Bernanke & the Markets

Let’s cut Ben Bernanke a break: the present situation wasn’t of his making; he merely inherited a bad economic set up. Slowing growth, rising inflation, high energy costs, a real estate dependent economy, and the longstanding problem of excess liquidity — none of these rest at the feet of the present Fed Chair. In reality, they are the result of what Tim Iacono charitably describes as The Mess That Greenspan Made.

Further, some of the critics are exempting Greenspan and blasting helicopter Ben. Kentucky Sen. Jim Bunning (R), has called Bernanke an "amateur" and "blasted the former Princeton University professor for unnerving markets with his anti-inflation rhetoric." Bunning said Bernanke’s "been in a cocoon of academia and is not ready for prime time."

Its funny to hear these criticisms, which ignore history. First, every new Fed chair is an amateur for a while. Even the most qualified economist/politician is unprepared for what may very well be the most powerful position in the world. What can prep you for that? That’s why market historians know of the New Fed Chair Curse. No black magic involved, just a painful honeymoon period of adjustment.

Second, consider the opposite: imagine if the Fed allowed inflation to get away from them? If the cruelest tax were allowed to run rampant, the exact same critics would be all over Bernanke. That’s why the Fed tends to overtighten: Its the lesser of two evils.

Soft landings are a matter of luck, not policy. Its why they are so rare

Even Paul Volcker, the cigar chomping Fed chair who brought runaway inflation to heel in the late 1970s and 80s, noted that Bernanke faces a tougher task than he did. That’s a hell of an admission from a man I perceive as the greatest inflation fighting Fed Chair in history. He not only took away the punch bowl, but bitch-slapped the high priced escorts at the party and kicked the drunks out into the street onto their asses.

Now that’s what I call an inflation fighter.

But if you want to understand the true problem facing Bernanke, its the liquidity problem. Greenspan treated every issue as if the only possible repsonse was to increase liquidity. Thats like a dentist giving a kid candy every time they complained of a toothe ache.

Have a look at this liquidity chart for a better understanding of how weer got into the present situation:


Liquidity Driven Banking Policy 
click for larger chart


Source:  Ritholtz Research & Analytics


Makes the picture a whole lot clearer . . .


UPDATE July 19, 2006 11:42pm

The request goes up for what this looks in actual U.S. money supply growth;


Money Supply 1900-2000
clik for larger graph


Thanks to Smithers & Co. for the graphic


Note the surge from 1995 to 2005 — that’s Greenspan territory . . .


Bernanke: The wimp or the ogre?
Can the Fed chairman keep the inflation-wary bond market and rate-conscious lawmakers satisfied?
Reuters, July 16 2006: 10:11 PM EDT

Volcker Says Bernanke Faces Tougher Task Than When He Ran Fed
Matthew Benjamin
Bloomberg, July 14, 2006

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  1. DBLWYO commented on Jul 19


    Granted all your points about Ben inheriting the problems but, in the same spirit of letting the data/analysis speak for themselves, what alternatives policy strategies would you have suggested for the potentially disruptive crisis facing Greenspan and the Fed ?

    In each of those case the Fed didn’t create the underlying problem but had to deal with the conquences. For example post the 2000 crash there’s a very good argument in economic history that we faced a major economic retrenchment, ala Depression. Or at best a lost decade ala Japan.

    While on the upside inflation has terrible consequences (btw – if you want the full diagnosis up & down Keynes, “Essays in Persuasion” are brilliant reading. Worth it for the discussions of currency speculation alone.)

    The Fed cannot change the structural characteristics and trends of the underlying economy – it can only try to manage them in reasonable bounds around the trend.

  2. jrg commented on Jul 19

    The interest-rate mechanism currently used to control domestic inflation of a reserve currency is wrong-headed. If the Federal Reserve decides that there is too much dollar liquidity in the world, it can directly absorb it in a number of ways other than the indirect mechanism of managing interest rates. Using more direct methods, such as buying or selling bonds, while targeting the aforementioned market-based prices, would have the desired effect on both domestic inflation and exchange rates, while also diminishing market volatility.

