How the Fed Chief Gains Credibility

One of the best things about doing TV is who you bump into back stage or the green room. On Thursday’s K&C show, I ran into CNBC’s Chief Economist, Steve Liesman in makeup (I’ve chatted up Steve before from doing Squawkbox).

We started discussing markets and the Fed. Steve explained the current situation using a biblical parable — the tale of Abraham and Isaac. I told him this was a wondeful parable, and offered him the Big Picture as a platform to publish it.

He agreed, and so without further adieu, here is Steve Liesman’s explanation of how a new Fed Chair gains anti-inflation credibility — by his willingness to sacrifice his only son, the economy:


How the Fed Chief Gains Credibility
a biblical tale of credibility and faith

by Steve Liesman

"We throw this idea around a lot, but we talk little about it. The usual idea is that he shows this by raising interest rates to fight inflation. But I think the idea goes deeper. What markets want to know, what makes them sleep at night and not fret about inflation, what the real reason behind the Greenspan and Volker Puts is this: at the end of the day, the Fed Chairman is willing to sacrifice economic growth to fight inflation, to take on the body politic and risk his popularity in that fight and to cause a recession if needed.

This may sound absurd (but might not be in the context of Bernanke), but think of the Biblical story of Abraham and Isaac. Only by showing that he was willing to sacrifice his son could Abraham prove the credibility of his faith. This is the test that markets are putting Bernanke through.

Note, he doesn’t have to cause a recession, just make markets believe 100% that he will to fight inflation. And I mean 100%. There is no wiggle room.

David Rosenberg of Merrill Lynch said this: If we see a rate hike after the raft of soft data posted in recent weeks, then we can only draw the conclusion that in the name of rebuilding anti-inflation credibility, the central bank is willing to sacrifice the economy.

In fact, I believe that is the only way to rebuild anti-inflation credibility. I would add that Bernanke would have faced this test whether or not he talked to Maria. Greenspan, remember, is blamed for ruining Bush I’s reelection chances. Volker caused a recession.  Of course, we’re talking about inflaton being at a very low level now. But that’s balanced by the fact that the additional amount Bernanke has to tighten to gain credibility is much lower than the hurdle that Volker faced.

Note that we can now make an economic assessment. Is 25 or 50 basis points of additional tightening, and the increased economic drag it will cause, worth the value we’ll get from a chairman who has the market’s confidence? I’d say that every additional year that he remains in office, the less the cost of that additional tightening."

Steve Liesman
Senior Economics Reporter, CNBC



Thanks Steve — enjoy your vacation . . .

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What's been said:

Discussions found on the web:
  1. Brian commented on Jun 13

    Bernanke = Abraham? what?! haha

    Why doesn’t he just say what he really wants to say?:
    Bernanke = Jesus

  2. Manny commented on Jun 13

    As a corollary, I contend that that business needs to feel so bad about the economy that it won’t expand. Consumers have to feel so poor that they don’t buy the bigger house. The only way that can happen is if they feel the Fed has damaged their prospects BEYOND IMMEDIATE REPAIR. In other words, the Fed MUST be PERCEIVED as over-shooting or the economy won’t cool down enough to stop the tightening.

  3. jlx commented on Jun 13

    great insight ….. nice to get behind the scenes thought from someone who has his finger on the pulse of many top thinkers in the game…. thx Barry

  4. Emmanuel commented on Jun 13

    Lame-o biblical reference. In chronological terms, it’s more likely that the (rather dysfunctional) economy begat B-B-B-Bennie of the Feds and not the other way around.

    In any case, what’s Bennie’s anti-inflation weapon? Volcker had his “Saturday Night Special”. All Bennie’s brought to the battle is “Loose Lips Sink Fed Ships”.

  5. andiron commented on Jun 13

    I always knew that steve gets lots of data/info but cannot put it together into a coherent and meaninggul theme.

  6. D. commented on Jun 13

    I just went though my Globe and Mail. Couple of articles on Bernanke and how he’s failing on the transparency front and a few others about whether we’re going through a correction or not.

    Nothing about the coming US real estate meltdown. Canada’s firing on all cylinders thanks to massive American consumption. Yet no one seems to see the link between Greenspans’ low Fed funds rate, America’s voracious appetite for stuff and Chinese demand for commodities. IMO, Canada’s been strong despite our appreciating currency because of huge US consumer spending and this is about to end.

    Why does everyone seem to think that:

    1. Bernanke is aiming for transparency?

    2. Bernanke has any control over what is about to happen?

    No matter what he does, mortgages are resetting at higher monthly payments. Home buyers are realizing that prices will be lower in a year from now. The gravy train is heading for a cliff. And Bernanke is standing in front of it, trying to slow it down.

  7. me commented on Jun 13

    In the end, God saved Isaac, who weill save the economy? Bernanke is like Dan Quayle or John Kerry, branded by swiftboating. He will alwasy be Helicopter Ben and screwing up the economy will not help him or the marktes.

