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Bernanke — A Man For The Times
I am reminded of the 1978-81 period by what I see going on in the global financial community these days. It was a difficult time for many then, too. It seemed like everything that could go wrong was going wrong.
The Iran taking of hostages was a terrible weight on our minds. The Soviets had entered Afghanistan and that was about to really become a hot war. The economy was flagging (much worse than today), and people in general just seemed to be waiting for one bad thing after another to hit them square in the face. And, sadly, it just seemed to happen all too often.
But then one day in late 1978, we became aware of this actor fellow who said he was going to run for president. He smiled a lot, told jokes, mostly with himself as the butt of the joke, and started to say how what we saw was not really that bad, just a temporary setback. He said we were a nation with a heritage of buckling down and pulling through even the toughest times, and this would be the way we would get ourselves through this time, too.
He actually sounded optimistic in the middle of that big, huge mess. And you know, after awhile many slowly began to think maybe he had something there.
Now, what I am pointing to here is not to laud the man who became President Reagan, but to tell you what a huge difference one man can make to the fortunes of his country. How one man can make the difference between our giving up to defeat and despair and, instead, find the gumption to suck up our gut once more and plow through to a better day.
The S&P has fallen nearly 15% in the past month, while at the same time the Fed has slashed interest rates in near panic mode. Not only have stocks been falling but yields from CDs and money market accounts are tanking faster every day. The juicy yields investors have enjoyed investing in safe CDs and Money Market Funds has been nearly cut in half to around 2-3%
Unfortunately, the Fed's rate cuts probably won't be enough to avoid a serious recession — or tame out-of-control inflation! Higher costs for energy and food last year pushed inflation up by the largest amount in 17 years. Investor's settling for paltry 3% dividends in CDs and money market funds are seeing their principle being eaten alive by inflation. How can you still find dependable high yields in this volatile market?
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Today, though most will not admit it yet, we have a man like that in our midst. He is a quiet man, and doesn’t joke as much as did President Reagan. And unlike Reagan, he is more a man of quiet reflection than the vigorous handshake. But, he is a man with as sure a hand on the throttle as Reagan ever had.
And, like President Reagan in his time, he is a man who today has upon his shoulders the economic future not just of our country, but of the world. And he is the man, in my estimation, just right for this hour, without a doubt.
His name is Ben Bernanke. Born to humble beginnings, as he progressed through his years of education he found himself drawn more and more to the discipline of the financial world. He was still quite a young adult when he began to make his mark on that world through his research activities, writings, and uncanny way of looking at history — what everyone else saw as just history as it was meant to be, Bernanke instead saw history that actually never had to be. I speak here of The Great Depression, specifically.
Early on, he became a truly recognized expert scholar of the various financial panics of the mid- and late-1800s and early-1900s. It was his essay that pointed out so clearly the watershed events of the Panic of 1907 and revealed to the world the true magic behind the actions of one John Pierpont (JP) Morgan who single handedly saved the financial world in that Panic.
Bernanke showed, after incredibly meticulous research, how JP had seen the need and literally ushered every important banker in New York into his huge conference room, locked the doors, and forced their signatures to notes that financed the rescue of those caught in that terrible Panic. It was an example that deeply impressed Bernanke, now a Ph.D., running Princeton University’s Economics Department.
Dr. Bernanke wrote some incredibly insightful essays on that Panic and others and on what is today called the Great Depression. His essays, nine of them written over a period of 12 to13 years, were collected into a book that was published in 2000, a book that received rave reviews (but only from the financial community). In fact, one of those early essays written in the late-1980s period on the Great Depression is today required reading in just about every school of finance and economics in this and many other countries.
I said above that Reagan was a man for his time who almost single handedly saved his country by his actions. At first, as it seems to be with every great thinker, what he did was sharply criticized and looked upon as radical, unworkable, and by some even as un-American. He flew in the face of convention, the establishment of his day, and the so-called accepted norms of international politics.
Some of you may remember the huge commotion created by his proposal called “supply-side economics” and later a proposal called the Strategic Defense Initiative (or better known as Star Wars, a space defense system proposal that eventually led to the end of the Soviet Union). And certainly almost all of you remember his “Tear down this wall” pronouncement at the Berlin Wall. That one broke the back of the Soviet empire for good and is still played quite often on TV as an example of a great man with a mission.
What I am saying is that in times of trial it takes a man of unusual vision to do unusual things to save that day, someone who can comprehend the problem, understand what has to be done, and then does it, regardless of what the “normal” accepted procedures or others say should be done.
