Tuesday, February 8, 2011

Is the Fed Really Responsible for Rising Commodity Prices?

I've been reading "The Financial Crisis Inquiry Report". This 650 page missive is the end result of the Financial Crisis Inquiry Commission's 18 month investigation into the financial meltdown of 2008.

This may sound kind of nerdy (can't you find a compelling novel to read, Dave?) but the report really is pretty interesting.

I'll be writing more about this in the next few days, but one of the aspects of the report that is particularly striking is the fact that there is no "smoking gun" which points out the persons or institutions that were responsible.

No, as the old expression goes, "We have met the enemy, and it is us".

All of us - investors, homeowners, government officials, rating agencies - were involved in the fallacy that home prices were destined to go up forever.

Warning signs abounded for much of the last decade, but they were ignored. Debt levels soared to unimaginable heights, but no one seemed to care.

And when the Day of Reckoning came, no one was spared, and we are now left with one of the biggest financial hangovers in modern history.

Today, however, everyone seems to know who to blame for soaring commodity prices and the weak dollar: Ben Bernanke and the Fed.

While it is easy to bash the Fed (although I personally think that Bernanke is doing a pretty good job), many of the economic events that surround us are not the responsibility of the central bank of the United States, as this recent article from Fortune magazine points out.

Here's an excerpt:

The true stars of the story of rising copper, corn and livestock prices are rising incomes and growing appetites in Asia and other emerging economies. That combination stokes robust demand for goods and raw materials that doesn't fade with rising prices. Also making an appearance are foreign politicians crossing their fingers and hoping, as policymakers often do, that the party will wind down without anyone having to actually yank away the punch bowl....

..."You can't blame Bernanke for the Russian drought or the cotton crop failures in Asia," said Howard Simons, a strategist for Bianco Research in Chicago. "More money does create an inflationary environment, but rising commodity prices can't be totally blamed on the creation of money."

The Bernanke-bashing bubble - Street Sweep: Fortune's Wall Street Blog