Bernanke & the Markets

Wednesday, July 19, 2006 | 09:40 AM

Bernanke_markets_1 Let's cut Ben Bernanke a break: the present situation wasn't of his making; he merely inherited a bad economic set up. Slowing growth, rising inflation, high energy costs, a real estate dependent economy, and the longstanding problem of excess liquidity -- none of these rest at the feet of the present Fed Chair. In reality, they are the result of what Tim Iacono charitably describes as The Mess That Greenspan Made.

Further, some of the critics are exempting Greenspan and blasting helicopter Ben. Kentucky Sen. Jim Bunning (R), has called Bernanke an "amateur" and "blasted the former Princeton University professor for unnerving markets with his anti-inflation rhetoric." Bunning said Bernanke's "been in a cocoon of academia and is not ready for prime time."

Its funny to hear these criticisms, which ignore history. First, every new Fed chair is an amateur for a while. Even the most qualified economist/politician is unprepared for what may very well be the most powerful position in the world. What can prep you for that? That's why market historians know of the New Fed Chair Curse. No black magic involved, just a painful honeymoon period of adjustment.

Second, consider the opposite: imagine if the Fed allowed inflation to get away from them? If the cruelest tax were allowed to run rampant, the exact same critics would be all over Bernanke. That's why the Fed tends to overtighten: Its the lesser of two evils.

Soft landings are a matter of luck, not policy. Its why they are so rare

Even Paul Volcker, the cigar chomping Fed chair who brought runaway inflation to heel in the late 1970s and 80s, noted that Bernanke faces a tougher task than he did. That's a hell of an admission from a man I perceive as the greatest inflation fighting Fed Chair in history. He not only took away the punch bowl, but bitch-slapped the high priced escorts at the party and kicked the drunks out into the street onto their asses.

Now that's what I call an inflation fighter.

But if you want to understand the true problem facing Bernanke, its the liquidity problem. Greenspan treated every issue as if the only possible repsonse was to increase liquidity. Thats like a dentist giving a kid candy every time they complained of a toothe ache.

Have a look at this liquidity chart for a better understanding of how weer got into the present situation:


Liquidity Driven Banking Policy 
click for larger chart


Source:  Ritholtz Research & Analytics


Makes the picture a whole lot clearer . . .


UPDATE July 19, 2006 11:42pm

The request goes up for what this looks in actual U.S. money supply growth;


Money Supply 1900-2000
clik for larger graph


Thanks to Smithers & Co. for the graphic


Note the surge from 1995 to 2005 -- that's Greenspan territory . . .


Bernanke: The wimp or the ogre?
Can the Fed chairman keep the inflation-wary bond market and rate-conscious lawmakers satisfied?
Reuters, July 16 2006: 10:11 PM EDT

Volcker Says Bernanke Faces Tougher Task Than When He Ran Fed
Matthew Benjamin
Bloomberg, July 14, 2006

Wednesday, July 19, 2006 | 09:40 AM | Permalink | Comments (48) | TrackBack (3) add to | digg digg this! | technorati add to technorati | email email this post



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» Oil-fueled inflation is a key Bernanke worry from Political News and Blog Aggregator
Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that although economic activity is [Read More]

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» High Inflation or High Interest, Which is Worse? from Facteon Blog
Interest rates are slowly being moved up. Many blame Bernanke. But are high rates worse for the economy that high inflation? Barry Ritholtz, at The Big Picture, writes in Bernanke & the Markets, ...imagine if the Fed allowed inflation to... [Read More]

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A shadow falls across the land, as the expansion that wasn't becomes the downturn that mustn't. It is no wonder that some, never enamored with the bushconomy, commentators, such as Barry Ritholtz and Noriel Roubini have begun to sharpen the... [Read More]

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Granted all your points about Ben inheriting the problems but, in the same spirit of letting the data/analysis speak for themselves, what alternatives policy strategies would you have suggested for the potentially disruptive crisis facing Greenspan and the Fed ?

In each of those case the Fed didn't create the underlying problem but had to deal with the conquences. For example post the 2000 crash there's a very good argument in economic history that we faced a major economic retrenchment, ala Depression. Or at best a lost decade ala Japan.

While on the upside inflation has terrible consequences (btw - if you want the full diagnosis up & down Keynes, "Essays in Persuasion" are brilliant reading. Worth it for the discussions of currency speculation alone.)

The Fed cannot change the structural characteristics and trends of the underlying economy - it can only try to manage them in reasonable bounds around the trend.

Posted by: DBLWYO | Jul 19, 2006 10:04:45 AM

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