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01/24/2008 12:00 am EST
January 24, 2008
Will someone please give Ben Bernanke a break?
The Federal Reserve chairman just can't win. From the four corners of the globe, every move he makes is criticized-often passionately-by those who argue he's doing too little and those who complain he's doing too much.
In the lofty mountain air of Davos, Switzerland, elite attendees of the World Economic Forum from George Soros to Morgan Stanley's Stephen Roach accuse him of panicking in response to Monday's market meltdowns in Europe and Asia. (At an emergency meeting Tuesday morning, the Federal Open Market Committee voted to cut both the federal funds rate and the discount rate by 75 basis points.)
But on Wall Street trading floors, he might as well be called "Behind the Curve Ben," because he didn't bail out the markets fast enough.
That view appears widespread among independent advisers, too. Michael Murphy of New World Radar Report labels him "clueless," even "stupid and incompetent." Mark Skousen of Forecasts & Strategies goes so far as to call him downright "dangerous."
On CNBC, morning stock jock Joe Kernen has been sneering at his performance for months. And we all know about Money Madman Jim Cramer's infamous rant last summer on YouTube.
Sounds to me like Bernanke's doing something right.
Truth is, this Fed chairman has followed a clear path-watch the markets and the economic data and then move decisively. He has acted as quickly and aggressively as his predecessor, the once-revered Alan Greenspan did, but in a much more difficult environment. He also is way ahead of his peers at other central banks around the world.
And his actions may very well help blunt the effects of this slowdown or recession or whatever it is and set the stage for renewed economic growth-assuming that the real cause of the current problems, the crisis of confidence in the credit markets, is resolved.
Remember, until very recently it's been unclear whether inflation or recession was the bigger danger. Even in June, the yield on ten-year Treasury notes hit a five-year high of 5.25% and media-anointed "geniuses" like Bill Gross of Pimco declared that strong economic growth would push rates up, not down. (The ten-year traded at 3.43% Tuesday, by the way.)
As oil, food, and other commodities prices moved higher, warnings about inflation grew. Rising gold prices and a steadily weakening dollar only stoked those flames. US gross domestic product surged by 3.9% and 4.9% in the second and third quarters.
Meanwhile, the Dow Jones Industrial Average hit an all-time high of 14,000 on July 19th, while other world markets boomed. The following week the markets began what looked like an orderly correction.
True, the subprime-mortgage mess was beginning to unravel, but most analysts and economists (including the Fed chairman) thought its damage to the rest of the economy would be limited.
Yet as soon as the crisis really kicked in, Bernanke acted. When equity markets swooned in mid-August, the Fed cut the discount rate by 75 basis points, opened the borrowing window, and flooded the system with liquidity. Then in September it dropped the other shoe by cutting the federal funds rate 1/2 percentage point to 4.75%. Equity markets reached new highs in October as many investors believed the worst was over.
Altogether, Bernanke's Fed has slashed rates nearly two percentage points in four months-roughly the same amount Greenspan cut them from July 1990 to January 1991, when that recession was under way. Greenspan's Fed also started cutting rates in January 2001, ten months after the Dow and the NASDAQ Composite index peaked during the dot.com boom.
Indecisive? Hardly. Rather, Bernanke has acted firmly in line with the Fed's mandate and in response to rapidly changing realities. As this incisive profile by Roger Lowenstein shows, Bernanke is a scholar of the Great Depression and lived through the hard-fought battle with inflation in the 1970s, which took the Fed ten years to win. The Fed's dual mandate, by the way, is to promote "maximum employment and price stability," as governor Frederic S. Mishkin says.
That's why Bernanke's path is much tougher than Greenspan's, who didn't have to deal much with soaring commodities prices, a plunging dollar, and massive monetary growth in emerging markets-all of which gives the current Fed chairman much less room to maneuver.
And compared with his European counterparts, laid-back Ben has been moving at warp speed. Mervyn King, governor of the Bank of England, has been dragged kicking and screaming into cutting short-term rates by a mere 25 basis points, although the UK's economy may be deteriorating faster than ours is.
Also, on Wednesday European Central Bank president Jean-Claude Trichet affirmed the ECB's anti-inflationary stance even as growth slows in the Eurozone. Axel Weber, president of Germany's Bundesbank, told reporters that movements in equity markets "should not be overdramatized." Talk about clueless!
There's some indication Bernanke's medicine is working, too. LIBOR, the London Interbank Offered Rate, is the short-term rate at which banks lend to each other. It's used to set loans, swaps, and adjustable-rate mortgages, among other things. That rate, which has been very high since the current financial crisis began, has come down about two percentage points as the Fed eased, relieving some of pressure in the credit markets.
And by cutting rates (more are sure to come) and flooding the system with money, the Fed is providing fuel for the economy when the credit crunch unwinds and growth picks up again.
The hard reality is, there's only so much the Fed can do, anyway. As my former colleague Randy Forsyth put it in a recent column on Barron's Online, "The credit crunch is the root cause of the stock-market slide and the US economic slowdown, and Fed easing can provide only so much relief."
It was not Ben Bernanke who lost $100 billion of shareholders' money speculating on funky derivatives, and he shouldn't be blamed for not cleaning up Wall Street's mess fast enough.
Look, it's a free country, and everybody has the right to criticize. Fed policy, candidates' positions, head coaches' strategies-all are fair game.
But I'd rather see nearly any of the current crop of presidential candidates run the country than one of the Beltway bloviators. I'd rather have Bill Belichick or Tom Coughlin calling plays than even the best sports reporter.
And I'd rather have Ben Bernanke as Fed chairman than any of his critics.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily reflect the views of InterShow.
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