Tuesday, October 25, 2005

On Bush’s Nomination of Bernanke to be the next Fed Head.

Why Bernanke is the Wrong Choice
President Bush’s selection of Ben Bernanke to the be next head of the Federal Reserve (Fed Head) will only exasperate the coming financial calamity. Mr. Bernanke is woefully unprepared for the job, has the wrong priorities and is vulnerable to being politically manipulated. He is about to become the fall guy, or at least they will try and make him the scapegoat, for the coming crisis.

"It’s the Market’s Stupid"–Not the Economy
Mr. Bernanke is praised for his economic research and is noted for this strong knowledge of the economy, but he has no hands on financial markets experience. While the majority of previous Fed Head’s lacked financial markets experience the world has changed dramatically since 1987 when the last Fed Head, Greenspan, was nominated. We live in the era of free markets where much of what we do has been privatized and decision making has been transferred to the market. The markets rule. In such a world it is critical that the Fed Head have a strong knowledge and connection to financial markets and derivatives. Mr. Bernanke does not.

Worse Mr. Bernanke is an academic–a noted ideologue revered for his intellectual acumen. Most traders and money managers would tell you that this is a handicap. Markets are about pragmatism and not ideology. If anyone has any doubts about this look at how progressivism and the left have been at the losing end for the last 30 years because they have wedded themselves to ideology and the rule of academics.
(Click to read Mr. Bernanke’s speech on the transition from academia to policy making: http://www.federalreserve.gov/boarddocs/speeches/2005/20050107/default.htm .
Anyone doubting his emphasis on research and acadmea should read: http://www.federalreserve.gov/boarddocs/speeches/2004/20041008/default.htm )

What Fed Head Greenspan lacked in market experience he more than made up with his political maneuvering. Consider some of his feats–he was able to talk Democratic President Bill Clinton into fiscal austerity and balanced budgets, he has been one of the longest serving Fed Heads, he has refused to comply with Congressional demands at times and he has freely commented about matters far outside his bailiwick. How will Mr. Bernanke deal with a financial market’s crisis precipitated by factors outside his line of authority?

Treasury Secretary Robert Rubin was a testament to the influence and success a highly regarded and knowledgeable financial market’s person can have on the job.

The Smart Money Gives Bernanke a Thumbs Down
On Wall Street it is said that people working in the bond market are smarter, but that people working in the stock market are more interesting. Well, the stock market rallied and the bond market sold off on Mr. Bernanke’s appointment. Clearly the inflation hawks don’t think that Mr. Bernanke will do such a good job of fighting inflation.

The sound money folks at places such as the Ludwig Von Mises Institute have been deriding Mr. Bernanke for his comments for some time. http://blog.mises.org/blog/archives/003341.asp

Fighting the Last War
Economists are infamous for fighting the last war. Mr. Bernanke is expected to be an inflation hawk that sees the inflation fight as the Fed’s number one priority. But is inflation currently the USA’s most pressing problem? What about the Current Account and Trade Deficits? The Budget Deficits? The Housing Bubble? Private Debt Levels? Clearly many of these problems are outside of the scope of the Fed Head’s job. But they were not outside the scope of Fed Head Greenspan’s agenda. He had the knack for influencing lots of things. Mr. Bernanke has yet to exhibit such an ability.

Fed Head Bernanke is expected to apply Black Box Approach to inflation by establishing strict inflation guide lines or targets for inflation rates. For example, stating that the Fed’s goal was to keep inflation at or under 2%. Such a strategy won the German Bundesbank universal acclaim. It will not win the Fed neither acclaim or success. Times have changed.

The Bundesbank was created from the fallout of the hyperinflation of the Weimar Republic. At a time when it was critical for the German government to gain confidence for their money. The inflation surge of the 70's that lingered well into the 80's further edified the Bundesbank’s image.

Inflation targeting could become an albatross that locks the Fed into a corner at a time when a more dynamic and flexible approach is needed. Establishing a black box approach also reinforces the notion of Mr. Bernanke at a professorial ideologue. Greenspan would not commit or give anything to anyone as was seen with his infamous Greenspeak of mincing his words.

Trouble Ahead
While the stock market has rallied these past two years, given that none of the indexes have made new highs one must assume that this was a bear market bounce. After having peaked in early August markets have been steadily declining. Add to this that the triple deficits or current account/trade/budget are making record highs and pushing beyond limits that have brought about rapid rebalancing there is trouble ahead.

It appears that Mr. Bernanke sees it differently. Rather than worrying about the deficits the Fed Head Bernanke came up with a grand theory that the trade imbalances derived from the "global savings glut" as he noted this past spring
http://www.federalreserve.gov/boarddocs/speeches/2002/20021015/default.htm. Interesting theory. Perhaps credit glut, or foreign central banks making the US the buyer of last resort for their goods would be more appropriate. Instead of debating about what is going on it is important first for Mr. Bernanke to acknowledge that there is a big problem. Mr. Greenspan was slow to fess up, but he did.

I am sure Mr. Bernanke has several more theories. Unfortunately he will not have much time to consider them as the markets are in trouble. Lets not forget that market’s have traditionally had a bout of angst whenever a new Fed Head or Treasury Secretary took over. Mr. Bernanke will similarly be challenged.

No doubt Mr. Greenspan, the consummate politician, will be quick to comment. Watch out Mr. Bernanke.

Another perspective from an "armchair economist".

Bernanke: Jedi Master
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?