Big shoes to fill. Really big shoes. Could there be more conventional wisdom about Ben Bernanke’s ascension to Federal Reserve chairman after the glory years of Alan Greenspan? Wasn’t Greenspan the man who steered the U.S. economy on a flawless course in his two decades at the helm of the world’s most powerful central bank? Didn’t he at all times set short-term interest rates flawlessly, making it possible for an endless economic expansion and a bountiful stock market?
And so we all settled in for a rocky rookie year for the quiet, more academic, less PR-savvy chairman from the Princeton economics department. Some of us had been encouraged by the fact that he had let it be known that he would sift through all of the data and be open-minded about whether more rate hikes were necessary, something Greenspan seemed less prone to doing. Once the former chairman chose a course, it was a hell-or-high-water, we-are-going-to-wait-for-a-recession-to-abort philosophy. The scuttlebutt about Bernanke was that he would switch courses before a downturn hit, abandoning a tightening cycle before creating an economic fatality.
Sure enough, Bernanke appeared flexible in his first public statements, suggesting that the fifteen straight quarter-point rate increases might be enough to brake the economy before it broke the economy. But he seemed to reverse policy in late April, telling a CNBC reporter—at the White House Correspondents’ Dinner, no less—that he never meant to be a dove on inflation. Suddenly, we began to miss the old man at the helm, with his obfuscation and his avuncular wisecracks, always making us feel that Father Greenspan knows best.
The nostalgia grew more misty-eyed when the Bernanke Fed raised rates May 11 and not only left the door open for more rate hikes regardless of the Big Three weaknesses in the economy—autos, consumer spending, and housing—but positively propped it wide for what could be a move that would take rates from 5 percent all the way to 6.5 percent, where Greenspan moved them in 2000 to counteract a strong economy. The May 11 announcement turned out to be a beauty. Stock markets worldwide plummeted, with our own averages plunging 8 percent. It was the type of decline that the pundits thought Greenspan would have adjusted to but the new, inflexible Bernanke would ignore. I know I felt it; I immediately slapped Bernanke’s balding, bearded head on a box of Uncle Ben’s rice on my TV show and concocted a chopped-bull stew to symbolize the destruction he had wrought.
Those Greenspan shoes, again. Big shoes.
But the conventional wisdom turned out to be wrong on two accounts. First, Bernanke did listen to the market. At last month’s meeting, he made it clear that the weakness, particularly the weakness in commodities, could not be ignored. He suggested that, at last, the Fed might do one more hike, but that’s about it. Far from oblivious, he was proactive. Second, he caused some of us to recall that such a reversal before a slowdown was actually the exception, not the rule, under Greenspan. That’s right, perhaps Bernanke did represent a new Fed, more quick-footed and less opaque than Greenspan’s. When the markets rallied convincingly on Bernanke’s statement that he was concerned about a slowdown—stocks being the only report card a Fed chief ever gets—some of us breathed a sigh of relief that this time the Fed would avoid bringing on a recession just to prove its inflation-fighting credentials. Maybe we had too much nostalgia for Greenspan. Maybe the shoes were more of a size 8 or 9 and not Shaquille O’Neal’s 22.
In the Goldilocks world of the Fed, where rates can’t be too loose or too tight, Bernanke may have it just right.
Oops! Unpardonable-sin department: I just trashed Alan Greenspan, the most revered man in American financial history, save maybe Alexander Hamilton.
In truth, Greenspan may have been worshipped, but when we strip away the warm fuzzies for the former skipper, we have to remember that he often erred where Bernanke hasn’t. Didn’t he call the pricing of stocks irrationally exuberant a decade ago only to see them move up 5,000 deserving points? Two years later, in October 1998, he railed about inflation and the need to temper the economy, at the very moment that Long-Term Capital, an errant hedge fund, was creating one of the most deflationary spirals in our nation’s financial history. He reversed course a few days later, but you could see he had lost his bearings. Then, in May 2000, when the stock market and the economy were both rolling over, he steadily jacked up short-term rates to 6.5 percent to stop dot-com speculation—no matter that the market had already crushed those stocks—sending stocks and, more important, the economy, into one of the worst recessions of the past 100 years. In 2000, he wrecked the economic village to save it from stock-market speculators. Too harsh a cure for some small-time gamblers who had already been wiped out by the dot-com comedown.
What made Bernanke come around? I think he recognized—unlike Greenspan—that the inflation this time was more centered on something he couldn’t control, the hoarding of commodities by the Chinese because of the accelerated growth path that country sees as necessary to stave off domestic unrest. He’d be better off urging the Chinese central bank to curtail hypergrowth than stopping our moderate growth before inflation gets out of control. As big as our economy is, we are a service-based economy, not an economy that uses huge amounts of zinc, aluminum, gold, and copper—the complex that had surged because of overseas buying, not ours. I think Bernanke also realized that the huge spike in gas prices wasn’t inflationary as much as it was a tax on growth that would slow our economy on its own volition. Bernanke, in other words, adjusted to the data instead of blindly battling inflation. He trusted the markets in a way Greenspan could never do. He recognized that the economy is already on the other side of the mountain, no longer climbing, no longer in danger of hyperventilating, just trying not to fall off the cliff.
Can Bernanke really stop us before the decline from weak housing, autos, and retail snowballs into an avalanche? I know two things: Greenspan sure wouldn’t—and couldn’t—have done that because of his intransigence once he embarked on a tightening course. And the no-longer-rookie Bernanke just might be able to.
My bet? In the Goldilocks world of the Fed, where rates can’t be too tight or too loose, after last week’s rate statement Bernanke may have it just right. If so, stocks have finished their painful retreat, and you may at last start feeling, if not being, wealthier again. Maybe Bernanke’s a faster learner than I thought. Maybe he no longer had to show vain toughness. Whatever, the market’s reaction—the biggest rally in years—tells you that Bernanke’s now a friend, not the enemy, of your net worth. In a world where we have come to fear the Fed for its ability to make us poorer, Bernanke could make us rich with his flexibility and his ability to hear the markets where Uncle Al had, in the end, become deaf.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. E-mail: jjcletters@thestreet.com.