    In contrast, the indirect impact of raising interest rates is twofold: It reduces the supply of dollar liquidity, but at the same time diminishes the global demand for dollar liquidity. The paradoxical effect may be higher domestic inflation if the global demand for dollar liquidity drops. If this happens, gold will rise and the dollar will go down, effects that may then show up in higher measured price indices. Misguided by its focus on price indices, the Fed may raise rates again — with similar consequences.

  3. Michael C. commented on Jul 19


    Unlikely as it may be, if the market were to hold up and simply meander into years end, would you reign in your market low price targets or merely push out the target time frames?

  4. Bob A commented on Jul 19

    The question is, even though he learned not to leak to Mario Bartiromo, is he still whispering to the heads of major banks the day before we all get the news? It sure seems like it…

  5. Marrinner Eccles commented on Jul 19

    love how everyone takes shots at Greenspan and Bernanke ……. yet , no one has an alternative for any policy move …. i remember how Volcker was vilified , yet without his targeting Money Supply the economy never would’ve righted itself ….. I guess this is Routine 11 ….. everyone’s a critic

  6. Michael C. commented on Jul 19

    That Cramer over on RM is a real hoot.

    Yesterday mid-day he was saying this…”Remember, the only cavalry is the oversold. We aren’t there yet. But if this pace keeps up we will be there by Monday for certain.” Ohhhh…ok. So it will be Monday when we are oversold. Gotcha.

    Today, less than a half day later he says…”But none of those really triggered this [rally]. What triggered it is that every indicator of selling pressure says it just got too hard.”

    Ohhhh…ok. Anyone who follows this chap around will eventually go bald pulling out their own hair.

  7. Bob A commented on Jul 19

    Cramer? You can get better information at the monkey house at the zoo.

  8. jrg commented on Jul 19

    more ideas about what the Fed should be doing re monetary policy – instead of changing interest rates:
    “Again, the Fed must abandon its interest-rate targeting. Time is of the essence. This time the Fed should apply tried and proven classical principles by targeting a value for the dollar as reflected by a price for gold. The Fed can reach the target by selling its Treasury bonds to remove dollars from the economy.

    The target price should be between $375 and $450 an ounce, which would cause the least price displacement in the economies of the United States and the rest of the world. The precise gold-price target is not as important as the dollar’s stability. Lack of a floor under the dollar is what dropped the floor from under stock and bond prices during the stock-market crash of 1987. ”

  9. Tom D commented on Jul 19

    After watching some of the testimony I can’t help but think that Bunning is a complete fool. He clearly is more interested in propping up asset prices in order to make the “common man” feel more happy-go-lucky about the economy, which translates into votes. This is a cruel bribe in my opinion as most here agree that if the Fed stopped at 4.5% we’d have a hell of a lot more trouble and pain in our future. Attributing market action solely to Bernanke and the FOMC’s actions discounts the plethora of other factors influencing markets.

    Sarbanes waxing on about OER concerns, as suggested by home builders’ letters to the committee, is really humorous. If it’s overstating inflation today, I wonder what it was doing 1-3 years ago?

  10. Si commented on Jul 19

    Bernanke has impressed me slightly more than I thought he would. I still don’t think he is a real inflation fighter though, unfortunately.
    The guys who buy and sell on his every word are the real donkeys if you ask me. The Bartiromo incident was bizarre, with an amazing reaction to an off the cuff remark.
    Do we want the Fed to speak and if so do we want them to say what is really on their minds or not? Or do we want some kind of sugar coated crap that in reality gets us no where but makes everyone feel better?

  11. Whammer commented on Jul 19

    Si, I’m afraid the votes are in, and we’ve been heavily in favor of sugar coated crap for quite some time now.

  12. Cherry commented on Jul 19

    Pour some suger on me.

    The FED is nothing more than a suger daddy that helps the rich trigger depressions every once inawhile to clean out the herd.

  13. ML commented on Jul 19

    Tom D,

    Bunning is a retard. Your comment on such is the most accurate and penetrating analysis on this site today. How did he get on that committee?

