WE JUST GOT "BERNANKE'D"

The big news this week: President Bush disappointed the
wags by refusing to appoint his personal tax accountant to
the Federal Reserve. Instead he chose Ben Bernanke, the
renowned Princeton man. With a cheery glint in his eye, a
pleasing teddy-bear persona, and solid real-world
experience under his belt, Bernanke is well-respected on
both sides of the aisle. He is a John Roberts, not a
Harriet Miers.  Thank goodness for that at least.

What shall we say of the future fed head? It is probably
easiest to let Mr. Bernanke speak for himself, as he did in
this November 21st, 2002 speech: 

“Like gold, U.S. dollars have value only to the extent that
they are strictly limited in supply. But the U.S.
government has a technology, called a printing press (or,
today, its electronic equivalent), that allows it to
produce as many U.S. dollars as it wishes at essentially no
cost. By increasing the number of U.S. dollars in
circulation, or even by credibly threatening to do so, the
U.S. government can also reduce the value of a dollar in
terms of goods and services, which is equivalent to raising
the prices in dollars of those goods and services. We
conclude that, under a paper-money system, a determined
government can always generate higher spending and hence
positive inflation.”

That sums things up nicely, no?

As the late-night infomercials say: “But wait, there’s
more!

In off-the-cuff email discussion of the Bernanke
appointment, my colleague Chris Mayer called attention to
this quote from a 2004 Bernanke speech:

“We believe that our findings go some way to refuting the
strong hypothesis that nonstandard policy actions,
including quantitative easing and targeted asset purchases,
cannot be successful in a modern industrial economy.”

In everyday language, “targeted asset purchases” translates
to state-sanctioned purchase of private assets in the event
of a crisis. Such action would not be unprecedented, even
for a modern, democratic, free-market economy. Hong Kong,
that bastion of bootstrap capitalism, did it openly and
brazenly in 1998. (Type “Hong Kong market intervention”
into Google and you will get some interesting hits.)

So. In Bernanke we have a man who is well respected in
economic circles, readily accepted by the political
establishment, and almost universally hailed by the
cognoscenti as the next steady hand on the tiller. And yet
this same man has talked openly of letting the printing
presses rip, Latin-American style…and if that fails,
letting the 8,000 pound gorilla of government wade into the
private sector, nationalizing assets for the public good.  

I do not say this mockingly: God help us.

It’s easy to become agitated over the words of a single
politician (and make no mistake, the supposedly “neutral”
federal reserve is packed with political animals), but the
reality is more complex. Greenspan presented the image of a
powerful wizard, but he was always more of a showman. The
same will be true of Fed Chairman Bernanke, only more so. 
The new Fed Head will wield immense rhetorical power, much
as the old one did, but at the end of the day he is just a
bagman. 

Fund Manager John Hussman makes a powerful argument in his
piece entitled “Why the Federal Reserve is Irrelevant.”

One of Hussman’s key points is that the Federal Reserve
essentially shifts assets around, employing an elaborate
charade of smoke and mirrors in the process. US Dollars and
US Treasuries are interchangeable, and it is the Federal
Reserve’s job to determine the ongoing ratio of one to the
other in the marketplace. But because the Fed long ago
ceded control of the fractional reserve lending system, it
has minimal say in the creation of dollars beyond the
monetary base. And because the Fed has zero influence when
it comes to government expenditures, the total amount of
Treasuries in circulation is out of the Chairman’s hands
also. Thus the fed attempts to manage and massage the
supply of money and credit, but does not control it in any
real way. 

At the same time, the Federal Reserve is clearly not
irrelevant. The Chairman’s rhetoric and stature have
obvious psychological weight, the force of which is very
real, and Fed positioning can strongly influence short-term
market movements. In the past I have compared the Chairman
of the Fed to a jockey riding a docile elephant. The key
thing is maintaining the illusion of confidence and
control; much of the game is psychological, for elephant
and observers alike. Under normal situations, the jockey is
genuinely capable of directing the pachyderm this way and
that. But when real panic breaks loose? Forget it. 

When it comes to America’s financial situation, Mr.
Bernanke knows he will be weaponless at the extremes,
tossed about on the wind and the waves like any mere
mortal. Perhaps this is why his past speeches have talked
openly of such extreme measures. Anointed as Chairman, Mr.
Bernanke cannot turn down his shot at greatness… but he
knows in his heart of hearts where the dark road may lead.

I leave you with this pithy comment from Bloomberg
Columnist Mark Gilbert:

“The march of time and the shifting sands of history may
yet diminish the Fed chairman’s role. Waiting in the wings
is someone with the potential to overshadow Bernanke,
wielding even more influence over the global economy than
Greenspan ever did. Step forward Zhou Xiaochuan, China’s
central bank governor.”

Cheers,

jOEL

And the Markets…