Abigail with attitude: Bernanke's put is the grandaddy of all puts


Abigail Hofman
Published on:

Autumn is a wistful season: the balmy summer days redolent of hope are behind us. We wince at the prospect of grey winter and another year drawing to its close. The autumn is often a tricky and tumultuous period for markets. Some of us still remember the 1987 equity market crash. This occurred on October 19 when the Dow lost over 500 points and 22% of its value evaporated.

I’m surprised that retail investors ever went near the stock market again. But they did: only to be pummelled once more in further market plunges during 2002 and 2008. Perhaps we should recognize equity investing for what it is: Russian roulette for the affluent.

I jest slightly. But one must remember that none of us has a crystal ball and it is probably wise to bear in mind Warren Buffett’s wonderful adage: "Be fearful when others are greedy and greedy when others are fearful."

In the end, most of us are powerless when it comes to the trajectory of the markets. We have to try to figure it out, assess our risk attitude and then plunge in, keeping our fingers and toes crossed. However, senior monetary policymakers do have the power to influence markets.

And you don’t come much more senior than the chairman of the Federal Reserve. As dedicated readers will know, I have grave reservations about Ben Bernanke’s championship of ‘lower for longer’ monetary policy – in other words quantitative easing. If markets went into meltdown in late May when bountiful Ben talked about withdrawing some portion of ‘quality heaving’ – as I have termed it in my own mind – how will they react when interest rates are actually raised? I have some sympathy with a headline in a mid-October edition of the Financial Times. The newspaper thundered: ‘Did QE only boost the price of Warhols?’

Ben Bernanke has led the Federal Reserve since February 2006, when he took over from gargoyle look-alike Alan Greenspan. It was Greenspan, who coined the phrase irrational exuberance and then led the ‘irrational exuders’ right to the top of the hill with his infamous Greenspan put.

No one talks about the Bernanke put. But let’s face it, a policy of keeping interest rates at close to zero for some five years has to count as the grand-daddy of all puts. Despite all his intellectual aptitude (apparently Ben scored 1,590 out of a possible 1,600 on his SAT test for admission to a US university), brilliant Bernanke did not see the financial crisis looming on the horizon until those pesky sub-prime CDOs waltzed out of the undergrowth and bit him (and numerous other investors and bank executives) on the buttocks.

Bearded Bernanke gazed straight ahead, inscrutable. Yellen resembled a small schoolchild who had just won the class prize
Anyway, those days are now behind chairman Ben and he is probably looking forward to an easier life. I was amused to catch a glimpse of the October press conference at which president Barack Obama nominated Janet Yellen to succeed Bernanke as chair of the Fed.

The president made a fulsome speech thanking Bernanke for saving the world from the chaos wreaked on it by the "reckless few" (read: greedy, evil bankers). Bearded Bernanke gazed straight ahead, inscrutable. At one point, his lips turned up briefly, but the smile died before it reached his eyes.

Yellen, however, resembled a small schoolchild who had just won the class prize. For most of the president’s speech, she gazed around the room, with a broad grin. It was almost as if she were searching for her mother in the crowd and was about to start waving.

Yellen may conduct herself on the podium in a different way from her predecessor, but she has done well. She will be the first woman to lead the Federal Reserve in its 100-year history. Markets expect that the Yellen tenure will be more of the same in terms of ultra-easy interest rates. However, it will fall to jaunty Janet, if Congress ratifies her appointment, to implement some form of reduction in the central bank’s asset purchases and steer the US economy away from the drip-feed of monetary stimulus. I will be watching to see how she accomplishes this far from easy task.