Bernanke Says Economy Recovery Likely This Year

"Jeepers, creepers...where'd you get those peepers...
"Jeepers, creepers...where'd you get those eyes..."

Thank god for laser eye surgery! Now, the people who were blind to the biggest financial crisis in the history of the world can see clearly again. And what do they see? A recovery!

"Bernanke strikes note of hope on economy," says the headline in today's International Herald Tribune.

"The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday that the US economy appeared to be stabilizing on many fronts and that a recovery was likely to begin this year."

Is this good news? Or what? 'Or what' is our bet.

Yesterday, the markets seemed to take a breather. Stocks fell slightly. Oil slipped a bit too. The dollar remained where it was...but still on a downward trend. And gold held steady...at $902 an ounce.

Can the feds now fix the trouble they never saw coming? Can the people who ran banks into the ground now run the banks that will help finance the recovery? Can the investors who bought trashy investments with borrowed money now recognize the good investments that are put in front of them?

Neither Ben Bernanke, Tim Geithner, Hank Paulson nor Alan Greenspan could see it - but there was something clearly wrong with the Bubble Economy of 2001-2007. We said so many times.

'Good riddance,' we celebrated, when it keeled over

But now they struggle to revive it. Like a brain-dead codger on life support, they are bankrupting the next generation trying to keep it alive.

"We expect that the recovery will only gradually gain momentum," Ben Bernanke forecast, trying to manage expectations, "and that the economic slack will diminish slowly."

Really? Oh, the wonders of modern medicine. Now, with 20/20 vision, the Fed chief can look ahead and tell us what will happen next. If only he'd gone to the doctor two years ago!

Stocks are rallying all over the world. Economists are putting on their spectacles and looking to the future. Bankers are cashing their checks and laughing all the way home from work.

"That sense of unremitting free fall we had a month or two ago is not present today," says White House economic advisor Larry Summers.

Barron's Big Money Poll shows professional portfolio managers are bullish again. They're looking for the Dow to gain 7% this year...and 17% by the middle of next year.

(This is good news for us. We were beginning to look around and notice that that too many stupid people agreed with us. But now that we see the pros are in the opposite camp...we can sleep more soundly.)

The proximate cause of all this optimism is the vigor with which the people who didn't see the problem coming have gone about fighting it. Mr. Market may taketh away...but Mr. Federal Official putteth back. At least, that's the logic of it. So far, in the U.S.A. alone, they've earmarked a sum nearly three times the cost of fighting World War II. Not all of that are direct cash outlays. Much of it is in the form of financial 'guarantees' and 'investments' (such as buying up Wall Street's smelly derivatives). Still, it's a lot of money.

Normally, in a correction, the supply of money - M1 - falls. Asset values are destroyed...borrowers default...money disappears into vaults and mattresses. But this time, so vigorous has been the authorities' response that M-1 is actually increasing at about a 14% annual rate. The money's got to go somewhere...

Here in London, the government has taken a similarly energetic line. The Bank of England has fallen in line with the government and boosted its balance sheet by more than two times in the last 12 months. Banks have been shored up with easy cash. Rates have been cut. Stimulus budgets have been passed. And yesterday, the government bailed out LDV, a maker of industrial vans.

Naturally, the bailout comes with some strings attached. The government stressed that this was just a 'short term' solution, pending a rescue by a Malaysian group. And hey...wait a minute...the company also had to promise not to move its production out of the United Kingdom. Who needs Smoot and Hawley when you can protect your markets using central bank cash?

Bill Bonner
for The Daily Reckoning Australia

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