  14. Si commented on Jul 19

    Yeah, nice one Tom.

  15. DBLWYO commented on Jul 19

    Actually that looks like a severe downtrend from 1989 to 1996 and below the long-run trend from 1990 to 2000. How does that establish Greenspan’s Fed having provided excessive liquidity ? And how does that reflect Japanese monetary policies with contributed greatly ?

    The post-2000 period is clear a blip above trend and if that avoided a major Depression I’m all for it. Look at the Depression periods.

  16. DavidB commented on Jul 19

    cue the Columbia U video!!

  17. RW commented on Jul 19

    Agree with Tom D. As a baseball player Jim Bunning was something but as a senator he has proven himself virtually useless although, apparently, he can still throw a bean ball; “not ready for prime time” indeed. Bunning came within a hair of losing his last election and Kentucky would have frankly been better off if he had.

    If Bernanke can even come close to helping us get out of this credit bubble w/o a major smashup I’d say he’d earned his bones and then some.

  18. Michael C. commented on Jul 19

    >>>Kudos to Cody and Rev
    7/19/2006 1:51 PM EDT

    I love a good market call as much as the next guy, and two comments yesterday stood out for their level headedness and prescience.<<< IMHO, this is one of the things that encourages people to call tops and bottoms throughout. The Rev and Cody made several mis-timed calls and trades during the bleeding but no one commented negatively. On this good call..."Kudos!" Just sayin'...

  19. Rusty commented on Jul 19

    So is it time to put some of my 401k cash into one of the reverse ETFs? When the market is up 200, it’s a tempting buy. Someone talk me out of it, please.

  20. Cherry commented on Jul 19

    Talk you out of it? Can’t you see a suckers rally when it comes son? Especially since Bernanke told half-truths and didn’t even get into the juicy parts.

  21. brion commented on Jul 19

    Don’t do it Rusty!! You’re too young, er, too old to die….

  22. ralph commented on Jul 19

    I would love some feedback!
    If I understand this right, at some point if one ceases to increase liquidity, the result would have to be a general downturn in the economy. Granted it might hit certain segments more than others but lets keep this very broad and general for the moment and assume that many key segments will drop and that it will affect employment nos etc.

    First question – Is that a valid assumption?

    If it is a valid assumption, then is there a limit to sources of liquidity? As in, should we be able to tell when there is really no more chance of an increase in liquidity. If that is true, then we should be able to predict the market direction?? Maybe not short term but medium term??


  23. JimC commented on Jul 19

    Back up the truck Cherry !!!
    booyah !!!!!

  24. Alaskan Pete commented on Jul 19

    JRG: No offense, but please, no links to the National Review if you want to be taken seriously. Cato, I can handle in small doses, but a GOP house organ like Buckley’s rag that repeatedly displays mendacity, intellectual dishonesty, and plain ignorance on the topic of economics…umm no.

    Hey, how do you boys and girls like this BS rally? +220 on what? I believe I’ll take those coal profits now.

  25. bernankesucks commented on Jul 19

    Bernanke is jawboning markets. Notice how they freak out in one direction or another everytime he talks.

    This is the sign of an incomeptent chairman. Add the NBC mistake to that, and you have a pretty complete picture.

    I’m sorry, time for this guy to get replaced.

  26. Alaskan Pete commented on Jul 19

    Ralph, you ask a key question: is there a limit to sources of liquidity. Doug Noland focuses his anlaysis on expansion of credit and morphing credit and liquidity sources. If you can get through his difficult writing style, you might find it interesting. He does a weekly commentary called the “Credit Bubble Bulletin”, which aside from having a ton of data in a short-form, also has commentary on the credit markets and finance in general. You can find his stuff on the prudent bear website.

  27. fedchairmandoesntcontrolrates commented on Jul 19

    Also, neither Volker, Bernanke, or Greenspan controlled rates. They merely controlled the perception of the fed.

    Chairman has 1!!! vote. They can influence, but not control. They get the consensus, make sure everyone udnerstands the collective decision, and then communicates it to the outside world.

