Abigail with attitude: The consequences of benign Ben’s eruption


Abigail Hofman
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As September draws to a close, I am starting to wonder if I am living in a parallel universe. Ben Bernanke seems to have gone barmy. And I wouldn’t blame him. Saving the financial world from itself has been a Herculean task.

But baffling Ben sent the markets into a terrible tailspin in May when he talked about the possibility of the Federal Reserve reducing its monthly asset purchases. A great deal of collateral damage was done to emerging market economies and currencies as global investors jerked money away from these higher-risk areas. Then, in mid-September, benign Ben erupted, volcano-like, and said: “Oh, sorry. What we said before has had effects that we don’t like and didn’t expect, [ie an increase in bond yields and consequently mortgage rates] and therefore we are not going to reduce our bond purchases for the moment.” Most investors were wrongly positioned for Ben’s last pronouncement. This doesn’t say much for the Fed’s communication policy or indeed its credibility. But Ben’s change of heart certainly must have brought relief to many emerging market central bankers as global stock markets soared. I emailed a bank chief executive after the Fed’s taper turnaround to see what he thought. “The Fed is being very cautious,” the CEO responded. “Too cautious in my opinion.” The Abigail with Attitude column is despondent about the US authorities’ “no taper tantrum”. Money is too cheap. There is too much debt in the system. The Federal Reserve embarked on a gigantic experiment five years ago and I for one would like to see how they are going to normalize interest rates without causing a tremendous amount of pain.

The reaction in emerging markets was extreme when taper talk started. When rates do rise, the effect on credit-sensitive parts of the economy and over-leveraged consumers will be just as extreme. Remember, short-term interest rates are near zero in most of the main western economies even though such economies are no longer contracting. It is over 60 months since Lehman Brothers went bankrupt. Why do we still need an emergency regime for interest rates? I am baffled.