"It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions."
— Dr. Ben Bernanke (Fed chairman), from speech at a Jackson Hole, Wyo., meeting Aug. 31, 2007
So it was, at a pivotal speech in Jackson Hole, Wyo., on Aug. 31, 2007, that one Dr. Benjamin Bernanke, chairman of the Federal Reserve of the United States, buried the infamous "Greenspan Put," the event that occurred over the last 18 years whenever stock markets were in trouble.
In those days of Alan Greenspan as Fed chairman, he would always lower rates quickly to "save" the stock markets and banks from financial distress (read "losses"). If you will, he "carried the water" for big money.
With Bernanke's speech, those days are over for as long as he is in charge and possibly for as long as the Fed exists into the future. Bernanke is rapidly changing the face of American financial activities by the Fed, much to the consternation of just about all the big money centers.
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From now on, it is beginning to appear that these centers will have to suffer for their bad investment decisions. (What will they think of next — being responsible for our own mistakes?)
But, let's get down to serious comment here. These days at the Federal Reserve Building in Washington, D.C., things are taking on a very different air than in the halcyon days of Greenspan.
[Editor's Note: Sir John Templeton Was Right. Get His Latest Insight on Housing and Markets.]
In those days, the Federal Reserve Building was considered a mysterious cocoon, a labyrinth that housed all sorts of unknowable secrets. It was daily fodder for the media to say the Fed was "signaling" this action or "signaling" that action and make it sound as if they really understood what the Fed had in mind.
The real truth was the only one that had even a remote inkling of what was happening was Chairman Greenspan himself.
In those days, too, the 12 district presidents of the Federal Reserve System each ran a "fiefdom" of his own, and each felt he had some sort of special position of power in the country — which was to some degree true. But all you had to do was listen to them talk to the media or to convention meetings, and you could see that the opinions they held were all over the lot as to what the Fed was going to do next.
And the epitome of it all was when Greenspan himself spoke.
It was eventually called "Fed-Speak," an allusion to the George Orwell book "1984" and the "DoubleSpeak" in which what was said by Big Brother was not what was meant, and what was said was often revised to the point where it was as if it had never been said at all, depending on what Big Brother wanted.
Now don't get me wrong here. I am not implying that Greenspan was ever Big Brother, just that when he talked, the interpretation of his words by people, all in the same room listening to the same words, could literally be 180-degrees from one another. He spoke to confuse. Sadly, that was his style.
Then, early in 2006, amid all this subterfuge came Bernanke, an already widely recognized accomplished academic sublime, as the new Federal Reserve chairman. Bernanke had a long, stellar career in the academic field and had gained considerable attention for his incredible insight in writings about the Fed and U.S. money policy activities for the last 150 years.
There is nothing that Bernanke doesn't know about this subject. His writings are required reading for every financial student across this country, and I dare say for the international minds, as well. If you want to know what to expect from this man in the future, just read his books — it's all there.
Once in office as Fed chairman, it took Bernanke six to eight months to begin to make his policy approach — of transparency, straight talk, and clear goal fixing — the majority opinion of the Federal Open Market Committee (the FOMC, a collection of Fed district presidents and the chairman). The FOMC is a body that meets eight times a year and sets financial policy that literally drives the U.S. economic system.
In those early first days, four or five district presidents left their posts — likely peeved that they were not picked as chairman.
But, that only helped the initial consolidation of power that Bernanke needed.
As Bernanke's ideas began to take hold, not just with the FOMC, but at public meetings with the Congress, his style began to get attention everywhere.
His answers to questions were short and reflected his beliefs of a strong Fed containing inflation and promoting economic growth, its dual mandate from Congress.
This sudden change in manner initially caught many, especially congressional members, flatfooted. Here was a man that answered their questions without subterfuge or hyperbole. He was believable and predictable; a man of conviction willing to stand up for his beliefs in public — all the things congressional members only fuzzily remember as the reason why they wanted to go to Washington in the first place.
Yes, the Fed is morphing into a totally new-style powerhouse that may one day be looked back upon as having its new birth of sanity under Bernanke. I believe that time may well prove his tenure to be the truly pivotal moment for the U.S. financial and economic system.
But, lest I get too far ahead of history here, I want to grant that there are, of course, many conundrums yet to contemplate. Will Bernanke be able to control inflation? Will he be able to prevent the boom-to-bust cycle so familiar from the Greenspan days?
Will he be able to set in place sensible policies that will be governing the Fed's mode of operations for the next 50-100 years? And, above all, will Bernanke be able to blend the need to control inflation with the need to sustain a vibrant and steadily growing economy?
All of these are indeed tall orders. But if he can accomplish them, and at the same time show future Fed chairmen how to better manage the Fed, our kids and grandkids just might just have a real chance at a better life after all.
Stay tuned, this should be a fascinating show!
Editor's note:
Bernanke Reveals `Fiscal Crisis` Ahead
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
Sir John Templeton Was Right. Get His Latest Insight on Housing and Markets.
