Bernanke and Trichet: a parable
October 9, 2011
David R. Kotok
Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet enjoyed moose hunting during their annual outing that followed the Kansas City Fed / Jackson Hole retreat. Unfortunately, world events thwarted their plans in 2009 and 2010. The last moose hunt that Bernanke and Trichet experienced together was in early September 2008.
Following the ’08 Jackson Hole retreat, the two set off to Alaska and engaged a pilot in Anchorage to fly them into the wilderness to hunt moose.
For their 2008 hunt, they retained bush pilot Richard Fooledegg. On this trip, it was Bernanke who bagged a moose. Let us now fast-forward to 2011, where the two central bankers are off again on an Alaskan adventure.
In Anchorage, Bernanke and Trichet were unable to employ Fooledegg as their pilot, for reasons soon to be revealed. Instead, they engaged a woman, an experienced bush pilot named Diana Reingoff. Pilot Diana and the two central bankers boarded the plane with their equipment and weapons for a quick flight into moose country.
The moose were busy; moose calling was active. Lo and behold, it was Trichet’s turn to shoot first since Bernanke had bagged a moose during their previous hunt.
The moose went down, a magnificent specimen. It had a huge and ominous rack, one that would make a terrific trophy if it were successfully mounted.
However, Diana objected, “This moose is too heavy for me to fly on the plane. If I take the two of you and the equipment and the moose, I am afraid we will not be able to take off.” Trichet replied, “Non, non, non! We have experience in this. We shall be able to take off. It is a very long runway. Even though it is a dirt strip, you will be able to gain enough speed.”
Trichet looked to Bernanke for support. “This time is different,” said Bernanke. “We know better now than we did during previous hunting trips. We have new additives for the fuel. They will work. We are 100% certain. You can do it!”
Their debate with Diana continued. Trichet and Bernanke argued in favor, while Pilot Reingoff, drawing on all her knowledge and experience, attempted to dissuade them. In the end, she succumbed to their demand.
The moose laden plane was loaded. Diana taxied to the end of the dirt runway, held onto the brake to throttle up the engine, and then released it. The plane labored down towards takeoff. As it struggled to get airborne, Diana used all of her experience and skill in the wilds to muscle it off the ground. Slowly, it began to ascend.
FIRST ENDING.
At the last second, it became apparent to Diana that she was not going to clear the treetops.
After the crash, Bernanke and Trichet came to, lying on the ground at the end of the runway. They were dazed but luckily not seriously injured. As they looked around, however, they saw that poor Diana had expired, just as their former pilot had in 2008.
Breaking the silence, Trichet said to Bernanke, “How far did we get this time? How much were we able to gain in additional distance over 2008?”
Bernanke said, “It is all transitory. But we did add some duration. I estimate that this time we gained an additional 800 feet before the crash.”
SECOND ENDING
With an adroit twisting operation, Diana maneuvered the plane between two treetops. The new fuel assisted the plane’s engine. It struggled but ultimately succeeded. Trichet and Bernanke both retired from central banking with an abundance of moose meat in their freezers. A repeat of the 2008 disaster was avoided in 2011.
Today’s markets seem to expect the first ending. Arguably, they are pricing it in. Perhaps the biblical tale of Jonah applies. Often seen as a children’s story, the lesson of Jonah is in the outcomes. The unexpected happened. The boat did not sink. The fish spit up Jonah. The city of Nineveh was not destroyed.
We shall see. It may just end up a better year than many expect. Now some endnotes are important.
Readers have probably figured out that Richard Fooledegg is a play on words. In Roman mythology, Diana was the goddess of hunting. My first draft used Artemis, Diana’s Greek predecessor. I substituted Diana after the rating agency action downgraded Italy. Reingoff is obviously wordplay. And, as far as I know, Ben Bernanke and Jean-Claude Trichet have never hunted moose.
SOME ADDITIONAL OBSERVATIONS
In his July 14, 2011 Martin Feldstein Lecture (NBER) Ken Rogoff offered a measure of the size of the metaphorical moose we used in our parable. His words follow.
“It is difficult to pin down global aggregates, but a recent McKinsey study found that at the end of 2008, the equity market accounted for roughly $34 trillion out of $178 trillion in global assets, with government debt, private credit and banking accounting for the rest. This figure, of course, is exaggerated by the global stock market crash that occurred after the collapse of Lehman Brothers in 2008, but even at pre-crisis level of $54 trillion, equity markets represented less than one third of the total. True, there is an entire zoology of derivative markets that makes some of the debt contingent, but incorporating these would not dramatically change the basic point.”
Readers may note that Cumberland tracks the combined balance sheets of the G-4 central banks. They are now about $8 trillion, up from pre-crisis levels of about $3 trillion. See www.cumber.com.
We wish the best to retiring ECB president Jean-Claude Trichet, in my experience he is a gracious gentleman and dedicated public servant. Ben Bernanke’s term as Fed Chairman expires in 2013. Three dissenting votes notwithstanding, the Fed’s policy is now quite clearly established for the next two years. We hope the Chairman gets time to catch a baseball game. It won’t be the Phillies this year. Hmmmm, the Phillies? Was that the first ending or second ending?
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David R. Kotok, Chairman and Chief Investment Officer