Since Dr. Bernanke came into office, he has made a point of doing things differently. He went to Congress for his first bi-annual meeting with them and answered their questions in brief, pungent, and well thought out answers. That had not been done for several decades, and Congress was not sure of what to make of this man.
Then, when the subprime problems surfaced, he spoke at a meeting in Jackson Hole, Wyo. and said it was not the purpose of the Fed to save the skin of irresponsible speculators or foolish banks and other financial agencies. That one caused a roar of disproval of monumental proportions.
Then, as the subprime events unfolded, he resisted every call for a hasty and huge drop in interest rates — one that he knew could, if timed wrong, lead to more problems, not create solutions. Those calling for the rate reductions fast, fast, fast, saw that this was not a man doing business “as usual.” Dr. Bernanke, instead, waited until he knew his action would truly make a difference and then he cut rates more rapidly than had been seen in decades to address the problem.
He was and is, of course, accused of being behind the curve, of being a novice who was just out of touch with the real needs of the market, an academic who just didn’t realize the magnitude of this problem, and even of just being out of his league — a man who lacked “real world” experience and was clearly in waters much to deep for him.
Well, I am here to tell you, once again, that those who accuse him are all wrong and on every count. What is going on today will, I believe, be looked back upon as the watershed event of the understanding of the real power of the Federal Reserve Chairman.
As JP Morgan gathered the powers of his day in a locked conference room and made them take the steps that were needed to save the day, so Dr. Bernanke is slowly bringing the world’s banking and financial powers to the realization that he may be the only man who can save the day.
Now, understand the current financial system problems are far from being solved. I am sure that Dr. Bernanke would be the first to agree with that. But, let me add that the only man in the world who truly understands what is really at stake and going on and has the knowledge and vision to solve the “Gordian Knot” challenge that confronts us is Dr Bernanke.
No man, banker, CEO or scholar, has the depth of knowledge of the last 150 years of financial good times and bad and of how to effectively apply the lessons they taught like Dr. Bernanke has. And no knowledgeable member of the financial world will disagree with that statement.
So, why am I writing this column? First, I want to urge you to read Dr. Bernanke’s book. If you have not, the true meaning of what unfolds from here will make little sense to you. You will continue to look at the world through “green” glasses. Those old ways led to recession and rallies, contractions and bubbles all that eventually culminated in the complex problems of today.
Second, I want to tell you that if you will take the time to read Dr. Bernanke’s book you will begin to see that the answers to today’s stressful situation, including expositions regarding events like the recent TAF auctions, the placing of $200 billion in the hands of investment houses last Monday to re-liquify the mortgage market, and so many more of his current and coming actions are all there!
For example, don’t be surprised if you see the Fed target specific huge business entities to receive blank checks from the Fed to cash at any Fed banks as it sees fit. That one will knock the socks off of the financial world.
Or watch for the Fed to bring new regulation proposals to Congress, asking them to enact these proposals to help prevent specific abuses and future scandals like the subprime scandal. That has never been done before (though FDR, as President, not Fed chairman, did act in that direction in his day).
Now look, I don’t know what the next six months or year holds for us as this financial challenge unfolds. No one does. But, this I do know. If there is anyone in the world who can lead us through the mine fields out there, it is Dr. Bernanke.
Yes, that’s a tall order, I know. But, if Dr. Bernanke successfully finishes this job, as I believe he will, a statement he made to Congress over six months ago will begin to resonate in even the most closed minds. At that time he said (my paraphrase), “The economy need not suffer huge ups and downs, but can be nudged ahead and calmed down in such a manner that there should never be the need for recession or bubbles.”
Pretty heavy stuff! Think about that one for awhile. Oh, yes. That one is in his book, too. Never, I say never, sell this man short.
And one final note. If you are aware of the current actions of one Sen, Christopher Dodd (D-Conn.) to prevent the approval of several new Fed district presidents so he can apply direct political pressure to the Fed and control its activities (much as there are now huge political battles that occur for every Supreme Court Justice), you had better be scared. This is an action that could literally destroy the one key power that made JP Morgan’s saving of America possible, his demand to the President before he called all the bank presidents to his office for total independence from self-serving politicians.
If you are unaware of this incredible power play by Senator Dodd, I strongly urge you to look at what might, before long, become one of the most bitter battles on the Hill — unless, of course, Sen. Dodd comes to his senses, relents, and lets the Fed act unencumbered by congressional interference.
What might it be like to have Congress running the Fed with Congress’ history of running the economy? Oh my! JP Morgan knew only too well.
Well, that’s all for today. Not much market stuff this week. Just felt you might like to hear some other perspective about what was really unfolding in the Fed’s battle to rescue all of us from potentially deep, deep problems. Again, read his book!
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