Let’s get biases out of the way first. I’m a big Bernanke fan and have been since the financial crisis of 2008. But I’m open-minded enough to absorb new facts and modify that opinion at any time. It’s just that he hasn’t given me any reason to do so yet.
That said, we can now go over an imperfect timeline where he had the opportunity to screw up, and didn’t:
Fall 2008 through Winter 2009: American banking system and economy on the brink of implosion. Ben, along with Hank Paulson at the Treasury, engineer extraordinary financial rescue plans to shore up banks and hemorrhaging industries.
Summer and Fall 2009: Financial media and politicians fiercely criticize Bernanke Fed for setting the stage for massive inflation, devaluation of the dollar, a threat to the US triple-AAA credit rating, and not having an “exit strategy” clearly outlined “before it’s too late!” Ben doesn’t flinch and stays the course — for another year.
Fall of 2010: After US equity markets survive the second and third quarter rout, on the heels of Deepwater Horizon and the “flash crash,” stock averages are back on the upswing and even housing looks like it’s recovering nicely, implying all is well and the Fed should start raising interest rates soon. Instead, the Fed rolls out what comes to be known as “QE2,” an open market Treasury bond purchase program along the middle part of the curve.
Through it all — we’ll call that 2.5 years about six innings of this historic game — the critics railed about monetizing debt, debasing the currency, and being too chummy with Wall Street.
It’s Still Housing
None of any of this surprised me. In the first quarter of 2010, I wrote a piece titled “Bernanke’s Eye on Real Estate” for The Options News Network to address all the noise about whether he actually knew how to raise interest rates, or if he was still stuck in his Depression-scholarship ivory tower. I said it was as simple as housing, with a dash of commercial real estate thrown in.
Sustainable economic recoveries rarely happen without a coincident housing recovery. Trying to think of a good metaphor for the structural importance of housing to our economy, I’ll go with a ship’s ballast, a weight system used for stability. And it’s directly tied to many other important things, not the least of which are consumers and interest rates.
Clearly, many other areas of the economy such as manufacturing and Wall Street could be called the ballast. But housing seems more critical. Look what happened when the ballast was corrupted by irresponsible lending practices and contaminated leverage a few years ago. And look how the after-effects of that crisis still haunt consumers shopping at Wal-Mart (WMT), homebuilders like KB Home (KBH), and giant mortgage lenders such as Bank of America (BAC).
QE Next
So just about the time the economy is slowing down its rapid V-recovery, and housing data has been streaming in worse and worse for months, everyone is wondering if Big Ben and Co. will roll out QE3. And surprise, surprise, contrarian that he is, Bernanke is gonna go the other way on this one.
He put a plan in place over two years ago and he has stuck to his guns. He restored confidence to markets and the economy by swinging a big and steady bat at the threats of collapse and that deadly virus known as deflation. Depression scholar or not, anybody with eyes to see should recognize that the specter of Japan-style deflation was the worse of two evils.
In other words, he has been trying to create price inflation and it’s finally coming around the corner. Unless housing takes another turn lower, that is. Time will tell. And time is exactly what has been built into his plan all along. Housing is a big enough ship to steer as it is, without a generational, systemic banking crisis thrown on top that would need five years to heal under the best of circumstances.
Assuming we have a good three innings left in this crisis, what will the Fed unwind look like? It might actually be more like a stealth QE3 than anyone would expect. Here’s a great quote from Keith Fitz-Gerald, chief investment strategist of the newsletter Money Morning, after the historic, first-ever Fed press conference in April:
“Instead of actually printing more money to purchase U.S. Treasury securities and other paper, the Fed is going to let QE2 end then start selling the $1.4 trillion in toxic ‘securities’ that it acquired during the crisis. It will likely use those proceeds to buy yet more federal debt as a means of supporting more ‘normal’ conditions – although those new securities purchases will probably be farther out on the yield curve.”
In short, as $50 to $60 billion per month in 3 to 7 Treasury security purchases subside, potentially $25 billion per month from mortgage-backed securities (MBS) sales could be filtering in to the long end to keep rates from soaring.
Clear as Day
Probably the best thing about the Chairman, other than his knowledge and steadfast resolve, is his ability to communicate clearly and patiently with Senators, the media, and Wall Street. Despite the cries for abolishment of the tyrannical, aristocratic Fed, he bent over backwards, I thought, to give that public press conference. Call him wonk if you want, he’s a team player to be sure, and though he understands politics, I don’t think he’s playing anybody’s.
If you don’t read every speech by every Fed governor, and peruse the website now and then for interesting policy insight into the mind of Ben and Co., how can you say they aren’t transparent? How much more transparent can they be? Sure they could open the doors on the FOMC policy meetings. But that would be a mess. Would you want reporters and Congress looking over the shoulders of the Joint Chiefs of Staff during meetings?
The dismal science of economics doesn’t really lend itself to any kind of certainty you can bank on, to say nothing of throwing in egregious behavior on Wall Street and political grandstanding in Washington. It is a game of calculated risks on a playing field of numerous, dynamic unknowns, not only for the biggest, most important bank in the world but also for you on the next car or house you decide to buy, or not buy. The difference that makes a difference with Bernanke is his consistency and clarity about conditions and resultant policy.
By way of comparison, let us remember the infamous words of Chairman Greenspan who reveled so much in his Wizard of Ozness that he once said something like this: If you think you understood what I said, I probably misspoke.
Kevin Cook is a Senior Stock Strategist for Zacks.com
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