Defending Bernanke
Randall Forsyth does a good job explaining what FOMC Chair Ben Bernanke has done right:
"Yet much of the criticism seems unfair and after the fact. Not only have Bernanke's unorthodox moves staved off a full-fledged financial meltdown, but they also have done so while reducing the inflation risks inherent in the traditional policy response of merely slashing interest rates.
That's not my opinion. It is the one rendered by the currency, credit, Treasury, equity and gold markets. Since the credit crisis peaked (or reached its nadir, depending on your point of view) on St. Patrick's Day, the Monday after the Sunday night special with the Bear takeover by JPMorgan Chase, the extreme tensions in all those markets have eased.
It was not just the Bear deal per se. The Fed established the Primary Dealer Credit Facility, which let Wall Street investment firms to borrow from the central bank, a privilege reserved for commercial banks, except for the rarest instances in the Great Depression.
The PDCF joined other, new Fed instruments to funnel liquidity where it was needed most. Last December, the central bank began the Term Auction Facility, or TAF, which permitted banks to borrow anonymously for longer periods than via the traditional discount window borrowings, which were to cover overnight shortfalls. TAF also permitted borrowing against lesser-quality but still prime collateral.
The Fed also established the Term Securities Lending Facility, which allowed banks and dealers to swap their illiquid but high-quality government and mortgage-backed securities for Treasuries. It was like a pawnshop for the financial system, allowing Wall Street to exchange their (real, not fake) Rolexes for good-as-cash obligations of Uncle Sam."
What say ye? How much of the benefit of the doubt do you want to give Ben Bernanke?
Source:
Hey, Bernanke Bashers: His Moves Have Been the Right Ones
RANDALL W. FORSYTH
Barron's April 29, 2008
http://online.barrons.com/article/SB120939353075949559.html
Wednesday, April 30, 2008 | 07:57 PM | Permalink
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Zero credit to Helicopter Ben.
The credit crunch has not gone away because the fed facilities are still expanding, treasury finances are dwindling down and although the US$ may show a short-term uptick, foreigners will stop purchasing treasuries precisely at a time when we need them the most.
We will not only see long and deep recession, but it will be associated with high inflation, a.k.a. inflationary recession. If you think stagflation was bad, wait for things to unfold in the next 6-9 months.
Helicopter Ben thinks that by providing liquidity he can stop deflationary recession. In reality, he is leading us right into it.
The Fed is playing the depression book step-by-step - just as they did in 1929.
So, prepare yourself.
As someone once said - If you have to panic, be the first one to panic!
- Shankar
Posted by: Shankar Khadye | Apr 30, 2008 8:08:58 PM
I'll give him some.
Let's be honest with ourselves, he took over a thankless job. And everyone knew he was. Wasn't there a magazine cover from "The Economist" that showed Greenspan handing off a lit dynamite to Bernanke in a running relay?
Posted by: rj | Apr 30, 2008 8:13:46 PM
Not only have Bernanke's unorthodox moves staved off a full-fledged financial meltdown, but they also have done so while reducing the inflation risks inherent in the traditional policy response of merely slashing interest rates.
---------
I had trouble getting past the first paragraph.
One, his moves have only prolonged the financial suffering, and the possibility of a full-fledged financial meltdown has only been pushed down the road, not averted.
Two, I missed the part where the "inflation risks" have been "reduced". Last I checked, the dollar was the world currencies' bitch, and commodities were appreciating exponentially.
That said, he was dropped into a minefield...
Posted by: Mr. Obvious | Apr 30, 2008 8:23:33 PM
I've got dollars in my back pocket so I'm a big fan of Ben Bernanke and all he's done to keep our markets solvent. America had the best finacial markets in the world until recently -- let's hope the invisible 2% recovers. Ben punishes equity holders first - he understands the big picture (wink and a grin).
Posted by: paul griffith | Apr 30, 2008 8:32:05 PM
Everything depends upon the inflation prediction. Inflation is the ultimate 'reset' that will affect everyone, mortgage or no mortgage. If Bernanke is wrong on inflation, then the credit crisis could snowball, far bigger than the delinquent mortgage mess. In my opinion, since Bernanke didn't have the guts to raise interest rates or even keep them the same, then the commodities will have to do the work for him. Dennis Gartman is wrong. The commodity bull will be what finally spoils the party for everyone.
