Back in 2002, when Ben Bernanke was a junior Fed governor, he earned undying notoriety among monetary supply specialists by declaring that deflation was a problem that the federal government was well equipped to solve, because “the U.S. government has a technology called a printing press that allows it to produce as many U.S. dollars as it wished at essentially no cost.” He then made a reference to the “helicopter drop” theory originally proposed by the late Milton Friedman, which suggests that a government can help an economy escape a deflationary depression by finding ways to directly give money to consumers or businesses.
He didn’t come out and say directly that he would be volunteering to pilot the helicopter and he also noted that, “of course, the U.S. government is not going to print money and distribute it willy-nilly.” But nonetheless, he was immediately dubbed with the nickname “Helicopter Ben.” And judging by today’s bigger-than-the-consensus-expected half-point Fed funds cut, Bernanke is never going to lose that moniker. Because whether he likes it or not, the perception is that, in his first major test as Fed chairman, he has made clear his willingness, in the glorious tradition of his predecessor Alan Greenspan, to jump in and save the financial markets from their own excesses.
History may well deem that too harsh a statement. If a housing bust/credit crunch-induced recession was in the offing, and Tuesday’s rate cut has averted that future, then Bernanke’s swoop to the rescue may be just the kind of preventive medicine necessary. He certainly made Wall Street happy — the Dow Jones industrial average was up by 245 points with an hour to go before the markets closed. As one online commenter at Calculated Risk put it, referring to the theory that Greenspan’s rate cuts in the early 2000s fueled the housing boom: “The next bubble starts now.”
One thing’s for sure: Bernanke’s carefully nurtured reputation as an exceedingly cautious inflation fighter first and foremost is out the window. Tuesday’s rate cut was a bold move.
UPDATE: Too little, too late, says Nouriel Roubini.