The minutes of the last Federal Reserve policy meeting noted that the central bankers were worried about "an adverse feedback loop, that is, a situation in which a tightening of credit conditions could depress investment and consumer spending, which, in turn, could feed back to a further tightening of credit conditions." Rinse and repeat.
But maybe the Fed should be more worried about this adverse feedback loop: The Fed cuts interest rates. The dollar tumbles. Oil prices surge. Inflation rises. Real incomes fall. Consumer spending weakens. The economy slides. Housing prices fall. Credit markets tighten. The Fed cuts interest rates. Rinse and repeat.
Oh, and over at RealClearMarkets, editor John Tamny posted a must-read on Bernanke's career prospects in light of the plunging dollar. Here is a bit:
Whatever the electoral outcome in November, the dollar's collapse suggests the markets would like a change at the Federal Reserve. The question now becomes one of politics. Though there are varying opinions on Paul Volcker, history credits Jimmy Carter for inserting him where Miller failed. Will George Bush get credit for correcting the Bernanke mistake, or will Ben Bernanke's failures remain those of Bush; mistakes that Bush's successor will almost surely have to correct.