  8. john commented on Jun 13

    And the Lord saw and having seen said “B**l S**t!”

    I’d believe this crap if and only if the Fed instead of dripping out “accomodation points” had hit the economy with two 2.5 shots over a 6 month period. That would have stopped the housing bubble, cooled the economy and things would have been better today.

    What we got was drip drip drip along with ill-timed, politically motivated tax cuts and a runaway spendthrift Congress – a bunch of Rethugs who cheered when the towers came down because suddenly they realized that the piggybank was broken open and the sky would be the limit for their malfeasance and misgovernance.

    A pox on all their houses – and that too is a biblical reference and about the only one that is reality based – but then again I am a liberal.

  9. Tim commented on Jun 13

    Does the parable apply to both normal economies and bubble economies?

  10. B commented on Jun 13

    People, including Bernanke, believe the market is telling us he needs to prove his inflation-fighting mettle. Does he feel goaded? Will he respond emotionally? Or will he actually do what he says: look at forward data. The coincident and forward data shows the economy has a high probability of falling off of a cliff. At the mininum, growth appears likely to fall well below trend for more than a few quarters.

    Do we really know why markets are selling off? Are we so sure it is inflation? With global real estate peaking and commodities starting to tank why are we so sure inflation is still the problem? Or, in their zeal to draw conclusions and paint our Fed into a corner are they calling out the law of unintended consequences?

    So, with nearly every commodity at decade highs and in some instances 100 year highs, with global real estate extended to levels we haven’t seen in decades or by some measures, ever, and equity prices cratering, what will raising rates to fight inflation likely create as the end game? A soft landing? I hardly think so. In a bout of irony will Bernanke be called to fight his greatest fascination, deflation? If so, let’s see what the dollar and global economy does if his medicine is similar to what he would have done in 1929. The difference today is that now we are the world’s largest debtor. I think the situation might not respond as he would like. I pray to the God of Abraham I am wrong on all of this.

    If real estate craters, housing craters, commodities crater, equities crater, and by conclusion the global economies crater, unemployment rises, what is the end state? It’s pretty simple. If all asset prices are going down in value do we have inflation or deflation? What we had was a temporary bout of inflation caused by a global liquidity infusion but the likely end state is deflation. Does it work out that way? No one can foretell the future but we can postulate that the future will be fraught with danger. ie, In 2000 it didn’t take a rocket scientist to see we were in deep doo. I believe that is the reason we are seeing a disasterous cratering of the financial markets. Not because the Fed may raise another 25 bps to prove his manliness. I mean really….does anyone believe 25bps is worth a 50% sell off in the middle east or 35% in Brazil, India with Russia, Mexico, Venezuela and other commodity producing nations closing in on that number as well? Or some large cap tech getting dangerously low to retesting the 2002 bear market crash lows?

    The more likely outcome is that we never licked deflation with Greenspan lowering rates to 1%. We just shuffled the deck a little before dealing the final hand. We deferred the consumer’s recession until now. The purge is likely yet to take place. With home prices and equity prices falling, there has been studies show that the consumer spends less. Of every dollar made, 4 cents less when home prices are falling and 3 cents when equity prices are falling. Is this accurate? Who knows. But, I do know people will quit spending when everything they own is going down in value. So, as I’ve argued before, the unintended consequence is the paradox of thrift. The icing on the cake. For those who don’t know of this economic concept, it is that consumers create a self fulfilling prophecy of economic collapse by no longer spending, thus decreasing the wealth of the community as a whole. ie, Post 1929. Bernanke is not an idiot. He has given hints. He has effectively told global economies to start stimulating domestic demand because we are going on a hiatus. He said it last week. Now, why would he say that? Of course, it was said in secret code so as not to create mass panic.

    With the two bubbles of the 1920s, 21 & 29, almost paralleling today’s environment, are we about to see our second bubble pop? Something nasty is on the horizon and I content it ain’t some hedge fund debacle. That started small and spread over time. This started globally on the same day.

    So, in a twist of conspiracy theory, has anyone ever wondered why a Great Depresseion expert was called to be our Fed Chair and why Greenspan retired when he did? Yes, he was 300 years old but have the powers that be known all along the cleansing of post 2000 had yet to take place and there was no way around it? And that all they did was defer a deflationary scare? Did they know we’d likely see a repeat of some historical similarity? Interesting thought but I don’t know that it is baked in any truth. More of an irony.

  11. Michael L. commented on Jun 13

    The Fed, for whatever reason, refuses to use the rifle tools available to them. Instead they use a shotgun and shoot everything.

    In the internet bubble, all Greenie had to do was raise margain requirements instead of using the blunt instrument of rate hikes. Ditto Greenie/Bernake could have stiffen home lending requirements thru a variety of means to stop speculation.

    Too hard for them to take away the punch bowl.

