It was October of 2005 and Ben Bernanke was poised to inherit the Federal Reserve empire bequeathed to him by The Maestro. I imagine old Zimbabwe giving himself pep talks in the mirror as his wife tied his tie for him (Sagittarius, we aren't good at the "put together" thing you know) "I'm just as good as Greenspan... I'm just as good as Greenspan...".
Well, you're no Alan Greenspan, sir. But let's leave The Maestro out of this; he created an unsustainable pressure cooker which has obviously exploded in our faces of late. That's not exactly Bernanke's fault. But was he ever cut out to be the 2nd most powerful man in America?
In a Slate.com article just before Bernanke took his place on the throne of funny money, his viability as Fed chairman was analyzed against - what else - his portfolio. What could we learn about him from his investment choices? Were there any red flags that might clue us into a possible sticky situation? And who the hell was this dude anyway?
Oddly enough, Bernanke checks out. In fact, his portfolio at that time = vanilla. Sorry but if I had his education, connections, and textbook residuals, I'd be riding the booms and busts like a drunk college girl on the mechanical bull at the country-themed bar. Just sayin'.
In his previous job as a Fed governor, Bernanke filed disclosure statements detailing his assets and income. The latest of these, filed in 2004 and covering 2003, is available here and serves as the basis for the discussion below. Bernanke will presumably file more up-to-date info as his confirmation proceeds.
Since this is an old article, Bernanke's more recent statements can be found for 2004, 2005, and 2006. I could not find his 2007 or 2008 disclosure statements for the years previous.
Bernanke and his wife have socked away enough of his former $295,000 salary as head of the Princeton economics department, his six-figure textbook royalties, and her salary from Princeton Day School to amass a retirement account worth $1 million to $5 million (by far their biggest asset). Regardless of how the confirmation hearings go, the Bernankes will not eat cat food during their retirement (unless his Fed policies lead to skyrocketing inflation).
Ohhh Slate.com - you deserve the Miss Cleo Award for Financial Clairvoyance for that last statement.
The bulk of Bernanke's holdings outside the TIAA-CREF retirement account are plain vanilla mutual funds. Yes, there are fancy ones here and there (a Greater China fund for his son, Joel, for example), but most are the type familiar to many Americans: Merrill Lynch Large Cap Core Fund, Merrill Lynch Balanced Capital Fund, etc. What's interesting about Bernanke's fund choices is that most are actively managed instead of passively managed, meaning that Bernanke is choosing to pay portfolio managers to try to beat the market, instead of picking low-cost, passive index funds.
This is interesting because Bernanke is an academic economist, and most academics believe that the market is so efficient that stock-picking is usually a waste of time and money. (The average active fund costs its investors 1 to 2 percentage points of performance every year.) Fifty years worth of academic research supports this conclusion, and almost every analysis of mutual funds over the last 30 years has concluded that the vast majority of active funds do worse than passive benchmarks.
So, why would a financial rocket scientist pursue a dumb investment strategy?
Slate offers four possible answers to that question. You can read the article yourself for all four. Although the "Bernanke isn't as smart as his academic resume might imply" excuse got a hearty chuckle out of me, I found the 2nd option most appropriate. Though a lot of it is hooey, as some of you know, Ben Bernanke and I share a birthday (December 13th) and if there is one thing I know about Sagittarians (no offense to any reading this), it is that we should not be in a professional position that requires constant discipline, structure, and order. We just aren't cut out for that. We also tend to be persuaded by our ruling planet of Jupiter to overspend and burn out in the pursuit of more, more, more. Damnit why didn't George Bush Google this before he hired the man?
2) Bernanke has the brainpower necessary to find the truth but lacks the willpower and decision-making discipline necessary to put it into practice. (Also known as the difference between the ivory tower and the real world.)
In this scenario, Bernanke believes that active management is a crock but won't act on this belief. Why? Perhaps Bernanke's charming financial consultant has opined that the efficient market stuff is a load of hooey: "It's the pursuit of mediocrity, Ben. Who wants to strive to be average? Certainly not you. I mean, it's downright un-American." Perhaps Bernanke finds this convincing or lacks the energy to argue. This, too, would spell disaster at the Fed.
I hate to break it to you, kids, but someone really should have warned GWB about putting one of us in charge of the money.
