Bernanke Speak

Yesterday, our beloved Fed Chairman, Ben Bernanke spoke to Congress about the state of the economy, interest rates, inflation, and the financial system. Most investors agree with him that the banking system is not headed for collapse due to the bailouts by the government and the Federal Reserve. Fear was very high in the fall after Lehman Brothers went bankrupt and AIG, Fannie Mae, Freddie Mac, Merrill Lynch, Goldman, and Morgan Stanley were all potentially headed for collapse without government intervention. We would argue that risks to the financial system have not disappeared but the equity capital raises by many banks have reduced the probability of future failures.

Mr Bernanke addressed the concerns of controlling inflation down the road but he seemed far less convincing to us. The party line is that the government will be able to withdraw some of the excess liquidity at the right moment to minimize the chance of unleashing inflation when the growth of the economy resumes and the velocity of the monetary base accelerates. If one listened closely yesterday, they would have heard the Fed Chairman's voice cracking from being a tad nervous. It is hard to keep a straight face and explain away inflation when one truly knows it will take a miracle to perform such a magic trick flawlessly. Ben has been a magician so far and his bag of tricks have saved us from crisis but controlling the dollar, interest rates, inflation, and the stock market for long periods of time may not be so easy.

All markets today are much more global than in past recessions. In addition, information flow tends to be instantaneous with the internet and broadcast TV. As such, the interdependence of economies globally effect trade, currencies, commodity prices, and stock prices. The Fed and the U.S. government did a yeoman's job to provide enough liquidity to our financial system and saved the country from a depression. However, the unwinding of those programs may not be in its control. China cares most about China and they will do what is best for their country's health and prosperity. That sentiment can be said for every country in the world. The result may not be in the best interest of the United States and could be a major factor in the level of our interest rates and the value of the dollar.

Mr. Bernanke seemed to be pleading with Congress to focus on spending cuts and reducing the massive deficits. It is time to throw out politics and do what is best for the country. He is right but plenty of money has been printed and more will be spent by the government. Ben is a student of the past and he knows that he needs to juggle many balls at once. Unfortunately, hope won't help him but he is hoping to get lucky.