Ben Bernanke’s big bet

On May 22, an elderly man with a bald head and a close-cropped gray beard spoke to a highly attentive audience and, as he spoke, world markets swung back and forth, hanging on nothing as concrete as actual words but more on nuance.

At that moment, when he addressed the U.S. Congress, and indeed maybe in every public moment since, Ben Bernanke has been the most powerful man in the world. Behind his polite but somewhat nervous manner one sees a man who is clearly intelligent and apparently benevolent, but who, when he speaks, lacks the authority and confidence of his predecessor Alan Greenspan, previously known as “the maestro.”

Although that description would clearly be contested by many (myself included), Greenspan held the position of Federal Reserve chairman for 19 years, and oversaw what was mostly a period of prosperity for the United States. Maybe his most brilliant feat during his tenure was knowing when to end it and turn the reins of the ill-fated economy over to Bernanke.

In early 2006, Bernanke took the position of Fed Reserve chairman and inherited a U.S. economy that could most simply and accurately be described as a mess. Despite his calm, unassuming demeanor, Bernanke has adopted unprecedented (some would say radical) policies. Simply stated, he has forced interest rates to essentially zero, and created huge liquidity by “printing” nearly 3 trillion dollars. The intention is to “prime the pump” and push the flailing U.S. economy into motion.

The measurable metrics for success (economic growth as measured by GDP, and an improvement in employment) have not been seen, and the risks (inflation, and loss of faith in the currency) also have not clearly emerged. What has happened is a huge bull run in the stock market to record highs.

Bernanke believes he can gradually withdraw Fed support and the economy (and the stock market) will continue to grow unassisted. Opponents to this aggressive policy believe that this economic life support (money printing) has created a false recovery and huge stock and bond bubbles that will pop when the support is removed.

The reaction of the markets on May 22, at even the hint of gradual withdrawal of liquidity, supports the view of the Bernanke opponents. We will see.

Greg Johnson

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