Only thing we have to fear... is fear itself (and maybe Ben Bernanke)

First inauguration of Franklin D. Roosevelt

So, first of all, let me assert my firm belief that the only thing we have to fear... is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.

By Jonathon M. Trugman
12/11/10
NY Post
New York Post

Ben Bernanke told the nation last week he was "100 percent certain" he could control inflation.

This is the same Fed chairman who prior to beginning his latest bond-buying binge, known as QE2, told anyone who listened that it would lead to lower interest rates and to more affordable borrowing costs.

Since Nov. 4, one day after the Federal Reserve's FOMC meeting where QE2 was launched, bonds have plummeted, sending yields on Treasuries skyrocketing from approximately 2.5 percent to an astounding 3.2 percent. Clearly this is not exactly what Bernanke and the Fed were hoping for.

When Captain Ben embarked on QE2, Treasury yields were appropriately trading at or close to record lows across the yield curve, with strong depth of market and robust volumes and very low volatility. It was a well-functioning market.

So the Fed chief's actions are like taking a supermodel in for plastic surgery: All you can do is mess up a good thing.

Now historically the relationship between 10-year Treasury bonds and mortgage rates has been quite strong.

Mortgage rates have risen almost 0.75 percent since the meeting. That is a huge difference, and has the potential to lead us into a double dip in housing as the cost of ownership just shot up.

This is just as the economy is attempting to get back on its feet. We now have a 9.8 percent unemployment rate and the economy is creating very few jobs.

The rise in rates creates many economic casualties. This affects everybody who owns a home because as home ownership becomes less affordable, prices are likely to fall.

What the economy needs is affordable accessible home finance; we had affordable before QE2, just not accessible. Home loans are no more accessible today than they were prior to QE2 leaving the docks To top off Bernanke's week, it was announced this week that Ron Paul will chair the House Domestic Monetary Policy subcommittee, which oversees the Fed.

Paul would rather see the US still on the gold standard and do away with the Federal Reserve. This may be finance's equivalent of Ali-Frazier boxing match, only with slide rules and pocket protectors.

Jonathon Trugman is president of a New York City asset management firm.