Saving Ourselves from Bernanke

by: Cam Hui, CFA

There have been a number of diatribes in the blogosphere about why Bernanke shouldn’t be re-confirmed as Fed Chairman. Examples include Simon Johnson’s Should Bernanke be Reconfirmed? and comments from Cunning Realist such as Bernanke responds, Man of the Year and An Inadequate Answer.

Who bells the cat?
There was once a children’s story about the mice getting together and deciding that it would be great idea that the cat should wear a bell. The problem was, who bells the cat?

That’s the fantasy world that we live in now. I wrote back in July that there were few alternatives to Bernanke. If you get rid of him, who are the alternatives? The leading candidates at the time were Janet Yellen (an apologist for inflation) and Larry Summers (another disaster).

The corruption of Washington culture
In a perfect world, we would have a better replacement for the Fed Chair, but we don’t. Dean Baker, co-director of the Center for Economic and Policy Research, wrote an article entitled Bernanke and the corruption of Washington culture where he railed on about how Bernanke actively encouraged and abetted the creation of the excesses that created the mess in the first place. He then concluded with:

How on earth can you do worse in your job as Fed chair then bring the economy to the brink of a total collapse? If this is success, what does failure look like?

But, in Washington no one is ever held accountable for their performance. The economic collapse is treated like a fluke of nature – a hurricane or an earthquake – not the result of enormous policy failures.

When Bernanke was first appointed to the Fed Chair, I told friends and colleagues that he was the Second Coming of Arthur Burns, the Fed Chair in the 1970s who had a head in the sand attitude about inflation. In fact, Burns was instrumental in the adoption of the core inflation (ex-food and energy) measure that is widely in use today. My investment conclusion at the time of the Bernanke appointment was to buy gold.

As individuals, sometimes we have to recognize that we can’t save the world and we can only save ourselves. My inner investor tells me to get long commodities but to be prepared for extreme volatility. My inner trader tells me that this will be a time of financial and economic instability and to rely on tactical timing models such as the Inflation-Deflation Timer (pdf).