Bernanke
If anyone needed confirmation that ingénue Federal Reserve chair Ben Bernanke is suddenly worried sick about the U.S. economy, yesterday’s "inter-meeting" slashing of the federal funds rate is it.
The gentlemen’s club known as the Federal Open Market Committee (two of the committee’s alternate members are women) voted 8 to 1 to cut the benchmark interest rate by 75 basis points, citing a deepening of the housing contraction and a tightening of credit among the reasons for the move.
It’s easy to dip into arcane language when the committee is the subject of the day, but there are two key points to keep in mind.
The first is that the cut was surprisingly big.
The second is that amidst the market noise and the paucity of positive economic news south of the border, the committee moved aggressively in advance of its pre-scheduled meeting, set for next Wednesday.
We’ve seen this agitated anxiety before. Recall Sept. 17, 2001, the Monday when markets reopened after the devastation of 9/11.
Alan Greenspan was chair of the Federal Reserve then and, after an emergency meeting, announced a cut of half a percentage point.
Greenspan made the simple observation that cutting interest rates makes it easier for people to borrow and spend. Consumers, you may recall, were urged to spend, spend, spend in order to save America.
The message here is that inter-meeting rate adjustments don’t happen often and usually only in extreme circumstances.
Thus it’s fair to criticize Bernanke for failing to monitor shrewdly the current unravelling of the U.S. economy, which, even considering the big-bank writedowns, has been pushed incrementally to the brink by internal, friendly interests as opposed to explosively by hostile, external marauders.
Writing in the New York Times Magazine this past Sunday, Roger Lowenstein profiled the Federal Reserve chair, finding him both likeable and wanting. Bernanke has been "unable to re-instill a sense of confidence," Lowenstein wrote, in what, by the way, is a superb feature no checking account payday advance. In Lowenstein’s assessment, Bernanke failed to connect housing foreclosures with its ultimate effects. "Perhaps worst of all," Lowenstein continues, "he has failed to persuade investors that the Federal Reserve, which was formed in 1913 for the very purpose of halting market panics, is up to the job."
Granted, Bernanke has not been dealt an easy hand. The groundwork, at least in terms of the housing crisis, had been firmly laid long before his investiture. But that fact only supports the view that Bernanke should have been able to see the landscape of the housing crisis before him. David Rosenberg, chief North American economist for Merrill Lynch, is quoted in the New York Times piece saying Bernanke is "seriously behind the curve."
The Federal Reserve chair appears to be in good company. Yesterday, U.S. President George W. Bush announced the creation of the President’s Advisory Council on Financial Literacy. "Sometimes people in this country don’t know what they are looking at," the president said, referring to Jack and Jill subprime mortgage holders.
He could have been referring to the big bankers who have professed shockingly slight knowledge of the off-balance-sheet packaged investments that have wiped out earnings.
It is against such opacity that Bernanke has to now test his belief, as Lowenstein presents it, that economic science is enough to guide central bankers. For all his faults, Greenspan put great stock in the power and unpredictability of investor psychology. Bernanke is charting a different course.
"To prove that he is right," Lowenstein concludes, "Bernanke will need to minimize or, if possible, avoid the looming recession that looks ever more likely."