Monday, March 26, 2012

The Bernanke Lectures

Back to school. In case you need a refresher course in central banking, Fed Chairman Ben Bernanke is providing a series of four free lectures on the Fed’s website. He delivered two of them last week at the George Washington University School of Business on Tuesday, March 20 and Thursday, March 22. There will be two more this week on Tuesday, March 27 and Thursday, March 29. The most important message for investors in the first lecture is that the Fed Chairman is in no rush to raise interest rates no matter how well the economy seems to be performing.

It’s great that the Fed Chairman has some free time to educate us. Of course, the point of this exercise is to let us know what an outstanding job the Fed has done in averting a financial meltdown during Bernanke’s watch. According to him, the Fed has done so well by learning from the mistakes made by monetary policymakers during the 1930s. No one has studied this subject more than he has. However, his intense focus on the role of monetary policy in causing and prolonging the Great Depression seems to have blinded him to other causes, such as the Smoot-Hawley Tariff, which isn’t mentioned even once in his Essays on the Great Depression (2000) or in his first lecture.

On November 8, 2002, when he was a Fed Governor, Ben Bernanke famously concluded the speech he gave at Milton Friedman’s 90th birthday as follows: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” The Great Depression was caused by monetary policy mistakes, and the Fed won’t make those mistakes again.

In his lecture, Mr. Bernanke blamed the Fed for causing the 1929 stock market crash by raising interest rates rather than focusing on “bank lending, on financial regulation, and on the functioning of the exchanges.” I would argue that the Fed set the stage for the latest financial crisis by raising interest rates too slowly in the years before the crisis. Presumably that was meant to avoid repeating the bad economic “side effects” that rising rates had in the 1930s, according to the first lecture. The lesson learned during the 1930s made the Fed too cautious this time. Worse, in the years preceding the latest financial crisis, the Fed failed to regulate the excesses in the over-the-counter exchanges for credit derivatives. That led to the collapse of securitization, which triggered a credit crunch that nearly caused another Great Depression.

In his lecture, the Fed Chairman observed that the Great Depression was actually two recessions with a severe downturn from 1929-1933 and another one in 1937-1938. In between the two, there was a good recovery. While he concedes that the cause of the second downturn is controversial, he believes it was a “premature tightening of monetary and fiscal policy.” He concluded: “I think if you accept that traditional interpretation…you need to be attentive to where the economy is, and not move too quickly to reverse the policies that are helping the recovery.”

Today’s Morning Briefing Bullet Points: (1) Paradise found. (2) An impressive 6-month bull market within an impressive 3-year bull market. (3) Bernanke bad-mouths good employment indicators. Stocks cheer. (4) Leaders are Consumer Discretionary, Financials, & IT. (5) Revenue estimates continue to rise. (6) P/E-led rally has more upside. (7) PEG ratios find value in Consumer Discretionary, Industrials, and IT. Overvalued are Consumer Staples, Health Care, Telecom, and Utilities. (8) Housing recovery stalled in Feb. and Mar. (9) Another happy employment indicator in Texas. (10) Still some oomph in Germany’s Ifo. (More for subscribers.)

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