Frankly, this is pathetic. If Bernanke and his minions can’t take the heat of some well-deserved criticism from the highly-regarded Martin Wolf of the Financial Times, they don’t belong in public service.
To recap: yesterday, Wolf issued a stinging rebuke of Bernanke’s conduct on the Financial Times editorial page, in “Central banks should not rescue fools.”
Wolf first took aim at Bernanke for giving all appearances of having submitted to political pressure. The Fed chairman not only met with Henry Paulson and Senate Banking Committee chairman Christopher Dodd, but then appeared jointly with them. The Federal Reserve is supposed to be independent, yet as Wolf put it, “This showed Mr Bernanke as a performer in a political circus.”
His next criticism:
Policymakers must distinguish two objectives: the first is macroeconomic stability; the second is a sound financial system. These are not the same thing. Policymakers must not only distinguish these objectives, but be seen to do so. The Federal Reserve failed to do this when it issued statements, on prospects for the economy and on emergency lending, on August 17. This unavoidably – and undesirably – confused the two goals.
Enter Greg Ip of the Wall Street Journal. Ip is widely considered to be a preferred, if not the preferred, outlet for informal communications from the Fed.
Now as of this hour, the WSJ first page‘s “What’s News” column has this summary of an article by Ip as its lead item:
Bernanke is showing signs of a break with Greenspan by distinguishing between the Fed’s two main roles of maintaining financial and economic stability.
This is a direct rebuttal to Wolf, editorializtion masquerading as news.
It gets worse. From the article “Bernanke Breaks Greenspan Mold,” by Ip:
To Mr. Greenspan, market confidence and the economy’s growth prospects were so intertwined as to make the Fed’s two duties almost inseparable. He cut rates after the 1987 stock-market crash and the near-collapse of hedge fund Long-Term Capital Management in 1998 to prevent investor reluctance to take risks from undermining the nation’s economic growth.
By contrast, Mr. Bernanke distinguishes between the central bank’s two functions. So, on Aug. 17, the Fed cut the interest rate and lengthened the term on loans to banks from its little-used discount window in hopes banks would use the window — or at least the knowledge it was available — to lend to solid borrowers having trouble getting credit amidst the market turmoil. The action was aimed at restoring the normal functioning of disrupted credit markets, not primarily at boosting growth.
Ip should be too seasoned a Fed watcher to buy this bunk (although some have suggested he serves as a scribe for the Fed). And it goes without saying that the existence of Wolf’s piece is never mentioned.
The discount window was not an effective mechanism for dealing with the seize up in the money markets, which was where the crisis lay. That problem resulted from a repudiation of asset backed commercial paper, which potential buyers feared might be tainted by subprime exposure. Many of the issuers who couldn’t roll it were either corporations or special purpose entities that had no access to the bank discount window. Thus Bernanke’s move was no remedy.
As we said at the time, the important act that day was not the discount rate cut, which was merely symbolic, but the Bernanke commitment via Dodd, that the Fed stood ready to act, which traders have taken as a promise that a Fed funds rate cut is soon coming. In fact, our reaction on August 17 was that Bernanke’s actions showed him to be the true heir of “Greenspan put” Al. But Ip would have us believe otherwise.
Our dim view is further confirmed by the fact that the Fed has allowed the Fed funds rate to trade below its target levels for most of the last two weeks (chart courtesy Calculated Risk):
Calculated Risk notes that this de facto easing is much less than during the 9/11 period.
So we can either believe Ip is an idiot or he is so loyal to his Fed sources that he will take a story line from them and faithfully write it up. I’m inclined towards the latter view. And if true, that is even more discouraging that what Wolf told us yesterday.
A more charitable take is perhaps: Bernanke thinks the Wolf piece is misinforming the market about the Fed’s intentions, and he is using Ip to clarify.
As near as I can tell, all one can criticize Bernanke up to this point is that he stood behind Dodd while Dodd summarized their meeting. Perhaps this was naive (Dodd is a politician and will say what he wants, even if that puts others in a bad position).
But let’s see what Bernanke actually does – specifically the Sept Fed meeting – before criticizing him.
Ip may be right about the weaning. The real test comes at the meeting. Here the dejure versus will be key.
Wolf sets out reasonably sound stall which may need some refinement re: communications and what needs to be communicated, nothing which has not been said once to date.
But as post last there can be expected to be a reaction. No need not to prepare a solid defence. Kremlinology may of may not be an important part of this.
Fantastic piece Yves. I couldn’t agree more. I read the Martin Wolf piece and thought it summed up the situation perfectly. It’s a sad thing to say, but I ignore virtually everything that comes from the fed.
2Q GDP at +4%. Looking in the rear view mirror anyway, it looks like the real economy is doing pretty well. What could change the view of the Fed on the real economy for the Sep meeting? Does this figure mean that a Fed cut is almost off the table…??
Is it possible the money did make it where it needed to go if the banks were borrowing on behalf of clients and/or funneling money to affiliated BDs that in turn could finance the hedgies, SIVs, and even corporate clients? Hasn’t the Fed been issuing exemption letters for this purpose?
Don’t know much about the process; but reading between the lines it seems a back-door was opened.
There is still a lemony smell about. Is issuing from a persistently large number or from those being squeezed?
Thanks for the comments. Some off the cuff reactions:
I’d like to see what the stat watchers make of that GDP release. There’s been a tendency for the initial release to be high and for it to be revised down in at least once, sometimes twice. I must confess I don’t watch this closely myself, but as I dimly recall, auto sales were very poor in April, and retail sales were very strong at least one month, but very weak another. So the few stats I’ve seen don’t support a 4% increase, but I as I said, I only watch this in passing.
As to the wisdom of someone at the Fed queuing up this story with Ip (if my suspicion is correct), what bothers me is that makes the Fed more concerned with image management than substance. Remember, traders read the Dddd statement as a promise to cut. If the Fed doesn’t like that reaction, using Ip is great way to clear that up. But instead, this appears to be reputation defense, and weirdly, against a source that, although highly regarded, isn’t widely read here.
Long winded way of saying it smacks of hypersesnsitivity and wrong priorities.
I spoke too soon; a lesson for me not to work from memory in an area I don’t follow closely.
This was the second GDP release for that quarter. It was revised up from an initial estimate of 3.4%. Apparently an increase was expected; the consensus forecast was 4.1%.
I have to confess to being a bit perplexed, particularly since the economy grew only 0.6% in the first quarter. In a big economy like ours, big swings aren’t normal.
I’ll see if I run across any helpful commentary from the stat mavens.