Farr: Does Chairman Bernanke Get It?

It’s easy to criticize.

Everyone from politicians to sports stars is a great target, and we don’t even need to resort to Charlie Sheen (who, as we all know, is WINNING!).

Investors spend a good deal of time parsing the actions and statements by the Federal Reserve banks and governors. Ben Bernanke has the dubious distinction of chairing this eclectic economic curia, and his weighing-in of opinion carries more weight. It is only fitting then that Ben spends a little extra time on the examination table.

During the past few years of the banking crisis and recession, Ben and the boys have been busy. They braved Bear Stearns, lost Lehman, foreclosed on Fannie and Freddie, and dreamt up TARP and a tremendous variety of tortured, tedious transporters of accommodative, stimulative liquidity. The Fed snatched salvation from the precipice of systemic financial doom and hasn’t stopped.

From the first Bear Stearns-shaped bump until the current round of Quantitative Easing, no matter the problem, cash has been the answer. The old expression that if your only tool is a hammer, all of your problems start looking like nails, comes to mind. But the Fed hasn’t been the only source of cash. The Treasury Department, Congress, and Executive Branch have all been elbowing their way onto the cash court through stimulative fiscal policy as well. In the three years since Bear Stearns was granted reprieve and the economy recessed, cash has been just the transfusion to nurse the patient from extremis. BUT at what cost and consequence?

Much well-justified time has been spent criticizing the deficit and relentlessly increasing debt. There are continued worries about job creation, housing prices and what appears to be inevitable future inflation. Some point to the Fed’s monetary policy as one reason for the falling dollar and the rising costs of commodities, including $108/barrel oil. Others believe our massive deficits will cripple future generations with higher taxes. While we believe there are other factors at play, we also believe that the longer-term ramifications of the aggressive monetary and fiscal stimulus are fairly predictable: a falling dollar, higher inflation, higher interest rates, and higher taxes.

Nice Work, Mr. Chairman.

Ben Bernanke, Federal Reserve Chairman
Ben Bernanke, Federal Reserve Chairman

The role of Ben Bernanke’s apologist holds precious little attraction, but fairness moves rational observers to wonder if it may be possible that Ben is doing everything that you might do if you were crowned ‘keeper of the economy.’

Consider a severe recession triggered by financial crisis.

A GDP that relies on the consumer for more than two-thirds of its success finds the post-crisis consumer laden with debt, ill-prepared for retirement, and very underemployed as he watches his home continue to fall in value. In an economic world perpetually driven by the most basic tenets of supply and demand, your consumer is wounded and recovery will take time. But you’re Ben Bernanke, and you understand that a recession that languishes can easily become a depression with twin spirals of falling prices and rising unemployment.

The Congressional charge to the Fed is twofold: strong employment and price stability. They are tightly intertwined. If you know that you have to do something to remedy the contagious contraction, it seems a tall order to expect that success will result from fervent hope and desperate desire alone.

Based on the premise that it’s easier to start a fire using dry tinder, Ben focused on improving the financial standing of those less burdened by debt and therefore in better position to channel their new-found cash not into debt reduction but into consumption. In September 2010, Mr. Bernanke said that he wanted to see stock prices rise. This focus on market levels is near heresy for a Fed Official. Federal Reserve Chairmen going back to Alexander Hamilton have eschewed the importance of stock prices and argued that such things were not part of the Fed’s mandate and that laissez faire and free markets worked just fine.

While higher share prices have done rather little for Fred and Ethel Everyman, shoppers at Coach, Neiman Marcus, and Tiffany’s have seen their portfolio values and confidence surge. It’s classic trickle down economics. If the wealthy feel better and have more money, they’ll spend more and create jobs. Corporations resting on the laurels of higher share prices will be more likely to invest and hire with confidence.


Ultimately, Mr. Bernanke has done most everything conceivable to apply the monetary shock paddles to the fibrillating fiscal victim. While it’s easy to criticize much of what constitutes our current and future economic predicament, it is impossible to suggest that Mr. Bernanke isn’t doing everything he can. Wealthier Americans and Corporations report feeling more sanguine about the future, but remember that whoever robs Peter to pay Paul can reliably count on Paul’s support.

It has worked somewhat to date, but the future remains a considerable concern. Last year in March, the Fed began an orderly removal of their accommodative programs, and stock indexes fell about 15% between the end of June and the end of August 2010. The current round of Fed buying is scheduled to end in June, and there is no reason to expect that prices will not suffer.

I have long contended that it is the proper role of government to save us from crisis but not from all consequence. It’s problematic that the line between the two is blurry. Too much cash support for too long and the dry tinder of inflationary intent can quickly blaze beyond the best planned fire lanes. On this front, we draw no distinction between inflation in commodities, consumer goods and services, real estate or other financial assets. We must have learned something from the bubble in housing prices that was created, in large part, by Greenspan’s loose monetary policy following the tech market crash.

Massive budget deficits continue to balloon the size of our national debt. Government operations currently require about 10% more money to operate than the government “earns” through tax collection. Spending more than receipts creates debt, and that debt continues to increase as excessive spending continues. The wise advice when one is in a hole is to stop digging. US lawmakers seem pathologically wed to their shovels, but the rub is that they’re shoveling our current and future tax dollars. Think about that: government’s spending today requires dollars that they won’t actually receive until you and I pay more taxes in future years. In addition, we will be paying more money in interest payments, for many years, on the debt they’re creating and to which they’re obligating us.

Pay no attention to that man behind the curtain....the...Great...er...Oz has spoken. --L. Frank Baum

Mr. Bernanke’s next act may be the most critical of his career and certainly the most vital for his legacy. Largely forgotten are his super-human feats of 2008’s miraculous rescue. But, Wall Street’s typically ungrateful refrain of “what have you done for me lately?” is merited as the consequences of so much untried monetary intervention remain untested and unknown.

Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.