Thursday, August 09, 2007

Bernanke's Stance

Bernanke has taken up a job that has shoes that are hard to fill. Alan Greenspan has had a long stint at Federal Reserve and has left behind a strong track record. Greenspan has ridden out the LTCM debacle and internet bubble and his policies helped set the platform for good quality economic growth, keeping inflation at bay.

Last night was crucial for Bernanke. Would he kowtow to market pressures over the jitters caused by subprime and lower rates? In the end he stood firm, and his message sent a clear message that this was his term and he was going to set out his parameters as chairman of Federal Reserve.

The clear message was that investors should not look to the Fed to cure short term jitters. Another message was that the Fed would not play a direct interventionist role to "manipulate" the stock markets. This affrms the belief that the Fed's role is NOT to ensure an always trending up stock market. Many things have to be worked out by the market themselves - be it excesses in certain sectors, they must be allowed to correct on its own terms.

The Fed also indicated that they look at many factors such as overall growth, employment, prices inflation and the dollar. They also look at the rates set by other major countries as the dollar has been on a downswing and need to stabilise. While Bernanke probably welcome a weaker dollar, he did not say so, but his non-action probably hinted that he wanted an orderly decline in the dollar.

On the cynical side, you probably won't get the Fed to step in to tackle the subprime matter because it did not involve the big investment banks (such as the LTCM problem). Of course the Fed would have acted if the problem was severe enough and the Fed was the "last resort" solution. The Fannie Maes could still step in later to buyout some of the suprime mess. As explained, hedge funds can expect zilch help from the Fed. Most of the CDOs were packaged by the banks and sold to private funds, hence another reason for non-intervention.

The stance taken by the Fed also hinted that the underlying US economy (minus the property side) is still firm enough. The Fed also wanted no panic, in fact if they had reduced the fed funds rate, we could have seen markets dipping further.

Overall, 9/10 for Bernanke, he has added to his stature, reputation and resolve. He has shown confidence in his analysis and conviction in his beliefs. This gives markets confidence to expect the Fed to act responsibly, and intervene only when things are really dire. Bernanke has successly stepped out of Greenspan's shadow.


Ali BAba said...

Bernanke will soon cut the rate and safe the US market.

Btw, actually investment bank which engage into Subprime are also earning Interest on it. hence, whether is a credit crunch or not is still too early to say it ...

Salvatore_Dali said...

i guess i have to clarify that the banks involved were not top tier ... top tier investment banks such as G Sachs, Merrills, Morgan Stanley and Citigroup have "lobbyists" all over Wasington an in higher echelons of power such as Fed and top gov officials ... if they have to bear he brunt, they can call for help... if you r second tier such as Bear Stearns or Lehman, I think you will be left out to dry ...

Windsurfer said...

Hedge-Fund Meltdown Heats Up -