Cool and collected -- the very model of a careful academic -- Ben Bernanke is not the kind of man who, in his constant stream of public speeches, addresses to Congress, and regular updates on the state of the economy, expresses himself with hyperbole or irrational exuberance. He is the antithesis of CNBC's rabid mad dog of stock speculation, Jim Cramer, forever frothing over with bug-eyed babble.
But the hyperlinked global markets of the 21st century measure a Fed chairman by his rate cuts, not his über-rational reasoning. And when you shock the world with an emergency three-quarters of a percentage point cut in the Fed Funds rate that is larger than anything the U.S. has seen in 23 years, your image as Mr. Calm is bound to take a beating. Wasn't he telling us just a few months ago that the housing bust was "contained"?
Even as Congress and the White House step up efforts to craft a fiscal stimulus rescue package, frustration is boiling over. In a Senate Finance Committee hearing held Tuesday, Congressional Budget Office director Peter Orszag was peppered with questions as to what strategies for juicing the economy would work best, and was asked, by at least four senators, for his opinion on the Fed's rate cut. But sparks flew when Sen. Jim Bunning, R.-Ky., exploded after Orszag noted that "Chairman Bernanke and many economists" believe that the risk of a recession in 2008 "is substantially elevated relative to normal conditions."
Please don't bring Chairman Bernanke into this, because he's been wrong so many times ... Chairman Bernanke and his predecessor put the U.S. economy in this situation by their monetary policy. And now they are getting into the business, the Federal Reserve, into advising the Congress on fiscal policy, which is none of their darn business. So, I get a little upset sometimes when our Federal Reserve gets into our job, which is to try to stimulate the economy if we think it's in dire straits.
Bunning's intemperate outburst begs for a follow-up. If Bernanke has been "wrong" so many times, was he wrong Tuesday morning? As of this writing, around 2:20 p.m. EST, the lead headline on the Wall Street Journal declared "Fed's Deep Cut Appears to Soothe Markets." After falling almost 500 points at the start of trading, impelled by massive sell-offs on stock exchanges around the world, the Dow Jones industrial average had fought its way back to a relatively minor 118-point drop. What if Bernanke had done nothing, or even waited just eight days until the regular meeting of the Federal Reserve Board of Governors meeting to deliver his rate cut? If Monday, Jan. 21, is already being called the 21st century version of Black Monday, summoning up memories of the crash of 1987, what would Tuesday have looked like without a rate cut bailout?
Given the clear connection between Tuesday's rate cut and global market turmoil, it is hard to avoid at least one conclusion. Bernanke has proven, once and for all, that juicing the stock market is now considered Job No. 1 for the Federal Reserve Bank. The material effects of rate cuts do not show up in economic growth statistics for months or even years after their enactment. By making an emergency "inter-meeting" cut a mere eight days before its regularly scheduled meeting, Bernanke is conducting economic policy in order to appease market psychology. The fragile psyches of Wall Street traders who played such a pivotal role in creating this mess by romping through the derivatives wonderland, are now in control of government strategy.
[The Fed doesn't have] much interest in protecting the investments of stock market participants. Instead, I suspect that the Fed is using equity prices just as I and many other economic analysts do, namely, as a useful aggregator of private and public information about near-term prospects for economic growth. All the recent indicators have suggested a significant deterioration of real economic activity over the last two months. I take the global stock market sell-off as one more confirmation of that assessment, and new information about the global scope of the problems we face.
In his testimony before Congress, CBO director Orszag said, "I think it's important to keep our eyes on the real economy, and not respond too dramatically to short-term movements in financial markets." But while nice in principle, Orszag's recommendation ignores how hair-trigger the entire global economy is becoming. We've been hearing for years about how strong the overall global economy has become, and how China and India are so vibrant that they might even have become "decoupled" from the global economy. Even if our locomotive jumps the track, the rest of the train is supposed to keep going. But the lesson of this weekend is that panic on Wall Street means panic in Shanghai and London, and panic in Shanghai and London means panic at the Fed. And panic at the Fed means a lot of scurrying back and forth on Capitol Hill.
How bad can it get? Economist Nouriel Roubini, who has been preaching doom for years, declares that the oncoming "recession will be ugly, deep and severe, much more severe than the mild 8-month recessions in 1990-91 and 2001." Dean Baker, co-director of the Center for Economic and Policy Research, observes that the housing bust "is creating the largest financial crisis since the Great Depression and might well lead to the most serious recession since World War II."
Such rhetoric seems to belong to a different universe than that which the Federal Reserve inhabits: Its statement, explaining its actions Tuesday morning, was far more constrained, attributing its action to "a weakening of the economic outlook and increasing downside risks to growth." And Treasury Secretary Paulson did his best to give the bad news a positive spin, arguing that what the Fed's rate cut "shows to this country and the rest of the world is that our central bank is nimble and is able to move quickly to respond to market conditions. That should be a confidence builder.''
At a White House briefing for reporters, press secretary Dana Perino confined her comments to noting that the White House did not comment on Fed rate cuts or market fluctuations, but that the "the president's advisers are advising him that they are not forecasting a recession."
President Bush better hope they are correct, or that if they're wrong, a fiscal stimulus package in combination with the Fed's testosterone boosters perform some economic magic. Because this one will go on his permanent record. When the "mild" recession of 2001 hit, it was tempting for some to blame George Bush immediately, although fairer minds, no matter how partisan their inclinations, had to acknowledge that, economically speaking, one couldn't pin responsibility for the inevitable fluctuations of the business cycle on a newly arrived president. All one could do is critique how the new president handled the situation. But if the current economic downturn gets anywhere near as bad as some of the more gloomy observers are suggesting, there will be no escaping the verdict of history on this administration. The worst recession since World War II? Just another line on Bush's résumé, highlighted, underlined, in bold and italics.