Posted by: Fen | Apr 30, 2008 8:37:37 PM
no credit: bailing out a bunch of dumb banks blinded by profits using leverage to generate fake alpha deserve to die. the capital markets in this country are broken and only a washout will enable decent leadership to emerge with a mandate to fix them. paulson and crew have the audacity to keep the banks as "self regulated organizations" (SRO's)...after the fed bails them out? where, oh where are the p. volckers of this world? grantham says it much better than I ever could...
Posted by: schnauser | Apr 30, 2008 8:39:37 PM
The FED still expects inflation to moderate and it will. Perhaps, just not in our lifetime.
Posted by: Pat G. | Apr 30, 2008 8:41:45 PM
By appearance alone I would say that he has an unseasoned aspect. No offence to Ben Bernake, but I would say that he is well out of his league. In his defence, I have to state that he is a sevant to persuasive interests in finance and government. In other words, he has no choice but to execute a policy that will benefit those interests.
Barry; I have to believe that, most of your readers would find that obvious. He has been extraordinarily predictable.
"swap their illiquid but high-quality government and mortgage-backed securities for Treasuries."
I'll swap some illiquid "but high quality" government and mortgage-backed securities for Treasuries. Yeah, that's the ticket... SURE.....
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Apr 30, 2008 8:59:10 PM
It's too soon to tell. He may have staved off meltdown and that may turn out to be a good thing but it's too soon to tell.
Posted by: rw | Apr 30, 2008 9:02:26 PM
"that said, he was dropped into a minefield".
That may be but he was one of the ones that planting the mines!
The capital system exists so that money may be channeled to the highest and best uses. Markets are allocaters of this capital. When you rig the system by turning a blind eye, you get what we now have. Distortions!
Ben is cut from the self same cloth as Greenspan. Only difference is one has more hair than the other. These guys are rented political hacks whose retirement, like Clinton's, is funded ex post facto by the 'Street' as a reward for services rendered. They can't even claim that they didn't know they were whores.
Posted by: Ross | Apr 30, 2008 9:04:54 PM
And Rubin's. I'm proud of that ex-Citi guy who stood up at the annual meeting and pointed out that many folks were being laid off while Bob was getting $10-15 million. For doing what? Maybe repeal of Glass Steagall??
Posted by: TomD | Apr 30, 2008 9:14:16 PM
Who is this Randall Forsyth anyway?
Sounds like a lobbyist for the banking and finance industry--one of President Bush's most important clients--to me. And his assesment of Bernanke? Hogwash.
Bernanke is a functionary of the imperial presidency. As one columnist put it, the Fed chief is now "part of the president's cabinet."
And his actions show it. They conform perfectly to what we have seen from other members of this administration. Whether the issue is torture, phone tapping or pollution, the pattern is always the same: politicize the department and push the law to its very limits. Many argue they go beyond the law.
In the instant case, as Paul Volkler said, Bernanke is operating at "the very edge of [the central bank's] lawful and implied powers."
Bernanke's actions are totally predictable, and they fit the pattern that we have seen time and time again from this administration. History will probably not be kind to him. The Bush administration has destroyed many a good man--Colin Powell, George Tennet, Alan Greenspan, just to name a few--and all indications are Bernanke awaits the same fate.
~~~
BR: Hardly a mouthpiece for anyone: He's been very critical of both the administration and the FOMC about their policies. In fact, he's been more right than wrong about the economy, housing and the credit crunch than most journalists . . .
Posted by: DownSouth | Apr 30, 2008 9:14:24 PM
Hi Barry,
Any chance you'd throw up a monthly chart of the ES futures, now that this month is over? I cant gettem.
Thanks,
Sean
Posted by: sean | Apr 30, 2008 9:16:15 PM
The problem as ever is :
1. calling these assets high quality when they aren't.
2. Not charging a penalty/high interest rate.
From a trading basis, in terms of present value, he's swapped 60 to 80c worth of crap for (what was ) good quality treasuries. The bill comes due in various intervals but I can make PV calculations and on that basis he's added to the monetary base.
Separately, Randall Forsyth has carried water for the Fed through all this fiasco. I remember how the Fed surreptiously lowered the Fed Funds rate a full 3 weeks before the actual meeting last Aug/Sep - and despite people pointing out this anomaly, RF continued writing it up in Barrons as if no change had taken place.
-K
Posted by: sk | Apr 30, 2008 9:25:23 PM
Bernanke's only mistake was that he was not aggressive soon enough. December should have been a 75bp cut, not a 25bp cut. That being said, we would probably be at about the same place we are today regardless.
