Ben's of the World

I can recall four Ben's in my entire life. 

Ben Wallenberg was one of my best friends when I lived in Chicago for eight years.  We did everything together; we built a fort in his backyard that may still be standing, we went sledding at the skatidum which may still be open, and I sort of taught him to ride a bike without training wheels.  His next door neighbor was my next door neighbor's next door neighbor.  We went to each other's houses all the time and played with things like Playmobil and the SpeedRacer.  He was awesome.  I miss him but can't find him on facebook.     

Ben Franklin forged the Great Compromise and was, at least in part, responsible for the Constitution of the United States.  My 8th grade American History teacher called him the "Father of the United States," not because of the immense role he played in the founding of our country but because of the number of women he slept with. 

Ben Graham was Warren Buffet's mentor.  He's the father of value investing, and while I don't agree with all of his principals, he made a killing in the stock market and so has Warren Buffet.  I'm glad that Class B stock in Berkshire is going to be split, since individual investors with limited incomes such as myself will be able to find the absolute price (that is, ignoring PE ratio) non-insane.

Finally, there is Ben Shalom Bernanke.  I've recently begun reading a book by David Wessel (a reporter for the WSJ) called In Fed We Trust.  The book's great; while I wish it went into more depth about the AIG's and Lehman's of the world, it does an incredible job explaining the role of the Federal Reserve during the monetary crisis. 

Before I read the book, I thought Ben Bernake was handling the "Great Panic" well.  Having read about 75% of it, I think Bernanke is a sage...a man we will look back upon 50 years from now and point and say "it was he who saved us from another Great Depression."  This is why...

I.  Criticism

A.  The Greenspan Years

Much of the criticism surrounding Bernanke is a result of his complicity in keeping interest rates too low for too long during the Greenspan years.  Bernanke is unquestionably guilty of that - he did advocate for maintaining low rates for too long during Greenspan's tenure as Chairman of the Federal Reserve.  Bernanke should have been more outspoken, and for his failure to object, we should judge him.  At the same time, we must remember that before Greenspan left the Fed, he was treated as a God among men.  No one on the Federal Reserve or even outside of it questioned his decisions; he was a Jamie Dimon to JPM, not a Fritz Henderson to GM.  Still, deference and loyalty must be thrown out the door when you're talking about economics, and Bernanke should have realized the nature of the problem and acted accordingly. 

B.  The Bernanke Years

Bernanke not only was complicit in the cause of the Great Panic though, he failed to nip it in the bud during the first year he spent as Chairman of the Federal Reserve.  Since its founding in 1913, the Federal Reserve's mandate has been to protect the American economy through stable monetary policy and regulation.  The Federal Reserve has never sought to prevent bubbles from forming; the Federal Reserve has only sought to clean up the mess.  For instance, during the tech bubble of 2001-2002, the Fed role wasn't to ensure that tech companies did not become overvalued; rather, the Fed was charged with cleaning up the mess afterward. 

Why is that?  Why does the Fed wait for a bubble to pop and clean up the mess rather than prevent the mess in the first place?

First, the Fed doesn't really have the tools to do that.  It can't raise interest rates to curb economic growth in the technology sector without raising interest rates and curbing economic growth in the transportation sector, a sector that may be undervalued.  "Its like trying to put a tack in the wall with a sledgehammer;" you'll drive the tack in but at the cost of destroying the wall. 

Second, the Fed can't always predict when something is a bubble and when something is just really good.  Amazon a bubble in 2001?  Well, its worth more now then it was then.  The role of the Federal Reserve isn't to judge the value of companies in the marketplace; that is role of the investor and shareholder. 

During the Great Panic, this thinking prevailed.  Bernanke didn't deflate the bubble because he didn't think it was his role, and he sought to clean up the mess after the bubble popped.  The recession, however, changed the role of the Federal Reserve.  Ben Bernanke unquestionably called audibles at the line, threw hail mary's, and fumbled the ball in trying to contain the mess.  At some point though, he realized he had to get in front of the crisis, and to that extent, the role of the fed was no longer janatorial (after the fact) more scotchguardial (before the fact).  Bernanke realized that he couldn't wait for the bubble to pop and its ramifications to take effect; he had to act prevent those ramifications in the first place.  He can be condemned for not realizing so many homeowners would be underwater and that banks, private equity funds, hedge funds, pension funds, and insurance companies had so many loans on their books (bank's hadn't just securitized and sold mortgages it turned out; they held many on their books).  But when he did realize it, he stepped up to the plate.

II.  Praise   

Its insane for me to think I could briefly describe everything the Federal Reserve and Treasury Department did to contain the Great Panic.  Since I've been writing for about an hour, I'll just mention them quickly.

1.  Open the discount window to non-commercial (non-Fed regulated banks)

2.  Extend the maturity of loans from the discount window

3.  Reduce the premium charged at the discount window as compared to the fed funds rate

4.  Marry Bear Stearns to JPMorgan

5.  Save AIG

6.  Marry the Bull to Bank of America

7.  TAF

8. TARP

9. TALF

The list goes on.  Perhaps the most important thing he did though, was never show any fighting or dissent with the Treasury Department.  If we had Treasury saying we should buy mortgages from banks and the Fed saying we should invest capital into banks in order to stem the crisis, there would have been even more panic.  At every stage, at every level of the game though, Bernanke and Hank Paulson showed a united front.  Bernanke didn't always agree with what Paulson was thinking and Bernanke sometimes got his way, but if Paulson was on the news saying X, Bernanke never said Y.  He stood behind Paulson and showed Wall Street that the government was united in fighting the credit crisis.  

Bernanke is awesome.  He'll sail through confirmation hearings and remain as Chairman of the Fed, but he shouldn't have to go through the grilling that Senators are going to give him for a crisis they still don't understand. 

Shut up, don't advise, just consent.

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