A Second Term for Bernanke

Economics 101: It’s all about the Benjamin’s. As in Benjamin Bernanke and Benjamin Franklin.

The recession seems to have run its’ course and wreaked still not fully accounted for havoc on investor wealth, home values, (for those still willing to make their mortgage payments) and countless millions of jobs. Tuesday the market breathed a collective sigh of relief. Chairman Bernanke was offered up another 4 year term by President Obama. Why? The markets dislike uncertainty. With Chairman Ben you know what you are getting. A monetarily creative, great depression era history buff. Or, does he more closely resemble a fire fighter with arson-istic tendencies? For wasn’t it the policies of easy credit and lax regulatory oversight that created the fireball the Federal Reserve itself had to ride to the rescue and extinguish?

How exactly are we or did we exit the recession and avoid a deep depression? As I stated it’s all about the Benjamin’s. As in Ben Franklin's face on the US currency, $5 and $100 bills. Most of us don’t fully understand the concept of the liquidity crisis, or as it were, the lack of liquidity that nearly crippled the US and global economy. We believe you either have money or you don’t. Not necessarily. As many of us know you personally can be wealthy, owning a home, lake house, stocks and bonds, etc. But, let’s say a tornado rips through your neighborhood and tears your roof off and levels your garage. Now you need to repair the roof and rebuild the garage. For our example, your homeowners insurance has somehow lapsed. You now need to raise cash and in a hurry. But, you find the stocks you own are actually private placements, 144a’s that don’t trade actively. Your bonds are severely discounted and your bank won’t lend against your lake house. We can agree to a reasonable degree, you still maintain a significant amount of wealth, you are simply constrained by your illiquidity.

Now you are a bank, with over a trillion dollars in assets. However, no bank will lend you money against your collateral. I bet you didn’t realize you had so much in common with Goldman Sachs. When no one else will lend, what’s a Fed to do? Crank up the printing presses and open the windows. Those presses were running full tilt, 24/7. That room, I’m sure was getting smoky. Banks couldn’t or wouldn’t lend, even to one another. The Federal Reserve, instead of the backstop lender of last resort, became the only lender out there. They offered funding at reasonable rates and accepted collateral others balked at.

As private investors regain their appetite for risk, the Federal Reserve will begin sopping up all that excess liquidity. A trick I’m sure that if executed properly would impress Houdini himself. If they miscalculate and move too early, they risk choking off a potentially fragile economic recovery. If they keep the peddle on the accelerator too long, they risk igniting a bout of hyper inflation and a Volker like response to borrowing rates down the road.

So, while we can debate who was responsible and how we got so dangerously close to the abyss, when the discussion switches to how we escaped? As I stated, it’s all about the Benjamin’s!