  28. bernankeneedstoshutupaboutinflation commented on Jul 19

    Bernanke needs to shut up about inflation. It’s not his place to say where it’s going, but rather communicate the various pressures in place.


    a) he doesn’t know
    b) he’s speaking for the fed when he says what’s it’s going to do, something he shouldn’t be doing.

  29. Bob A commented on Jul 19

    Hate to be picky but while Cody waaas right yesterday, he made three wrong buy QQQQ calls in the prior 8 trading days.

  30. Jason commented on Jul 19

    What’s “Marshallian K”?

    BR Gavekal defines it as: “A Marshallian K is a simple ratio between the supply and demand of money in any given country. When the Marshallian K rises, the supply of money is outpacing the demand for money and there is a strong chance that the excess money will find its way to one asset class. In an excess liquidity environment, one asset class typically captures the imagination of the investing public (eg: TMT in the late 1990’s). When the demand for money exceeds its supply, (either because of rising prices, strong economic activity or restrictive monetary policy) the Marshallian K goes down and financial markets have a hard time turning in positive performances. ”

  31. albiegf13 commented on Jul 19

    Markets speak much louder than words. Oh my, Gee willikers and Gosh… How many times are we going to set our expectations in anticipation of the Fed Chairman’s comments… And how addicted we have become to statistics… Every time that the Fed appears dovish the dollar gets “bitch slapped”. This means that we have not yet acheived equilibrium. Our current Fed Chairman is in an unfortunate possition as his margin of error has become significantly narrower, primarily because of the monetary policies of the previous Chaiman and the fiscal policies of our current Chief Executive. We are not talking about a “punch bowl” here, we’re talking about a crack pipe. I think that we can keep this party going through one more weekend. That’s the only good news that I have.

  32. alan commented on Jul 19

    To Dblwyo:

    The Fed engineered a drop in the money supply starting in 1987 to compensate for the big drop in the dollar with the Plaza accord agreement, ie, to prevent inflation as an aftermath of mega stimulation by the huge drop. Unfortunately, Greenspan since 1995 undid all the inflation fighting that Vocker accomplished, which I am sure was very hard on Volcker emotionally.

  33. Brion commented on Jul 19

    Jason, a negative Marshallian K plus Si’s “sugar coated crap” gives you liquidity smores resulting in irrational exuberance i believe…

  34. albiegf13 commented on Jul 19

    jrg: You are correct sir…. However, the gold play is new to the market psyche and even those of us (me) who have limited knowledge on gold’s historical function, would find it difficult to define either the price, or the real treasury yield whereas this equilibrium in the dollar can be sustained. It may be too late or better said the hole may be too deep meaning, that it would take Draconian measures to achieve this equilibrium. Politicaly unacceptable, I see too many Range Rovers around. The incremental approach blends in some hope with the anxiety. That’s the presentation of a great master and that is why Fed policy is what it is. Today, I heard it called the Bernanke rally. Really….?

  35. Michael C. commented on Jul 19

    >>>Notice how they freak out in one direction or another everytime he talks.

    This is the sign of an incomeptent chairman. <<< What's your reasoning there? You seem a bit emotional. >>>I’m sorry, time for this guy to get replaced.<<< Uh...he's hardly done a thing. The market is reacting more to the countless rate cuts and rate hikes by Greenspan. Like Barry says, not only is it the job of the Fed to be concerned with inflation, it's better than the alternative. The market has gotten concerned with it mostly because of the parabolic move in energy & commodities even after umteen rate hikes by the Fed. If you take a step back, Bernanke hasn't even shown or made his mark on the economy or markets.

  36. Dan Green commented on Jul 19

    Even Bunning had a 6.35 ERA in his rookie season…

  37. whipsaw commented on Jul 19

    per Michael C:
    “If you take a step back, Bernanke hasn’t even shown or made his mark on the economy or markets.”

    I’d agree with that- what has been happening is just a reflection of how insubstantial the market and the economy already were thanks to a lot of addictive/compulsive fiscal and monetary behavior that is the equivalent of a cokehead living off of credit cards until they are all maxed out.