Posted by: bsneath | Apr 30, 2008 9:28:46 PM
☺☺"...he's swapped 60 to 80c worth of crap for (what was ) good quality treasuries."--Posted by: sk | Apr 30, 2008 9:25:23 PM
60 or 80c??????
The public doesn't have a clue as to what securities were received or what they might be worth.
Another hallmark of everything this administration does--secrecy.
Posted by: DownSouth | Apr 30, 2008 9:32:02 PM
"What say ye?" Barry's question suggests that this is an issue on which reasonable minds could differ. And yet, Jim Cramer has written repeatedly: (1) that the credit issues we now face could have been "easily avoided" (exact quote) if the Fed had lowered short-term rates sooner in 2007, (2) that nobody understood gravity of the problem sooner than he (i.e. Cramer) did, and (3) that the Fed "knows nothing." So there are there only two possibilities. By even asking for debate on the issue, Barry is essentially saying that about 95% of Cramer's Fed comments for the past eight months are nothing more than the rantings of a self-aggrandizing creep. And I would agree.
Posted by: Eric | Apr 30, 2008 9:38:15 PM
The Fed also established the Term Securities Lending Facility, which allowed banks and dealers to swap their illiquid but high-quality government and mortgage-backed securities for Treasuries. It was like a pawnshop for the financial system, allowing Wall Street to exchange their (real, not fake) Rolexes for good-as-cash obligations of Uncle Sam."
It takes some balls to tell us that a fake Rolex is real. "High quality" mortgage-backed securities? I'm sure we can take Forsyth's word on that, seeing as how he is a Serious Expert and all and the critics are just too small minded to see Bernanke's brilliance.
So no credit to Bernanke. Short-term fools' rallies, when the fundamentals look dreadful, do not win Bernanke any laurels today. Perhaps he needs better cheerleaders.
Posted by: Mr. Flibble | Apr 30, 2008 9:40:56 PM
Beautiful Mind! Lousy/clouded Intellect?! ...But it is the same underlying spirit that drives all of us. Good and Bad -- all is part of the same whole.
Sounds like there is a competition going on right now? Between the folks in charge of epicenters of greed and power -- wall street and washington -- as to who can outdo the other before Bush leaves in January.
I guess dollar is doomed and Oil will march on to greater heights. Don't know too much about the history of currency pegs but someone will break away soon
Posted by: Nihilism | Apr 30, 2008 9:48:12 PM
As the great Henry Rollins said...
"Knowledge without mileage is bullshit!"
Lots of people "know" how to manipulate things to their will, but just because you can, doesn't mean you should. Bernanke and Co are trying to manage a problem that has never existed. Bunch of armchair economists and policy makers here spewing fantasies like Uncle Ricco in Napolean Dynamite.
So far so good for Bernanke IMHO.
Posted by: Barry Green | Apr 30, 2008 9:51:52 PM
Maybe if you looked up what the NY Fed's Tim Geithner has been upto in the last couple of months, you'll find that Bernanke has been pretty much lucky to be able to take all the credit while doing squat.
Posted by: PLing | Apr 30, 2008 9:55:53 PM
The house of cards still stands... until it doesn't.
Just like the assets these banks had until they weren't assets any longer.
What else can Bernanke do?
Give a man a fish and you'll feed him for a day.
Teach him to fish and he'll deplete his food supply.
Posted by: JRip | Apr 30, 2008 10:07:30 PM
Another hallmark of this administration: liberal use of exaggeration and fear, so we hear things like "mushroom clouds" and "a full-fledged financial meltdown."
Posted by: DownSouth | Apr 30, 2008 10:12:38 PM
Here's the report card as I see it.
Greenspan - F
Bernanke - D
Congress - F
Bush - Get in the corner with the Dunce
cap.
Bankers - Thank God I own my home, my cars and don't have a dime of revolving debt.
Posted by: Rosevillebill | Apr 30, 2008 10:14:56 PM
In my books, he is being smart...and fulfulling the dual mandate of his job.
I would rather have the pain of inflating food and energy with the pain of deflating asset prices rather the utter destruction and instability that deflation across the board will bring...People calling for such a deflation are either naive...or dont own a home or have kids to take care of...failures in a Darwinian sense.
Posted by: DMR | Apr 30, 2008 10:16:09 PM
