Is the Fed Signaling More Trouble Ahead?

By Greg Hunter     Nov 18 2009 10:58AM usawatchdog.com

With all the euphoria about the stock market these days, it would seem that the worst of the economic meltdown is behind us. After all, the  S & P 500 is up an astounding 64% since March. I have heard plenty of market pundits say "the worst is behind us."  Then again, I saw this story on Bloomberg over the weekend.  It said, "Federal Reserve Bank of New York President William Dudley said the central  bank could curtail the risk of future liquidity crises by providing a “backstop” to solvent firms with sufficient collateral.  “The central bank could commit to being the lender of last resort” to such firms, Dudley said in a speech yesterday in Princeton, New Jersey. This would reduce “the risk of panics sparked by uncertainty among lenders about what other creditors think...” (Click here for the complete story)

Why would the New York Fed President even bring this up if it were not a potential problem?  My bet is  new “liquidity crises” is something the Fed sees in the not too distant future. It seems the Fed wants the financial community to know it is on top of things, and  it will do whatever it takes to stop another meltdown. I asked economist John Williams of Shadow Government Statistics (shadowstats.com) about the Bloomberg story above. He told me, “It sounds to me like they are front-running a problem.”

Market and gold expert Jim Sinclair had a more critical view  on his website (jsmineset.com)  about what Dudley said. Sinclair wrote, “A "pre-emptive" backstop to "solvent firms" with "sufficient collateral" – that sounds like an oxymoron to me.  If they really want to work to prevent future liquidity crises they should do exactly the opposite. Stop providing implicit taxpayer guarantees to preferential industries and increase system transparency.”

We have had a good quarter boosted by government spending, but one good quarter does not mean we have a new bull market. NYU Economics Professor Nouriel Roubini feels the economy is going to get a lot worse before it gets better. In a recent article Roubini said, “Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening.” Roubini also said, “There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, help fiscally strapped state and local governments and provide a temporary tax credit to the private sector to hire more workers.”  (For the complete article click here)

John Williams, on the other hand, thinks there is no “…quick fix” and that America needs to “rebuild its industrial base.”  However, Williams agrees with Professor Roubini and also thinks the worst is ahead of us. So I asked Williams about the possibility of systemic failure?  He said, “My betting remains that the Fed and the Treasury will do everything in their power to prevent systemic failure, as they have been doing for the last two years…. The efforts to prevent systemic collapse, however, have a cost: inflation. Given the government's long-range fiscal bankruptcy, current efforts by the Feb at debasing the dollar have created high risk of eventual hyperinflation beginning to surface in the year ahead.”

In my final question to John Williams I asked how people should protect their assets? Williams said, “Holding some physical gold remains the best long term hedge against all that can go wrong here.  It maintains purchasing power in a liquid and portable form.  Long-term holding is emphasized, since any of these markets can go through wild, short-term gyrations, particularly with possible government intervention.  Gold was a buy at $200, $500, $1,000 and will be at $5,000 etc. on a long term basis.  Williams goes on to say, “If there is risk of systemic failure prior to a hyperinflation, holding some cash is worthwhile, as is stocking up on necessary supplies same as one would for a severe natural disaster.”

Williams, Sinclair and Roubini have been most accurate in their predictions and assessments of the economy. That is why I included them in this post. In my humble opinion if everything was turning positive, the Fed would certainly say it.  Instead, William Dudley is talking about providing a “backstop” to solvent firms. That sure sounds to me like trouble is coming soon.

Greg Hunter

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Hunter joined ABC News in 1999 from WTSP-TV in Tampa. He has earned a “National Headliner Award," an International “Freddie Award” for health and medical reporting, as well as investigative reporting awards from both the “Society of Professional Journalists” and the “Radio Television News Directors Association.”