Keep Bernanke as Fed Chairman?

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Includes: DIA, QQQ, SPY
by: James Byrne

The topic surrounding whether Ben Bernanke should gain another term at the helm of the Federal Reserve is front and center these days. The opinions are as diverse as whether we should have the designated hitter in baseball.

Here what is being bandied about.

Cons

  1. Bernanke was not up to the task. As sitting chairman he allowed the unregulated credit default swaps market to experience explosive and, unknown to the rest of us at the time, unregulated proliferation.
  2. As the financial collapse began he was slow in recognition and guilty of a sloth-like response.
  3. His quantitative easing policy is monetizing the U.S debt further, allowing for enormous deficits instead of forcing Congress to address the fat and waste embedded within all aspects of government and budgets.
  4. All this money sloshing around in the market and economy is going to create a bout of hyperinflation in the not too distant future, resulting in skyrocketing interest rates not seen since the President Carter/Volker days, which will cause the US economy to enter into a prolonged depression.

Pros

  1. While late in recognizing the magnitude to which all financial institutions had levered themselves up on cheap money and complicated derivatives, once engaged he acted decisively. His policy response was to drive rates to virtually zero using both conventional and non-conventional methods. Think back to the days of his predecessor, Chairman Greenspan. A bold move back then would see the Funds rate moved 1/4-1/2%. While the financial walls were crumbling, back in January 2008, the current chairman cut rates 3/4% at the regularly scheduled meeting only to follow up a bit more than a week later, sensing the rampant market fear and the need for bold action, by cutting rates a further 1/2%.
  2. Did he save the system? One only needs look back to Bear Stearns' collapse. With the SEC asleep at the switch and the FASB accounting board sipping margaritas on some beach, short sellers set their sights on the investment banks. Bear, along with the other investment banks, were over-leveraged and the very ones they were providing the funding to (hedge funds) began eating the host. Fear began to spread: Bear would fall first, then Lehman, then Merrill, Citi (NYSE:C), Bank America (NYSE:BAC) and eventually the golden child, Goldman (NYSE:GS). Those were dark days and the Fed worked every weekend "negotiating forced" marriages, identifying who would and could emerge from the ashes. What could have been done? The SEC could have done their job and enforced the naked short sale rule already in place. FASB could have amended the Mark to Market accounting rules #157. The investment banks could have and should have cut the lines of credit for the very hedge funds that were creating the run on the banks. But, that is a very lucrative business and the banks themselves never looked far enough down the road to see that they themselves would one day become the prey. By the time of that epiphany, it was way too late. This left the Fed and Treasury to hold the line, as it were.
  3. George Santayana once said, "Those that cannot remember history are condemned to repeat it". Chairman Bernanke is widely acknowledged as an expert surrounding the crash and subsequent Great Depression. Couple that with his experience gained working during Greenspan's reign, and it would seem he has a unique knowledge of both an economy being over stimulated with easy monetary policy and the crippling effects of not enough credit.
  4. Transparency. In a break from his predecessor, Chairman Ben has been a breath of fresh air. Having worked on Wall Street at some of the largest firms, I can attest to this first hand. No matter which firm I was at or how prominent our economists, after listening to Greenspan their analysis went something along this line, "After having listened to and reading his policy statement, I "think" he is looking at XXX for signs of inflation and stabilization. For future moves he "could" be looking at XXX". Our top economist had to always give a best guess, because they simply did not know. Which, from my seat in the room, was frustrating. After listening to both Greenspan and then our own economists, I had to go back and re-read everything. Probably explains why I'm a bit thin on top now - all that scratching my head all those years. Thanks, Alan! Chairman Ben has been clear and articulate with policy outlook and execution. Clearly under Ben if you don't know his intentions, for economists, you're simply not listening.

Closing

So, as I stated in past updates and personal conversations, I believe there is no other person we want at his post. Time to re-up this man before he realizes he could get a much better paying job in the private sector without being left for cannon fodder should things get a bit more dicey on the economic front.

In a note of full disclosure, I may currently own or look to purchase in the future this security for myself or clients. As always do your own due diligence or talk to your advisor before making any investment decision.