Fisher Investments Editorial Staff
Others

The Devil You Know

By, 12/04/2009
Story Highlights:
  • Despite the political show of questioning, delaying, and debating, confirmation of Bernanke's reappointment is practically assured.
  • Looking back on Bernanke's first term, it's clear there were failures along with successes.
  • The Fed's moves in the months and years ahead are to be monitored as a risk—but it's unlikely political posturing will derail the bull market at this point.

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Fed Chairman Ben Bernanke is on Capitol Hill today facing the Senate Banking Committee for his confirmation hearing. There's plenty of criticism for Bernanke and the Fed as his first term was punctuated by the worst financial crisis in decades. Despite the political show of questioning, delaying, and debating, confirmation of Bernanke's reappointment is practically assured. Looking back on his first term, there were failures along with successes.

 

At the onset of the financial crisis, Bernanke and then-Treasury Secretary Henry Paulson's lack of consistent, coherent policy response probably contributed to the panic as they opted for a different solution to each episode, heightening Wall Street uncertainty with each step. Inconsistency is a cardinal sin of financial public policy.

 

In a departure from his lead-from-the-front predecessors (Greenspan, Volcker), Bernanke didn't often control the situation and define the decisions. Known for his collegiality, he allowed the stewardship of the crisis to be managed by committee (namely, then New York Fed President Tim Geithner and the aforementioned Paulson, among others). This led to a sometimes public back-and-forth that exacerbated market confusion and added to the severity and swiftness of the downturn.

 

But at this point, it's all Monday morning quarterbacking. The fact is, the head Fed job is really, really tough. There's virtually nothing like a "right" solution. It's more like some things are more effective than others, and some things have more unintended consequences than others, and they keep muddling through. Bernanke's shortcomings aside, there was no playbook for last year. The circumstances during the panic were unprecedented and people were thinking Armageddon. As a preeminent scholar on the Depression, Bernanke was uniquely qualified to address the demands of the spiraling financial crisis. He understood the importance of coordinated, massive stimulus—done with alacrity. Under his direction, the Fed innovated numerous solutions, from emergency liquidity programs to lending facilities—and implemented those solutions (mostly) quickly and on a wide scale. Monetary policy has been accommodative, with extremely low interest rates and increased liquidity. The Fed has wisely publicized its intention to keep policy flexible until the economic recovery is on firm footing—choosing that approach ahead of inflation fears (which have yet to materialize). For all that, he deserves some credit.

 

As Bernanke prepares to transition between two terms (remember, his first one was short due to Greenspan's mid-term retirement), the US is shifting between economic climates. With recession turning to recovery, key questions remain: Namely, can Bernanke successfully lead an effective exit strategy? He's been greatly accommodative, but does he have the gumption to tighten? Tighter money is still a future event—not for the here and now. The Fed has (rightly) assured Congress and the public they are adequately prepared to head for the monetary stimulus exit, but for now the focus remains on supporting nascent economic revival and strengthening the financial system. The biggest mistake today would be pulling the rug out from under the recovery, and Bernanke seems to have no illusions about this.

 

Is there a better man for the job? Maybe. The grass is always greener. But such speculation does little but make for cocktail party fodder—Ben will be the man. At least with Bernanke there to see through the current policy trajectory, we know what we're getting. Perhaps "the devil you know" is a better thing after all.

 

Debate over the Fed's power and role will continue in the months ahead, with bills proposed in both chambers of Congress to limit the authority and autonomy of the institution. And on the other side, you can bet the Fed will argue its case for greater oversight and power over the financial system. Where all that settles will be a 2010 issue.

 

The Fed is an evolving and dynamic thing, coincident with the economy. Without question, the Fed's moves in the months and years ahead are to be monitored as an ongoing risk for investors. But it's unlikely political grandstanding over the Fed and its Chairman will derail the new bull. The broader forces of global recovery will continue to push it forward.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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