    I think that The Cooler must be quite perplexed by the reactions to whatever he says. Imagine if every time your kids asked “can we go to Disney World next summer?” you said “I don’t know, we’ll see.” And then they either started hugging you or packing to run away from home, depending on what they imagined the tone of your voice to be when you were just trying to drink your scotch in peace (i.e., they lost sight of the underlying fundamentals)?

    But I’ll have to say that I like all of these setups that the bulls keep creating- I pulled the trigger a little early buying SPY LEAP puts today, but didn’t miss too badly against my defined risk that $SPX would bang its head on the roof created by the 200 day EMA at 1260. So much for random walks. Some cds happened to have cashed into my account this morning, so I raised the stakes a bit altho I am still around 90% sidelines.

    My main concern is that it is becoming a little too easy to simply wait on the bulls to do something stupid like today, reload, and then wait for Reality The Assassin to kick in the door again. But I see little reason to believe that we will not be knocking on 1200 in due course.

    At any rate, Bernanke is basically taking the heat for the situation that Greenspan and the Bushists created once it came time to pay the bill. I wouldn’t say that his job is “tough,” I’d say it is impossible.

  38. ari5000 commented on Jul 19

    I bought the DOG etf end of day.

    I’m curious to see how much irrational exuberance is out there.

    Overbought conditions plus profit-taking plus rise in oil prices plus lack of conviction equals pullback.

    Reality is hard to swallow — that’s for sure. But let’s face it. EVERYONE was ‘all cash’ or short out there. That creates its own volatility problems. The 400 point drop based on Israel’s problems was unwarranted, along with the rise in oil prices.

    So basically, the way I see it, one can profit by paying attention to the currently schizophrenic nature of the markets. Bearish — but occasional delusions of hope. Was this not the 3rd 200 point day in less than a month? Someone check the statistics. This is a very twitchy market. Dangerous to anyone who holds overnight, long or short. But mostly long.

  39. whipsaw commented on Jul 19

    per ani5000:
    “I bought the DOG etf end of day.”

    hmmm, I am curious about why you would buy this instead of just shorting DIA or buying DIA puts. Restricted account?

  40. Facteon Blog commented on Jul 19

    High Inflation or High Interest, Which is Worse?

    Interest rates are slowly being moved up. Many blame Bernanke. But are high rates worse for the economy that high inflation? Barry Ritholtz, at The Big Picture, writes in Bernanke & the Markets, …imagine if the Fed allowed inflation to…

  41. kennycan commented on Jul 20

    Bernanke, like Greenspan, doesn’t realize he is behind the curve. Fed raises a quarter, CPI accelerates a quarter. Look @ May 06 to June 06 for your answer. May 06 avg of FF for one year was 4.00%. CPI 4.11% yoy change. Essentially a 0 real rate. June and avg of FF over one year is 4.25% and CPI yoy 4.33%. Essentially STILL 0% real rate. So for at least one year, probably nigh on two years the Fed’s creeping 1/4 points have been merely maintaining 0% real rates. There has been no tightening but the economy has felt the effects of the higher rates via the mortgage and housing market, which had gotten a big boost from low nominal rates and a steep yield curve, and that is now reversing. So the real rates have been driving inflation while the flattening yield curve has been hurting the economy.

    If they read Volckers book they would see that he made the same mistake his first year or so. He raised rates, or rather his monetary target forced rates higher, @ what he thought was a fairly aggressive pace. But since he was starting WAY behind the curve, he wasn’t really tightening. He then came to his senses and realized he had to go postal on rates to get in front of the curve. Hence the really, really bad pain of the 80 – 82 period.

    Amazing how we never learn from history, even when it is in our own lifetimes.

  42. whipsaw commented on Jul 20

    per kennycan:
    “Amazing how we never learn from history, even when it is in our own lifetimes.”

    Tell me about it buddy. I never thought that we would have another Vietnam either, but here we are.

    The only things that you can really count on over generations are greed and stupidity, which are the underpinnings of capitalism. But I think that we may get a little bit different outcome when things tank this time, maybe a little less worship of white collar criminals.

