Is new Fed chief Bernard Bernanke an inflation hawk or a dove? The Street ornithologists will likely see whatever feathers suit their preconceptions, as they did with Bernanke’s predecessor, Alan Greenspan.
Greenspan left the Fed in February. His name remained bright even as he gave ever more convoluted explanations of why he was in fact doing the opposite of what he was implying. In reality he has reduced interest rates and supported the administration’s deficit spending while steadily driving down the value of the dollar in relation to gold and other currencies.
What changes he made served to ‘send signals’ to the markets, and like the augurs who examined the entrails of sacrificed chickens – or doves – the markets read whatever signs they wanted into them. Greenspan epitomized the good old days of soothsaying, when the rule was to be as obfuscatory as possible – so that afterwards the seer can always say, ‘Look, I told you so,’ whatever happens.
Greenspan didn’t rhyme like Nostradamus, and nor did he reason. He talked of ‘irrational exuberance’ as the tech stocks ballooned, and did nothing. When the bubble burst, he nodded sagely and let people point to his earlier statement as prescience.
Last June, looking at the house price boom caused by the low interest rates that he had maintained courtesy of the flood of Asian capital into Treasury bonds, he said: ‘I think we’ve learned very early on in economic history that debt in modest quantities does enhance the rate of growth of an economy, and does create higher standards of living, but in excess, creates very serious problems.’ This was, of course, a long-winded way of saying ‘Good night and good luck!’ to Bernanke, who will be the one holding the string on the real estate balloon when it bursts. Plain-speaking Bernanke seems ill-suited to the prophecy profession, since those to whom he reports actually seem to understand him most of the time.
This really gets to the role of the Fed chief, which is to be therapist to the nation and to Wall Street in particular. His job is like that of a lifeboat skipper, at the mercy of the weather. He must exude calm while squinting inscrutably at the horizon. When the reefs loom afore the bow, he must convey that he had known about them all along but did not want to cause alarm. The second stage, as the oars are lost and the water starts to seep in, is to reassure the passengers that things would have been much worse if not for his wise piloting.
Bernanke is already in full therapeutic mode, trying to ground his reputation as ‘Helicopter Ben’. Keynes once memorably suggested that to defeat deflation you bury money in jars and pay people to dig it up; Bernanke’s anti-deflation remedy was to print lots of money and scatter banknotes from helicopters. He should have remembered that for Wall Street, irony is what they used to make in the rust belt before they offshored it to China. His quip gave him the reputation of being – horror – an inflation dove, so on appointment he has had to look like a bird of a different feather – an inflation hawk – to reassure the easily excitable Street.
In the true quantum spirit of the markets, he is a dove and a hawk simultaneously, and the various factions see whichever avian they prefer. It’s a big hop for Helicopter Ben – but no big flight for a Fed chief. Whether by wing or rotor, however, Cassandra here sees a crash ahead.
