Has Ben Bernanke Learned His Lesson?

This market plunge makes me optimistic. Why, you may ask. Because I feel that Ben Bernanke will finally learn his lesson, which is, “Don’t talk tough on inflation.” Every single time that Bernanke has talked tough on inflation, the market has tanked.

On June 10th, Bernanke stated, "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation." He followed this up with, "Although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

Yes, the possibility that the economy had entered a substantial downturn had diminished. But the “tough inflation” talk brought that possibility right back. The very act of making the statement about the possibility having diminished resurrected the possibility of a “substantial downturn.”

The S&P 500 index has dropped by 7.79% since June 10. This reduces the Fed’s ability to staunch inflation without sending the economy into an even worse tailspin. The stock market is a leading indicator, one that is causal and not simply indicative or reactive.

This is far from the first time. On June 6, 2006, the stock market tanked after some tough on inflation talk by Bernanke. And earlier, on May 2, 2006, Bernanke had made some comments to Maria Bartiromo that she announced on her news show, and which also clobbered the stock market.

Now we are in a bear market for real. We are down more than 20% from the October 2007 high. Is there any chance at all that we could stop the inflation tough talk? It has been incredibly destructive. This is an economy that has already been battered raw by the sub prime crisis, the resultant fallout in financial institutions and high petroleum prices. Is there any chance that we could enter into a period of benign neglect from the Fed Chief’s statements? He can still raise interest rates. But comments that have phrases like “strongly resist” in them frighten people. They introduce uncertainty that is destructive to people’s ability to make positive decisions and commitments.

But now I’m hopeful that the stock market, this collective mouthpiece of so many, which is nothing if not 100% sincere, will have finally taught Mr. Bernanke that he could just be a little milder in his statements. Could he not simply have said something on the order of, “It looks like there might have been some mild erosion of price stability expectations and it is probably nothing, but don’t worry, if it ever became a serious concern we would take action that I feel certain would be very effective.” This is a market that needs reassurance.

My gut feel is that this has happened enough times so that the stock market has now tamed Ben Bernanke, at least a little. If he does it again, his term really should not be renewed. But I would hate to see him replaced because at least now he has some experience, and a new Fed Chief would not. And it seems that being Fed Chief is a job where there is just no substitute for actually doing it for awhile to get the hang of it.

Comments

[Jason Rines...:]

You have no clue buddy. The bill has come due for 15 years of excess liquidy from the Greenspan era and the Fed has little control of the adjusting economy towards financial equilibrium. The free market will never be fooled. This Fed is fighting similar conditions of the 1930's. This Chairman is a student of this time period so he is qualified. Do any of you bother to keep notes where Bernanke's plan was to fight bank melt-down first and then focus on inflation second half of the year? He is following the gameplan written in February, this is not empty rhetoric and actually, his comments strengthened the dollar immediately afterwards for a tad and the timing coincided just prior to the EU's stance on inflation, it called 'coordinated Central Bank strategy' ever hear of it?

It is dummies like you that don't know what a PLAN is and don't pay attention. He is being leaned on by the President himself on this effort. And that is responsible, to dry up the liquidity, end the party, accept our pain and rebuild. We have no further options except to let the 1% wealthiest in government and banking continue to propogate failed theories while fleecing the entire American citizenship of a future. Sorry I was harsh but I am tired of mincing words to educate. Time is money.

2008 Jul 10 02:58 PM

[icandoitdon:]

this guy, like mark perry, is just another educated idiot. he belongs on CNBC.

2008 Jul 10 04:26 PM

[kashirin:]

so market is frighetened by possibility of low inflation?
Yeah, market in Zimbabwe really like high inflation

2008 Jul 10 06:44 PM