  43. Bearish commented on Jul 20

    Check out the after-market quotes on MOT, QCOM, AAPL, EBAY, INTC.

    Another fun day on thursday.

  44. flincinc commented on Jul 20

    I read the following:
    In the movie Liar, Liar, Jim Carrey, an attorney becomes literally unable to lie. Surely an impediment for a profession where manipulation of language is vital to one’s interest. Were the same spell cast upon the Professor, Ben Bernanke, these are the questions I’d want answered. Perhaps some experts can provide the answers that the Chairman surely won’t.

    * The Federal Reserve has the responsibility not only to set interest rate policy but to control monetary expansion. What is your view about the relation between monetary expansion and inflation?
    * As a followup, why has the government elected to take M3, the purest overall measure of the money supply offline, when you advocate a data-dependent economic policy?
    * The Federal Reserve is charged to promote price stability. How do you define ‘price stability’, concerning asset prices, commodity prices, labor prices, et cetera?
    * Does the Federal Reserve, as a matter of policy, support the manipulation of stock prices via the so-called “Plunge Protection Team”?
    * How would you define the success of the Federal Reserve in controlling prices when in terms of real purchasing power, the dollar has declined to about 2% of its initial value since the Federal Reserve was created in 1913?
    * Hypothetically, should growth remain high, resulting in commodity inflation, let’s say at 6-8% annually in the BRIC countries (Brazil, Russia, India, China) resulting in cost inflation and profit deflation, how would you both fight inflation domestically and promote growth?
    * What is the relevance to the CPI to the real cost of living for ordinary Americans, who must use energy, eat, pay tuition, pay rising insurance costs, and so on?
    * Does the Federal Reserve as a matter of policy, act alone or in concert to suppress gold prices for its own needs?

    We’ll never get the real answers to these real questions. I’d surely like to hear the answers and why we can’t get them. It’s our government, the best that money can buy.
    I read it here:

  45. BettinaZ commented on Jul 20

    I almost fell off my chair when Bunning repeatedly declared, “THERE IS NO INFLATION!” That is true for anyone who does not buy groceries, fill their tank, pay insurance premiums or tuition… or has had regular pay increases, like Congressmen and Senators. His statement made me think about the failure to raise the minimum wage for working poor families. With their nominal wages stagnant since 1997, these price increases surely feel like inflation to them. All I can say is THROW THE BUMS OUT IN 2006!

  46. RN commented on Jul 20

    “bitch-slapped the high priced escorts at the party and kicked the drunks out into the street onto their asses…

    Let’s see, I’m looking through my macro textbook trying to find that… funny, it’s not turning up…

    But good macro nonetheless. :)

  47. pete commented on Jul 20


  48. mike simonsen commented on Jul 21

    Great liquidity graphic, Barry. Rings so true in retrospect.
    The GevaKal guys paint a slightly (different? additional?) picture on the excess liquidity->bubble problem: Japan.

    an excerpt from a couple months ago:
    One of the trademarks of perma-bears is to blame all the World’s ills on an hyper- active Fed whose policy shifts endanger the state of our economies and the value of financial assets. But is this a fair indictment? Judging Fed policy by the growth rate of the US monetary base (see chart), we find that the US monetary base has been growing fairly steadily and in line with US GDP growth. In fact, if one wants to blame a central bank for volatility in global monetary aggregates, one should instead turn to Japan. The chart shows the US monetary base, the Japanese monetary base- in dollars- and the sum of the two (also in dollars). What emerges from this graph is very simple: all the volatility in the US + Japanese base aggregate has come from the Japanese part of the component. The volatility in global M [and thus three bubble periods] has in the past thirty years come from Japan.

    Mauldin has the article here:

  49. BOPnews commented on Aug 1

    A shadow falls across the

    A shadow falls across the land, as the expansion that wasn’t becomes the downturn that mustn’t. It is no wonder that some, never enamored with the bushconomy, commentators, such as Barry Ritholtz and Noriel Roubini have begun to sharpen the…

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