How the World Works is not normally inclined to feel sympathy for Federal Reserve Bank chairmen. But after reading Louis Uchitelle's account in Thursday's New York Times detailing how Wall Street is beginning to have doubts as to whether Ben Bernanke is "tough" enough to be the government point man tasked with fending off a recession, we suddenly find ourselves wanting to get the man a stiff drink and a massage to work the knots out of his undoubtedly tight back.
The problem: Wall Street is unhappy with the speed at which Bernanke's Fed has been lowering interest rates -- even though he's already brought the Fed Funds rate down a full percentage point since October. Even worse, they aren't impressed with how he has been articulating his manly resolve to take short term interest rates as low as absolutely necessary in order to keep the economy all juiced up.
Displaying a nice sense of timing, Bernanke gave a speech on Thursday in which he declared, in what constitutes excessively strong (dare we say studly?) language for him, "that the downside risks to growth have become more pronounced" and that the Fed will "stand ready to take substantive additional action as needed to support growth..." The market immediately interpreted this as promising that a big fat half percentage point cut is in the offing, and stock market indexes instantly surged upwards.
Way to go, tough guy!
But seriously, in what rational universe should Bernanke give a damn what this batch of Wall Street traders think of him? These jokers, with their insatiable appetite for shuffling around high-yielding derivatives junk from trading desk to trading desk until the music stops, are partially responsible for the mess the economy is currently mired in. As referenced in the Moody's report discussed here yesterday, it has become manifestly clear that the short-term operating horizons of these bonus-obsessed greed-mongers are in direct conflict with the long term health of the economy and their own employers.
A steady dosage of Federal Reserve steroid shots might bulk up some balance sheets for fiscal year 2008, but it seems highly dubious that they will do anything to address fundamental structural problems. Morgan Stanley's Stephen Roach wrote an incisive piece in the Financial Times this week pointing out once again that the underlying problem is that Americans don't save enough. We've relied on asset bubbles in stocks and home equity and the endless availability of credit to pay our ballooning health care bills and fuel our conspicuous consumption. We are living beyond our means. A reckoning is inevitable.
America's shift back to income-supported saving will be a pivotal development for the rest of the world. As consumption slows and household saving rises in the U.S., the need to import surplus saving from abroad will diminish. Demand for foreign capital will recede -- leading to a reduction of both the U.S. current-account and trade deficits. The global economy will emerge bruised, but much better balanced.
Washington policy makers and politicians need to stand back and let this adjustment play out. Yet the U.S. body politic is panicking in response -- underwriting massive liquidity injections that will produce another asset bubble and proposing fiscal pump-priming that would depress domestic saving even further. Such actions can only compound the problems that got America into this mess in the first place.
If Bernanke really wants to prove he's a tough guy, maybe he should tell Wall Street to shut up and take its medicine.