Fed Chooses Not To Taper: In Gentle Ben We Trust

by: Brian Gilmartin, CFA

A new all-time high for the S&P 500 as this is being written at 1,728, surpassing the August, 2013 high of 1,709 and a powerful Treasury rally are the result of the Fed and FOMC choosing to postpone taper, and leave current monetary policy and quantitative easing as is.

Chairman Ben Bernanke's press conference is still ongoing and we are listening to it as we write, but I also wondered while listening to the Chairman's earlier testimony if he still isn't being guided by the 1930's Great Depression experience.

Although the Chairman has a plethora of enemies and critics, I think hindsight will show in future years, he was the exact right Chairman, in the exact right place (Fed Chairman) at the exact right time (the Financial Crisis of 2008) that if events had transpired unchecked, the hit to the U.S. economy probably would have made the Great Depression of the 1930s, look like a walk in the park.

By that I mean the Reserve Fund, the largest money market fund threatening to break the back in October, 2008, the slow epileptic seizure of the commercial paper market, and the widespread exposure to the stock market via 401(k)s and pensions, that weren't present in the 1930s.

Although I am not an economist, given the fact I am a money manager, and have taken plenty of economics and money and banking courses, knowing economic history is at least some solace in times when clients ask about the economy and 2008.

Back in the 1930s as I have understood it from economics texts, the Fed ignored the stock market crash of 1929, literally thinking, "Oh well, that is just the stock market, and doesn't have any real impact on the real economy" and actually withdrew liquidity from the U.S. economy just as the stock market crash and the bank failures were starting to spread like a virus. Well, the Fed at that time found out that wasn't the case, and the U.S. economy cratered significantly in the early 1930s and numerous bank failures ensued. The Fed actually exacerbated the liquidity problem in the early 1930s, rather than alleviating the stress.

The other mistake the 1930s Fed made was that in the mid 1930s, just as the economy started to re-accelerate again, the Fed withdrew liquidity a second time, and sent the U.S. economy careening into the second half of the Great Depression.

Granted, the rise of Hitler in Europe through the 1930s and the slowly growing, ever-darkening cloud of Naziism, Fascism, the nationalistic fever of Japan, and Russia, was leaving the U.S. in an ever-isolated place in the world, which certainly wasn't helping. (One thing I failed to mention was the isolationist trade pact, Smoot-Hawley, was another nail in the coffin for the U.S. economy.)

The point of this brief missive on economic history, was to wonder aloud if Ben isn't being guided by the 1930s mistakes of the then-Fed, and doesn't want to do anything until the economy is growing smartly.

In 1994, when Alan Greenspan hiked short-rates six times, he only did it when GDP had printed +3% and Treasury yields were already starting to rise. Greenspan was always a "reactionary" to economic fundamentals, and rarely anticipated the economy, which was what this taper might have been perceived as.

Frankly, I think this was the right move by the Fed and Chairman Ben, given that the U.S. economy is still growing at less than a 3% rate, and there is no inflation, but I also think that this "no taper" call could invigorate corporate decision makers to start getting more aggressive.

Finally, think of the U.S. economy today versus the 1930s: an 80% services, internationally trade driven economy, versus the agrarian, goods-producing economy back in the 1930s, which didn't have near the depth or scope of involvement in American life, as does the stock market and financial system today.

Was this the right move today not to taper? Certainly all the pundits had it wrong, and Chairman Ben's presser and statement seem self-explanatory.

I just wondered when I heard the decision, if the ghosts of the 1930s aren't still tugging at his conscience.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.