I have spent many years prowling the marbled halls of the capital building in Washington, ambushing politicians in the underground passageway connecting the House and the Senate for off-the-cuff comments, sitting in on off-the-record, deep background interviews, and even occasionally offering some congressional testimony.
One thing I learned about the harsh realpolitiks of our chief governing body is that when one party shows the least amount of weakness, the other launches a vicious, coordinated, all out assault across many fronts. So the alarm bells rang big time for me when the Democratic candidate lost the Massachusetts Senate race, redefining the concept of incompetence and complacency to convert a 31 point lead into a 4 point loss. The “black swan” has landed.
Of course, Ben Bernanke will suddenly face the battle of his career over his Senate confirmation! Both the Republican and Democratic lynch mob are making the case that you don’t give an arsonist a medal for putting out the fire. The urge to conduct a human sacrifice to atone for the financial crisis is huge. Unsurprisingly, investors voted with their feet, trashing the Dow for 500 points, pricing in a new quantum leap in uncertainty for the global economy.
Since nothing less than the fate of the free world depends on the outcome, I thought I’d touch base with David Wessel, the Wall Street Journal economics editor, who has just published In Fed We Trust: Ben Bernanke’s War on the Great Panic.
I doubted David could tell me anything more about the former Princeton professor I didn’t already know. I couldn’t have been more wrong, as David gave me some fascinating insights into the inner soul of our much vaunted chairman of the Federal Reserve.
Bernanke was the smartest kid in rural Dillon, South Carolina, who, through a series of improbable accidents, ended up at Harvard. He built his career on studying the Great Depression, then the closest thing to paleontology economics had to offer, a field focused so distantly on the past that it was irrelevant. Bernanke took over the Fed when Greenspan was considered a rock star, inhaling his libertarian, free-market, Ayn Rand inspired philosophy in great giant gulps.
Within a year the economy had suddenly transported itself back to the Jurassic Age, and the landscape was suddenly overrun with T-Rex’s and Brontesauri. He tried to stop the panic 150 different ways, 125 of which were terrible ideas, the remaining 25 saving us from the Great Depression II. This is why unemployment is now only 10%, instead of 25%.
The Fed governor is naturally a very shy and withdrawing person, and would have been quite happy limiting his political career to the local school board. To rebuild confidence, he took his campaign to the masses, attending town hall meetings and pressing the flesh like a campaigning first term congressman.
The price tag for Ben’s success has been large, with the Fed balance sheet exploding from $800 million to $2 trillion, solely on his signature. The true cost of the financial crisis won’t be known for a decade. The biggest risk is that we grow complacent, having pulled back from the brink, and let desperately needed reforms of the financial system slide.
How Bernanke unwinds this bubble will define his legacy. Too soon, and we go back into a real depression. Too late, and hyperinflation hits. That’s when we see how smart Bernanke really is.
Oh, and by the way, there is zero chance of Bernanke losing the confirmation. The entire kerfuffle was invented by a bored, but hungry media.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, and where you can also catch me on Hedge Fund Radio weekly.