few days. They are now back at around 5.00 percent. Whenever there is a liquidity problem, ensuring an ample supply of reserves is a central bank’s top priority.

For now it looks like the Central Banks lead by helicopter Ben have saved the day. The Dow looks poised to resume its easy money upward march. However, there is always a price to pay for quick fixes like huge injections of cash into the world’s banking system. With the sub prime mortgage lending market fiasco set to intensify in October as a huge round of ARMs are due to be reset another crisis will likely develop in October and additional liquidity will be needed.

In the long run huge injections of a fiat currency into the banking system can not possibly be a good thing. However, for the near term look for the stock market to resume it’s advance back to the recent highs and possibility beyond.

However, Ben Bernanke will have to keep his helicopter warmed up and ready to go. We are in the region of last resorts to keep the unbalanced US economy moving forward.

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