Bernanke's Likely Weapon Of Choice

This is my prediction for Bernanke. He will raise fed funds rate very very soon. Just because of that, it does not mean that it will be bad for equity markets.

But lets go back to why it will happen very soon (by February I think). Most developed nations' central banks have been reluctant to move the low interest rates regime up because the Main Street has been showing nascent growth. What Bernanke wants to see are corporate spending on R&D and hiring - both not really evident yet. Despite the tons of liquidity being poured into markets, many banks are just sitting by idling.

The Fed has had to maintain a low fed funds rate for obvious reasons, but look at the chart, banks are earning very decent net interest margins by lending to the system, and not to clients. High ranking officials have been calling the banks to lend more aggressively, but that does not seem to be working.



Bernanke's hands are being tied a lot more now that many of the banks which received funds from the government are returning it - that means the government will have a lot less leverage to "move the banks" toward certain persuasions.

It looks like Bernanke will have little choice but to close the gap and raise fed funds rate. When net interest margins start to shrink, then the banks will have to put the money to work. The summary from all this deduction is that don't be worried when Bernanke raises fed funds rate, in fact it is a new bullish sign.

p/s photo: Erika Sawajiri

Bernanke's Reappointment - Yes & No Camps

In my view, he should be reappointed, no question. If Henry Paulson was still around, then I would have asked that Paulson be sacked as Treasury Secretary as it was mainly his fumblings with TARP and the yes/no with Lehman Brothers which exacerbated the crisis. Bernanke was reappointed by President Barack Obama for a second term as Chairman of the Federal Reserve. Bernanke will still need to be approved by the Senate. His current term as chairman of the Federal Reserve expires in January 2010. In the past weeks there was debate about whether he should or will be reappointed. Doubters pointed to political pressure to delay fiscal reform and to Bernanke's failure to prevent the housing bubble. Supporters pointed to Bernanke's success in preventing a second Great Depression, despite some mistakes, and to his democratic decision-making style.

Why Bernanke Should Not Have Been Reappointed

• Stephen Roach, Chairman of Morgan Stanley Asia, disagreed with Obama's choice because Bernanke did not do enough to prevent the recession. Bernanke failed due to his agnosticism towards asset bubbles, blaming the bubble on Asia's surplus savers and believing markets know better than regulators.
• Irwin Steltzer, Director of Economic Policy Studies at the Hudson Institute: "An angry president can be counted on to appoint a crew more sympathetic to his views, and less fixated on the sort of anti-inflationary exit strategy that Bernanke has been touting, and the Chinese, their vaults stuffed with dollars, are demanding. There might well be a new chairman in the Fed's near future."
  
• Richard Bernstein, Former Chief Investment Strategist for ML: "His policies both before and after the banking and credit crises have attempted to maintain financial market status quo. Despite the crying need for changes to monetary policy at least as monumental as those of Mr. Volker, Mr. Bernanke did nothing to alter the U.S. banking system's disastrous course...The next Fed chairman must lead a new paradigm of monetary policy to ensure that neither real nor financial asset inflation becomes extreme."
  

Why Bernanke Should Have Been Reappointed

• Dr. Nouriel Roubini: "Bernanke deserves to be reappointed. Both the conventional and unconventional decisions made by this scholar of the Great Depression prevented the Great Recession of 2008-2009 from turning into the Great Depression 2.0....Bernanke deserves to be reappointed so that he can manage the Fed's exit from its most radical economic intervention since its creation in 1913."
  
• Steven Pearlstein, WashPost Business Columnist: "Bernanke has been courageous and creative in his determination to do whatever was necessary to prevent a financial meltdown....As chairman, he has gone out of his way to share power and responsibility with other board members and fostered a new spirit of collegiality. His deep understanding of financial crises--as an academic and as crisis manager--makes him uniquely qualified to help Congress shape the new regulatory architecture and implement its reforms."
  
• FT: "Bernanke's fine judgment has stood him and the economy in good stead. Decisions to lower interest rates in early 2008, excoriated by many other central bankers at the time, have since been vindicated. His tenure is not flawless. Like others, he overestimated financial markets' ability to regulate themselves. But he has proved a pragmatic crisis manager not hostage to dogma."
  

p/s photos: Yang Mi