The markets waited with baited breath. Bernanke began to speak ….. and the Dow plunged straight down. As soon as he said the words, “remains unusually uncertain”, about the outlook for the US economy, the markets fell over, while the VIX, the measure of volatilty, went the other way.
Are we really to believe that this was news and came as a bolt out of the blue to Wall Street traders? If that stretches your credulity as it does mine, then what was it the traders heard between the lines? Or what were they expecting him to say that he didn’t?
What Bernanke said, and re-iterated when questioned by Senators Dodd and Shelby, was essentially that he believed the large deficits, while unfortunate, had been and still were essential for stability and recovery. He said he was reluctant to withdraw,in the short term or even medium term, the ‘exceptional’ measures the Fed had taken thus far.
The Fed would keep rates low and maintain all aspects of the stimulus and bail-out, deficit spending in order to ‘maintain support’. But this would be combined with “serious attention” given in the long term, to return of the Fed balance sheet to what it was before the crisis and the deficit to a more manageable level.
So on the one hand 3 Trillion or so in spending and more “if needed”. Balanced, on the other hand, by some…. “serious attention”. Ata boy! You tell them Ben!
Senator Dodd, he of the ‘lets pretend to spank the bankers bottoms but make sure we do it with a velvet paddle’ fame. Whose financial reform continues the late twentieth century trend of doing terminal damage to the word ‘reform’. It may be financial but it has nothing to do with reform.
Anyway, Dodd was going for the ‘most oleaginous question award’. So he asked a long rambling sort-of-question which offered that, ‘Mr Bernanke as a student of the Great Depression would surely agree with those who have argued that the policy failure of GD1 was that the government failed to keep sustaining growth, and instead reigned in spending and went for austerity which only prolonged the depression?’ Concise, sharp, to the point – I’ve seen sharper billiard balls.
To which Mr Bernanke obligingly opined that, ‘while deficit reduction is something we need to bear in mind and achieve over the long term, we must spend to stimulate growth.’
So far, I was saying to myself, ‘what is there for the bankers not to like in all this?’ But the Dow stayed resolutely down.
Senator Shelby was next up and asked what can the Fed do to stimulate further? Given that interest rates are already within 0.25% of being zero and the Fed has already purchased far in excess of a Trillion dollars of agency (F&F mortgage backed ) debt. What measures does the Fed have left? Good question.
Bernanke’s answer was – “we can modify our language.” No, really, it was. That was, the first thing he talked about and what he spent the most time on. Then he added rather more briefly and quietly, we could also lower rates (presumably to negative), and the Fed could …. buy more agency debt. Sorry, Mr Bernanke I didn’t quite catch that last little point. Could you repeat that last bit please? “The Fed couldbuysomemore debt”
Kerching!!!
In case you’re wondering how the long term deficit is going to emerge from buying more debt in every term up until the long-term – so is everyone else. Bernanke did offer one actual thought on this – larger reverse repo auctions – “with more counterparties.” Sort of like “with more raisins” but for central bankers.
In case you’ve forgotten, reverse repo’s are when the Fed sells ‘assets’ (paper debt) that the Fed is holding, back to the counter parties for cash with the agreement to rebuy them at a specified date and price. All the repo does is withdraw the cash for that specified term. A way of mopping up a bit of liquidity, but only short term.
Yee harr! Is that it? More counterparties is the only interesting nugget in what is otherwise the intellectual equivalent of bellybutton fluf. Which might well be where Bernanke gets his ideas. So the Fed will try to force/invite maybe large money market and hedge funds to be in the repo gang alongside the banks. Interesting, but has a definite feel about it, of deck-chairs and Titanic.
So to some up, after what seemed a minor geological epoch of listeining to a dull man read even duller prepared statements, the result was the Fed “stands ready” to spend more on buying up bad debts. Since we all know the housing and broader property markets continue to come apart like a leper at a tug of war contest, he won’t have to stand ‘ready for’ too long. BUT to balance this, we are also going to give some ‘serious attention’, very, very serious… to modifying our ….Language!
NO WAY!? Yes Way, Dude! This whole thing gets more and more like Bill and Ted’s big financial adventure with every passing bail-out.
The fact that what Bernanke said, was essentially, ‘we are going to continue to do whatever the bankers tell us to do, no matter what the cost’ and STILL the Dow refused to come out of its sulk, convinces me, its not what Bernanke said but what he didn’t say.
Bernanke just wasn’t bullish enough. He sounded like a man who could be bullied by those who want to actually want to cut the deficit (there aren’t many in Congress) or, by people who might want to give money to someone other than the big Wall Street Banks. Such as bankrupt states for example.
I think, the bankers wanted to hear a bankers bully-boy tell Congress to stop whining. The bankers know growth is way too feeble to re-float the banks above the rocks of the next lot of losses. So they need to know they have a strong man, a bully, who is ready and able to TELL the politicians and the people. Not ask or explain. But TELL. Bernanke will do it for them. But not convincingly. That is what I think spooked them.
But no matter. They’ve already stopped pouting and are happily rallying again feeling more secure today that Uncle Benie has their back after all.
One of the very first pieces I wrote on this blog was called “Stimulus Withdrawal“. It said – there isn’t going to be any withdrawal. They can’t. As far as I am concerned, Bernanke’s speech yesterday confirmed what I wrote. And today, the Dow agrees too and is up, up and away with your pesky debt worries!