  12. vf commented on Jun 13

    it feels like this story is being directed by Mel Brooks and not Ben Bernanke..
    Liesman seems like a good guy but his analysis is worthless. there is something else going on besides the market thinking Bernanke is looking to tank the economy. i think the price action of the dollar and commodities correlated with emerging mkt and US equities is finally showing it’s ugly head. it has become obvious since the top that these markets had been propped up by inflating the currency and excess liquidity that accompanies the inflation.
    so what do the markets want? easy money to prop up the assets again. will it work this time? who knows but Mr B’s analysis could be dead on… Bernanke’s worst nightmare is a deflationary spiral and a liquidity trap, a la Japan.. Bernanke fighting inflation while deflation is on the horizon. won’t it also be ironic in the next easing cycle if no one borrowed because they are tapped out.. the recent spike in consumer credit is probably short term positive for retail sales (see BBY) but a long term ominous sign.. a liquidity trap will be the big theme in 2007.

  13. commented on Jun 13

    Too much obsession on the chairman. The chairman has *1* vote people. Doesn’t anyone get this?

    His job is to communicate the will of the fed, and not, I repeat, not to control the fed.

    So far, ben has done a poor job.

  14. B commented on Jun 13

    I couldn’t agree with your statement more. Even Bernanke’s postmortem analysis of the Fed’s action going into 1929 was extremely critical of the Fed. As I recall, the terminology he used was something similar to using a sledge hammer in so many words. He was highly against the Fed popping any potential bubbles with interest rates because the effects were disasterous and far reaching beyond the intended consequences. (And for those who don’t know, the Fed did actually target equities in 1929. It was spoken, it was debated and the “poppers” won out.)

    I don’t know that anyone has noticed but a few things have happened since Bernanke became Chair. The loan loss reserves were raised and margin requirements on speculative commodities were raised. Both are intended to stop speculation in real estate and commodities. Now, it’s late but it’s happening. And Japan is taking away liquidity without raising rates. It is no secret the Fed has a cozy relationship with the BOJ and has actually provided advice and counsel to them on how to work their way out of this deflationary mess over the years. So, the BOJ has tried to reduce speculation without using the sledge hammer of rate increases to crater their economy.

    While it is likely not going to stop the bleeding, at least they appear to be using other methods than the sledge hammer exclusively. It’s time to pause.

    IF this is

  15. B commented on Jun 13

    Too much obsession? He is the Chairman. Do you get that? The others get rotated in and out with their chance to temporarily play in the sandbox with the exception of the NY Fed President as I recall.

    Can you go back in the last 100 years and show me the number of times the FOMC voted against the Chairman? That would be a crisis of confidence. This is not a group grope. He’s the boss just like the Chairman of your company…………who also has one vote with the board of directors.

  16. C commented on Jun 13

    OK, so if the parable analogy holds, Bernacke will not actually have to sacrifice the economy? God will step in and stay his hand?

  17. Blissex commented on Jun 13

    «If all asset prices are going down in value do we have inflation or deflation?»

    My usual refrain: inflation or deflation of what??

    All asset prices going up was not ”inflation” whatever that is, so I cannot see how them going down is related to ”inflation” either… (just joking :->).

  18. spencer commented on Jun 13

    The Fed is independent in the govt not of the govt.

    When Volcker tightened like he did the political system was ready to accept a recession to stop double digit inflation.

    The political system is not willing to make that trade off right now.

  19. Gary Anderson commented on Jun 14

    It is interesting to note that Bernanke believes that Americans manage their money well, and that we can always fall back on the payday loan sharks!!!! This amazing statement was made as central banks everywhere are drying up liquidity.

    I believe those statements prove that interest rates will continue to be raised by the fed. They are rationalizations that everything is ok. What I can’t figure out is if he really believes that we are going to weather this or if he is purposefully and secretly out to destroy the housing bubble.

    Well one thing is for certain. If he listened to Lereah, he is probably confident in our weathering the storm. Only problem is that Lereah is now changing his story!!!! But don’t worry folks. If you come upon hard times the payday loan boys will be there for you. Lol.

  20. D. commented on Jun 14

    “What I can’t figure out is if he really believes that we are going to weather this or if he is purposefully and secretly out to destroy the housing bubble.”

    He’d be nuts to take the job if he didn’t believe in his powers. No?

  21. Bjorn Yesterday commented on Jun 21

    Gosh…I used to like this blog until Barry described his fuzzy feelings for Steve Liesman. Personally, I can’t believe that Liesman or anyone else thinks Bernanke’s task is so simple. His “game” is several layers deep. “Inflation” is a head fake that he knows will bait you so you don’t realize he is stepping outside the FOMC “dual mandate” to hike rates and artificially support the dollar in an effort to prevent foreign governments from dumping treasuries while other central banks (with smaller deficits) raise their rates. That PLUS what Mike and Tim said…sniff, sniff, someone deflated. Steve Liesman?!?!?! Sheesh.

    BR Gee, sorry you didn’t like it. That’s too bad, Greg Mankiw appreciated it.

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