OUTSIDE THE BOX : A Greenspan Put—For Now?

CBS MarketWatch

March 8, 2004  

NEW YORK (CBS.MW)—More shock and
awe from Ben Bernanke? Careful study of this rising
federal reserve governor`s March 2 speech suggests there
might really be a "Greenspan Put" underpinning the stock
market—great short-term, but ominous long-term.

Bernanke emerged from an

obscure existence
amongst the footnotes of arcane
economic history texts only in August 2002, when first
appointed to the Federal Reserve Board.

That November, he began his

shock and awe campaign by
asserting that, rather
than accept deflation, "…the U.S. government has a
technology, called a printing press (or, today, its
electronic equivalent)"
that would be used to
generate rising prices. [Deflation:
Making Sure "It" Doesn`t Happen Here
, November 21,

This inflationist speech arguably triggered the
gold`s subsequent breakout. But Bernanke was never
qualified or even questioned by the Fed.

Subsequent, equally decisive speeches have made
Bernanke the most significant Fed leader after Alan
Greenspan—more significant, indeed, for those who prefer
intelligibility. Any future president may have
difficulty not appointing Bernanke Greenspan`s

Bernanke`s adult life has been spent soaking in the
history of the Great Depression. That event, it is now
generally agreed, was essentially the

fault of the Federal Reserve
and other central

The fact that Bernanke`s expertise in central bank
mishandling of new policies was apparently his main
qualification to become a governor might suggest that
the Fed now regards itself as once again an innovator.

This latest speech is titled

"Money, Gold, and the Great Depression."
On its
face, it is a characteristically taut and elegant
discussion of the 1930s. At a deeper level, it is a
commentary on the aspirations of the modern Fed.

The speech displays:

Extreme solicitude for the
banking system. Bernanke ridicules the "liquidationist"
viewpoint that closure of weak banks was healthy,
and emphasizes the damage done by the credit contraction
caused by bank failures. Problem: the opposite policy,
arguably in effect now, leads to "moral
hazard"—promiscuous risk-taking—and privileges the
management of financial intermediaries.

Suspicious sensitivity to stock
market levels. Bernanke criticizes the Fed
(probably correctly) for pricking the stock market
bubble of 1929. But he then argues that the subsequent
market crash itself did real economic damage. This type
of thinking is what causes observers to believe that the
Fed will try to prevent any serious market decline—the
rumored "Greenspan Put."

Excessive collegiality with other
countries` financial elites. Bernanke has a fine
understanding of international economic relationships.
Thus, unusually, he notes that in the 1920s France, by
undervaluing the franc and hogging gold, may have
materially contributed to world deflation. Nowadays, the
Fed tolerates the undervaluationist echelon of Asian
states currently led by China, which recycle their
reserves by buying U.S. government paper. Which may be
great from the perspective of the Fed, Wall Street and
Washington. But it ignores Main Street America,
eviscerated by underpriced completion.

Alarming preoccupation with the Fed`s institutional
power. Bernanke & Co. always
blame the gold standard for the 1930s disaster. Gold
Standard defenders would see this as blaming bullet
wounds on the gun. The concept was mishandled in
important ways in the `20s, in part because of the
aftermath of World War I. Bernanke acknowledges all
this—but still prefers to disparage the gold standard,
thereby giving central bankers more freedom.

Bernanke`s speech suggests Fed ambition on a scale
not seen since the era of 1960s-style fine-tuning.

It`s currently good for importers, Wall Street and
other financial intermediaries, and the Chinese.

But it means a mounting risk of an
anti-business reaction from its Middle American victims,
1970s-style exchange rate turmoil—and a return to the
P/Es of that miserable time.