As Interest Rates Decline, Bernanke's Stock Goes Up

Fed Chairman Ben Bernanke’s stock is at a 52-week high on Wall Street --- with the exception perhaps of Bear Stearns, which appears to be selling him short.

Ben Bernanke, President Bush's top economic adviser, speaks in the Oval Office at the White House after Bush named him to take over the Federal Reserve from retiring Alan Greenspan, in Washington, Monday, Oct. 24, 2005. It was the third time in as many years the president has turned to the 51-year-old Bernanke for a sensitive post. Bush named him to the Fed board in 2002, then made him chairman of the president's Council of Economic Advisers earlier this year. (AP Photo/J. Scott Applewhite)
J. Scott Applewhite

Bernanke, who was criticized for being behind the curve of the credit crunch for most if not all of 2007, has won high marks in recent weeks, using both tried and true and unconventional tools to fight an economy suffering from both a cyclical slowdown and credit crunch.

“The Fed is riding the wave of financial instability and a threatening recession; it’s balance has been superb,” says Robert Brusca, chief economist at Fact And Opinion Economics. 

“Interestingly the Fed is being criticized both for going too slow and for cutting rates too low creating another new bubble,” adds Brusca. “I would point out that when critics say your policies are excessive in two different directions maybe those policies are just right.”

Brusca’s assessment and tone is somewhat representative of many economists, who found reasons enough to criticize or doubt Bernanke’s instincts and actions since the credit crunch first boiled up last August.

At various times, the Fed boss had been accused of being slow, tentative, unresponsive or panicky in setting monetary policy, while being a poor communicator and leader.

All of that began to change with Bernanke's decision to slash rates three-quarters of a point in between FOMC meetings in late January, followed by a half-point cut at the regularly scheduled meeting Jan 30.

“He's back on same wavelength with the market,” economist David Jones said around that time, signaling the beginning of Bernanke’s rise.

After that, Bernanke did what great Fed chairmen do. He came up with creative and unexpected measures, directed at the credit crunch and not necessarily the recession.

On March 11,the Fed said it would now hold debt other than Treasurys as collateral and for longer than usual. The move to include federal agency mortgage-backed securities and mortgages for up to 28 days was meant to loosen up a mortgage market that had not benefited from 225 basis points of rate cuts.

Stocks soared.

Economist David Resler of Normura International quickly called the measure “arguably the most important step yet by the Fed and other central banks to relieve strains in the financing markets that have increasingly seemed to bring virtual paralysis to the money and credit markets.”

Bernanke, however, was waiting in the wings with an encore. On Sunday, with Bear Stearns straining under the weight of its large mortgage backed securities portfolio, Bernake’s Fed’s  extended its discount lending window function to include investment banks.

In another interesting move, the Fed at the same time also cut the discount rate ahead of the FOMC meeting, narrowing the spread between it and the fed funds rate to a quarter of point, which was seen as an attempt to lessen the penalty and stigma of borrowing.

Stocks soared again.

Credit Crunch

The discount window move may well be Bernanke’s coup de grace.

Former Dallas Fed president Robert McTeer called the move “historic.”

Two days later, Wall Street was still taking about it.

Lehman Bros.CFO Erin Callan called the lending decision “great news, telling CNBC, “It certainly takes the question of liquidity off the table.”

Perhaps the best measure of Bernanke’s new status is Wall Street’s reaction to the Fed’s decision to cut the federal funds rate three-quarters of a point on Tuesday.

Some on the Street were expecting a full point cut. In the past, anything less than what Wall Street expected would have led to disappointment, criticism and the inevitable market selloff.

Not this time. Stocks soared ahead of the decision and went even higher after it.

The Fed statement even dwelled on the risks of inflation – a consideration many thought it had down played if not abandoned – and managed not to spook the markets.

“I think they walked the line beautifully,” PIMCO portfolio manager Paul McCulley said on CNBC Wednesday morning. He might have been speaking for much of Wall Street when he said: “I thought Ben did a great job.”

It’s worth noting that market watchers are generally pleased when they refer to the Fed boss by their first name and displeased when use the last name, perhaps a suggestion that are close to greatness.

Not all are enamored with Bernanke or ready to declare him a genius.

“I remain unimpressed,” said economist Ram Bhagavatula, who’s managing director at the hedge fund Combinatorics Capital. Bhagavatula, who has previously said he’s been dumbfounded by the Bernanke Fed since early last fall, adds, “Fundamentally, the Fed is confusing liquidity provision and monetary policy.  The two are not the same.”  As a result he expects weak growth and nasty core inflation in the coming year.

Money manager Jim Awad, who’s been a mild critic of Bernanke along the way, says, “The jury is still out. He has been scrambling to catch up to the curve.”

The Bear Stearns economic team couldn’t agree more. It a stinging research report released two days after the Fed engineered a fire-sale rescue of the Wall Street firm, the economists criticized Bernanke from his days as Fed governor and member of the Alan Greenspan Fed, concluding with the view that he put the lending tools in place way too late.

In fairness to both Bear and Bernanke, that remains to be seen – much like the Bernanke legacy itself.

When the credit crunch first flared in August 2007, just weeks before the 20th anniversary of the 1987 stock market crash, economic historian, author and New York University professor William Silber was asked to assess the nature of the crisis as well as the policy responses needed.

In discussing the differences between Bernanke and his predecessor as well as the two crises, Silber, whose most recent book, "When Washington Shut Down Wall Street", happens to be about the financial crisis of 1914, said: “Most great crisis management techniques come from improvisational thinking.”

Much of what Bernanke’s Fed has conceived and executed in recent weeks arguable falls into that category and has not gone unnoticed by some economists or Wall Street, where in the course of a week stocks posted their two biggest one-day percentage gains in five years.

“The Bernanke Fed has come into its own as this is a financial crisis that has no historical parallel,” the Bank of Tokyo-Mitusbishi’s Rupkey wrote in a note to clients this week . “The Fed has finally moved far beyond the legacy of former Fed Chairman Greenspan”