Tuesday, June 13, 2006

They're Selling, Mortimer!

On October 24, 2005, the day President Bush nominated Ben Bernanke to replace Alan Greenspan, I posted:
Bernanke, of course, it well aware of how his "printing press" comments affected his reputation. So when he takes over for Greenspan, his initial priority will be to establish credibility on inflation, particularly with the bond market. That means higher interest rates. Similarly, when Greenspan became Fed head in 1987, his immediate goal was to establish credibility in the wake of Paul Volcker, a renowned inflation fighter and the most respected Fed chief in history. Greenspan became Fed chairman on August 11, 1987. The price of gold had risen that year from $400 to $465 on Friday, October 16, 1987. On October 19---just two months after Greenspan's first day on the job---the stock market crashed, with the Dow losing 22% on the day now known as Black Monday.

Prediction (not advice): Ben Bernanke will be easily confirmed. And sometime between now and Bernanke's three-month mark as Fed chairman, the stock market will crash. If I'm wrong, fantastic. We'll see.
The crash call was woefully wrong (though possibly a bit premature, depending on what happens this summer). However, a few points are worth noting. First, I was correct about Bernanke's desire to establish street cred as an inflation fighter. While our stock market certainly hasn't "crashed," we're in the midst of a correction that's knocked the major indices to their lowest levels in many months; the Nasdaq is down 12% from its April high. Moreover, some major foreign markets have experienced serious corrections or bonafide crashes; Japan, Hong Kong, India, Brazil and others have lost 10-25% during the past few weeks (and as I type this late Monday night, I see Japan and India are down 4% tonight alone). All this has occurred in part because of the "new guy at the Fed" dynamic that I wrote about last October.

It's important to note that in terms of credibility, Bernanke's been his own worst enemy. Here's a great post at Barry Ritholtz's site that chronicles Bernanke's public flip-flops on interest rates. Part of what's going on here is nanny state-speak. Up until a few weeks ago (it's changed a bit recently) on days the stock market was weak, a Fed official would comment publicly about "the possibility of going too far in raising rates" or how inflation was "well-contained." On days gold was strong and/or the dollar was weak, a Fed official would comment about how "vigilance is needed on inflation." This micromanagement of the financial markets has caused serious credibility problems; in the many years I've been a Fed observer, I cannot remember such a constant barrage of public comments by Fed officials. Bernanke and crew are inverse Teddy Roosevelts; they speak loudly and carry twigs.

One other important point. Some market observers have started making the case that Bernanke "inherited this mess" from Greenspan and is simply "doing the best he can in a difficult situation." Can we dispense with that nonsense right now? Bernanke is not some poor Chauncey Gardiner rube plucked from obscurity. Prior to his current position, he was Chairman of the President's Council of Economic Advisers, and before that a member of the Board of Governors of the Federal Reserve. He's played an integral role in the development and application of both fiscal and monetary policy for years. Particularly under the Bush administration, you don't get to be head of the Federal Reserve unless you're a proven member of the team.

Ultimately, much of this may be academic. As I've posted before, essentially we've ceded control of our own monetary policy to foreign central bankers. They've grown tired of underwriting preemptive wars and irresponsible fiscal policy, and are demanding higher rates of return on our debt. Think about that the next time your mortgage or credit card payments increase, your house falls in value, or the terms become too dear on that small-business loan you wanted. It's all about consequences. Our debt will be sold, whatever it takes---and it's taking increasingly higher interest rates to entice foreign buyers. Combine that immutable reality with a new Fed chief who checks his chest hair in the mirror each morning, and you've got a recipe for interesting times ahead.

29 Comments:

Blogger phillybikeboy said...

Don't eat that crow just yet. After seeing what the Nikkei and all the other markets around the world did overnight, you just may have missed it by a few days.

6/13/2006 7:39 AM  
Anonymous Anonymous said...

I cannot think of a single person appointed by Bush who has been qualified for the position they have taken. If by some "stroke of luck" they were qualified, then they butted heads with the Administration and decided to "spend more time with their families".
I'd have to believe that this is a "global" observation.
Do you feel safer yet???

6/13/2006 1:39 PM  
Blogger Siryn said...

I think that the people being appointed/staying in position a la Greenspan are mostly qualified (minus Harriet Miers), but check their integrity at the door, if they ever had any.

Quite frankly, I don't know which is worse.

6/13/2006 2:06 PM  
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6/13/2006 4:30 PM  
Anonymous Anonymous said...

I agree, they're not all unqualified. Like or dislike Roberts, he's incredibly qualified, as is Bernanke.

Yeah, Bernanke's comments paired with his reputation is taking some time to shake out - but that's not uncommon. The market doesn't like uncertainty and new players are full of uncertainty.

The bigger issue is that the economy is fundamentally out of whack and a lot of stroking and gentle words has been keeping it well behaved, but in the end *something* will drive things back to where they ought to be. Bernanke is just the catalyst.

6/14/2006 12:40 AM  
Anonymous Anonymous said...

No mortgage.
No credit card debt.
House price falls, don't move, and a major plus, the tax bill will decrease, and maybe even the insurance. No problem.
People who bought McHouses at hugely inflated prices are part of the problem. Just as it was in the stock mkt in 1999. People don't think about risk. Everything always goes up.

But agree, "we've ceded control of our own monetary policy to foreign central bankers".

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES

All comes from a Republican controlled Congress and WH, mixed with corruption. Fiscally conservative. Not!

Maybe this is what Globalization looks like. After all, in a global economy a corporation isn't American, European, Asian, etc. It's loyalty is wherever it can make the most profits with the least cost.

Besides don't you know the Republican major issues are, (1) flag burning, and (2) gays. Deficit. Doesn't matter. Iraq war. Nope. National Security. Nada. And, (3) judicial nominees, and (4) anti-science, anti-women.

6/14/2006 3:00 PM  
Anonymous keller said...

Time to buy futures in OJ?

6/14/2006 9:32 PM  
Anonymous rapier said...

Interest rates are higher and it is starting to cause systematic pain but let's remember that rates were too low for a long time. The Fed did it's small part to get them too low and keep them there but mostly it was a markets own doing.

The manic unhinged credit system is finally starting to slow down. It may pick back up, I don't know, but for now liquidity is no longer keeping up with the inastiable desire for credit.

Greenspan got a great gift with the 87 crash. The financial world looked into the abyss of a liquidity crisis and realized there is something much worse than a little inflation. Greenspan made plain that liquity would be provided in any crisis. And so it came to pass. The Mexican crisis, Russia, LTCM, etc. etc., the floodgates of seemingly limitless liquidity was promised and some no small measure of it was provided.

Thus the Greenspan put was born. At the same time the bond vigilantes retired. No more carping by the likes of Stanley Kauffman. Nary a bad word would ever come from The Street again about breakneck money supply growth or inflation risks.

Yes, Bernake has punched recieved his inflation fighting badge. Now all he needs is a crisis so he can do his Fed Chairman Saves the Day act.

Actually I think the Fed chairman position is being downgraded by the powers that be. Greenspans rep was always overhyped, and that suited their interests just fine. Still no person who isn't a made man in The Party can be fully trusted. Watch the Treasure Secretary become the media and market darling.

6/15/2006 7:23 PM  
Anonymous Kevin Wohlmut said...

I agree with several above comments. The economy seems "metastable", but an outside shock has the potential (not the certainty, but the potential) to collapse the whole house of cards, plus the stability will deteriorate over time anyway. Something has to give sooner or later, and when it does, it won't be pretty.

Hilarious satire: Alan Greenspan Apologizes For Wrecking the World Economy

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