What goes inside Mr. Bernanke's mind? Inquiring minds want to know so, after a brief preamble, we shall today attempt to delve into the (professional) soul of our current Chairman. First, a little bit of background.
Alan Greenspan was credited with engineering several economic and market "bailouts", real and imagined, thus acquiring the title of "Maestro" and further creating the term "Greenspan Put". He probably does not relish this legacy - deserved or not - particularly now that the real estate/credit recession is clearly ante portas and which traces its origins to the ultra-low interest rates of the 2001-04 period.
With each successful bout with financial market adversity, the reputation of the Fed was gradually enhanced, to the point where it is currently viewed as a Protector of The (Wall Street) People - akin to ancient Rome's emperors who assumed this title to rule without fear for their lives (the Protector's person was inviolate for as long as he held the position). The Senate and People of Wall (SPQW) have almost to a man/woman spent their entire careers under Greenspan and Bernanke - mostly Greenspan - and have come to naturally view this near deification of a government bureaucracy as status quo.
Let's now examine Mr. Bernanke.
The professor has made an entire career out of persistently proclaiming the demi-godly monetary powers of the Fed. For example, in the very first page of his "Inflation Targeting Lessons From The International Experience" (Princeton U. Press, 2001) he proclaims that ".. of all the government's tools for influencing the economy, monetary policy has proven to be the most flexible instrument for achieving medium-term stabilization objectives". In the very next paragraph he says "..central bankers are striving to develop strategies for conducting monetary policy that will "lock in" the gains of recent years and contribute to continued stability and growth in the future". In his other book "Essays on the Great Depression" the main conclusion is that the Depression could have been averted, had the Fed just cut interest rates more drastically.
Do we all understand what this is? It takes us all the way back to the great tragedians of Athens: it is pure, unalloyed hubris (exaggerated self-pride or self-confidence, thinking oneself to be as powerful as the Gods - and we all know what happens next, don't we? Nemesis, the punishment for being so prideful). In sum, pride goeth before the fall.
So here we are today: the SPQW know
that our current Chairman is a firm believer in - nay, he is the Pontifex Maximus
of - monetary policy as THE
instrument to avert financial crises, by the application of drastically lower interest rates. And since the same SPQW grew up under Greenspan, they blindly believe in its absolute efficacy, too. They are the devoted followers of the cult of the Fed Saviour, now in full flower. Instances of economic troubles in real estate, mortgage banking, retail sales, credit and manufacturing are to be dealt with by the liberal application of low interest rate salves and constant incantations of "Cut More, Cut Faster - Cut Until You Cannot Any More, Oh Master".
Let me put it in another, seemingly more rational and academic, way.
- Prof. Bernanke was the Chairman of the Economics Dept. at Princeton, where he "proved" that the Great Depression could have been averted by cutting interest rates.
- He became Chairman of the Fed, where he can apply his "proof" in practice.
- He is now faced with the prospect of a recession.
- What is he going to do?
- What will the SPQW believe?
- What will the SPQW do?
What remains to be seen, of course, is if Professor Bernanke's theory is, in fact, correct or if he merely opened Pandora's Box
. In which case, I can picture Aristophanes watching from his perch in Elysian Fields furiously scribbling notes for a sequel to Plutus
(Wealth).P.S. LIBOR for O/N dollars just widened out again today. As Bloomberg reports:
"Sept. 28 (Bloomberg) -- The cost of borrowing pounds, dollars, and euros rose as banks sought funding over the quarter- end amid a credit squeeze that shows no signs of abating.
The London interbank offered rate that banks charge each other for overnight loans in pounds rose 20 basis points to 6 percent today, according to the British Bankers' Association. The corresponding rate for dollars rose 21 basis points to 5.30 percent, and the euro rate climbed 6 basis points to 4.23 percent."
Two points, which I have emphasized above in bold:
a) The reporter is using the term "credit squeeze" instead of "liquidity squeeze" - a telling differentiation from past terminology.
b) The spread between O/N dollars in the actual interbank market (i.e. LIBOR at 5.30%) and the Fed's target for O/N money (i.e. Fed Funds at 4.75%) is a very , very wide 55 b.p. Many readers may not realize that the Fed Funds rate as set by the FRB is not the actual rate at which transactions take place, but an expression of the central bank's desire. The market sets its own rates, based on supply and demand.
You want to know when was the last time that O/N LIBOR, the actual cost of money
, was as high as 5.30%? September 18, right before the cut was announced.
If you are wondering what got me into such a Graeco-Roman mood, I confess that I have been reading Robert Grave's "I, Claudius" and "Claudius The God" for the second or third time. Ave.