Remember Alan Greenspan, former Fed chairman, whose every gnomic utterance moved markets? He developed a reputation as a genius, a soothsayer who could predict the future. Of course he could: he shaped the future. In fact, Greenspan had power, not prescience. No one said Genghis Khan was a genius when he predicted someone was going to be flayed alive, impaled and hung out to dry outside the imperial ger.
Greenspan’s successor, Ben Bernanke, does not attract the same attention. One reason could be that he speaks more clearly, so he sounds less profound than Greenspan. He has expressed worries about unemployment and sub-prime borrowers being thrown out of their homes, in contrast to the Olympian detachment of Greenspan. Bernanke’s self appointed task seems to be group therapist for the financial community, as he continually reassures everyone that the housing market is fine, sub-prime mortgages are okay, hedge funds and private equity just dandy.
He also talks about ‘core inflation’, which leaves out food and energy. It so happens these are shooting up in price because of rising world demand against a finite supply. Short of a major slump, prices will keep rising.
Inflation is also relative. With the dollar trading at its lowest level for decades against almost all the major currencies, it is in fact an inflated currency. It takes almost twice as many dollars to buy goods from Europe or the UK as it did a few years ago. Oil states are gradually thinking about pricing their products in hard currency.
But the real reason why no one takes Bernanke as seriously as they did Greenspan is that he has less power. The Fed’s adjustment of interest rates was always a crude instrument.
But in the old days the US economy could pretty much chart its own course with the rest of the world in tow. Now it is traveling in convoy over uncharted and bumpy seas.
Today Bernanke has far less power than Zhou Xiao Shan, chairman of the People’s Bank of China. Zhou’s decisions on where to place his country’s foreign currency reserves can make and break the US. Meanwhile, the decisions of oil-producing states as to whether they want dollars or euros for their products will create ripples on Wall Street.
While markets look with mild concern at possible interest rate changes from the Fed, Bernanke is looking more like chief oarsman on a rubber dinghy. It is a tough job, but no longer a very important one in this globalized world.
