Finally, the Fed could simply do nothing.
As much as I disagree with Bernanke on most matters, he’s held his tongue most recently regarding further stimulative action. This suggests that he might be gaining some political backbone.
I respect that because the “all gain no pain” programs he’s undertaken so far have clearly been put in place to appease his political masters. The optimist in me wants to believe he’s going to say it’s time to take your medicine and let the markets sort this out. The pessimist in me says he’ll cave.
So which one option should the FOMC choose?
Option #5 — do nothing — would be best. That means no further accommodative measures should be implemented, or even hinted at.
The markets would tank — hard. But that would be a part of the healing process. The markets must be permitted to weed out the weaker players and eliminate those that aren’t strong enough to survive.
By engaging in repeated bailouts and stimulus, the Fed and our leaders in Washington are tying the free hand of risk. That limits our downside, but it also dramatically limits our upside, preventing a true recovery. It also goes against the very notion of capitalism, which includes failure.
Of course, to do nothing might be the best option, but we all know our policymakers don’t base their decisions on logic — they base them on political expedience.
To that end, doing nothing is an almost impossible call for most of our leaders to make, since they are more concerned with getting reelected than they are with solving problems.
That’s why I believe the Fed ultimately will choose to pursue Option #2 — some form of “Operation Twist.”
It probably will work for a short while, but then it’ll be business as usual. The problems of soaring debt, a lack of leadership, stagflation and a crushed middle class will re-emerge and weigh down the markets once again.
So where does that leave investors?