Paulson Protege Pellegrini on Bernanke's Fed: "Sheer Lunacy"

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Some smart people are feeling at least cautiously optimistic about the U.S. economy at the moment—among them BW’s own Jim Cooper. Paolo Pellegrini, however, is not.

Which might be worth noting because Pellegrini is the Rome-born analyst who helped hedge fund operator John Paulson make a ton of money on the subprime crash in 2007 and 2008. Pellegrini and his colleagues crunched tons of U.S. mortgage data, concluded that housing prices were due for a collapse, and invested accordingly. Paulson made over $3.5 billion on the trade. Pellegrini, now investing his personal money via his firm PSQR Capital, was ably profiled recently by our friends (and new owners) over at Bloomberg.

Pellegrini makes no secret of his disdain for Obama Administration policy in general and Fed chairman Ben Bernanke in particular. Speaking at private equity conference in New York last week, Pellegrini called Bernanke’s low rate strategy “Sheer lunacy.”

“Bernanke et al.,” he said, “are telling us the solution to our problems is to keep rates low even as another bubble forms, threatening to lure still more retirement saving into a one-way trip to oblivion.”

Recent rallies in equity and other markets, he says, are not signs of future growth. They are bear market rallies, not unlike those that followed the stock market crash of 1929. “Ben Bernanke is this great student of the Depression. I don’t know what he learned from it.”

Further, he believe signs of growth in the real economy are illusory. Pellegrini estimates the stimulus contributed 3 percentage points of the 3.5 percent real GDP growth the Commerce Department reported for the third quarter.”We are currently experiencing a recovery in real economic activity based exclusively on the massive fiscal stimulus the government is providing.” When that rush fades, which he expects by the end of the first half next year, the economy will resume sagging.

If that double dip happens, Pellegrini says, the already weakend dollar could collapse further. Bernanke and co. will have no monetary tools to fight back with. “Right now we essentially have zero rates,” Pellegrini says, “If rates were 10 percent we could lower rates, but we used that up over the last 20 years and that’s why we’re in the fix we’re in.”

What to do? Pellegrini says the first order of business is to pay down U.S. household debt. He’s proposed a plan to use TALF dollars to restructure underwater mortgages.

Beyond that Pellegrini thinks the Fed needs to exorcise the easy money ghost of Greenspan and return to the hardheaded example of Paul Volcker. He also think Congress needs to give regulators more authority to keep banks from taking huge risks. He doesn’t expect either to happen.

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