What has happened to Ben Bernanke? The supposed inflation hawk who everyone said was hellbent on overcoming the inflationist tinge attached to the nickname Helicopter Ben seems to have undergone some sort of road-to-Damascus conversion to the “punch bowl caucus” faith, the Central Tenant of which now proclaims that Solution To The Problem of Bad Debt Is More Credit.
In early-August he was one of those guys who famously drove Jim Cramer to pound the desk while hollering “They know nothing!” Ten days after the August meeting, however, he cut rates at the discount window and a month later the Fed cut its Fed Fund’s target rate beyond the expectations of most investors and economists. It’s widely expected to cut rates again at the end of October.
How did Bernanke go from knowing nothing to faithfully adhering to punch-bowl orthodoxy? Presumably didn’t receive the new faith from watching “Stop Trading” on CNBC. So who got to Bernanke?
New reports reveal that the day after the Fed’s August meeting, he got a call for Robert Rubin. The former Treasury Secretary who is now chairman of the executive committee at supposedly told Bernanke he did the right thing by not cutting rates in August. But we’re not sure what else he said. And we’re frankly quite skeptical about the notion that Rubin just calls the Fed chief to tell him he’s doing a great job.
Rubin has long been a backer of Wall Street bailouts. He engineered the Mexico bailout in the mid-nineties, the Korean bailout of the late nineties and was widely believed to have had a hand in the bailout of Brazil in 2002. (He’s also said to have made some calls on behalf of Enron suggesting to that maybe Moody’s shouldn’t downgrade the company.) Of course, in each of these bailouts, much of the money that was at risk in the debt and currency crises was owed to Wall Street.
So what else did Rubin tell Bernanke? Citigroup won’t comment on the conversation. So, you know, maybe he really did just call to say “Good job, buddy. Keep it up.”
Besides, there’s probably no need to pin it all on Bailout Bob. Bernanke’s schedule lists 35 Fed conference calls from Aug. 9 to Aug. 31, including at least two during the central bank’s summer retreat at Jackson Hole, Wyoming, according to a report based on information obtained under the Freedom of Information Act by Kenneth H. Thomas, a lecturer at the University of Pennsylvania’s Wharton School in Philadelphia, and first reported on by Bloomberg. And we all know that there are plenty of guys like Robert Rubin hanging around, people who can do things like get on calls with Ben Bernanke, and who seldom sway from the punch-bowl faith.
Bernanke Spoke With Rubin as Credit Crisis Worsened [Bloomberg]
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Bob Is My Co-Pilot?
Robert Rubin Called Fed Chief The Day After The Fed Refused To Cut Rates In August
By John Carney 
What was going on? This morning Ben Widdicombe of the Daily News explains how all this came to be.
“It turns out Volcker (who led the Fed for eight years under Presidents Jimmy Carter and Ronald Reagan) is the uncle of the lady in question, performance artist Lisa Paul Streitfeld,” Widdicombe writes.
Ugh. Performance art. It’s like pornography but even more boring. Usually involves women you don’t necessarily want to see naked who insist on getting that way and then smearing stuff on their bodies. Surely this isn’t what Volcker’s niece was doing.
Except that it was. And is. Streitfeld is currently performing one of five chapters in her performed “novel” The Alchemy of Love. You can watch video versions of four of the chapters on the novel’s blog. Of course it has a blog. Or you can stroll by The Lab, an art gallery in the Roger Smith hotel and see the thing live. It runs through September 29th.
If you run into Volcker, remember to ask him what he think the prospects for inflation are now that the Fed is back in rate cutting mode.
His interest is purely avuncular [Daily News, third item]
Alchemy of Love blog [Blogspot, of course]
You can’t fight the tape. Lehman comes out ahead of expectations and has a killer conference call. Bernanke & Co stomp down interest rates. Equities markets shoot for the moon.
Wall Street’s economists have had mixed and contradictory reactions to unexpectedly deep cut. Some think the 50 basis point cut is the full-monty. Others think there is more to come.
“The FOMC makes it sound like ‘one and done’ as it cuts both the Fed funds and discount rate by 50 basis points but continues to note inflation risks,” Drew Matus of Lehman Brothers is quoted as saying in the Wall Street Journal’s
Real Time Economics blog. “As of this writing, we no longer look for the Fed to cut rates in October but that position, like the Fed’s, remains data dependent.”
“I don’t think this was a one-and-done as some are interpreting it to be,” Jane L. Caron, chief economic strategist at Dwight Asset Management, tells the Journal’s Market Beat blog. “The fact that it was a fully supported move by all FOMC members suggests to me the board is indeed seriously concerned about downside risk in the economy.”
Merrill Lynch’s David Rosenberg says its impossible to tell. “The Fed kept its cards much closer to its vest than anyone would have guessed,” Mr. Rosenberg tell the New York Times. “It’s not at all clear they think they have more to do.”
For what it’s worth, both the Journal and the Times seem to have interpreted the accompanying statement as signaling that more cuts may well be on the way.
Around the blogosphere, the reactions to the unpredicted Fed cut were relatively predictable.
“The Fed now has a third problem to deal with: They have become Wall Street’s bitch. They may find that’s a difficult condition to wriggle out from ,” Barry Ritholz said at the Big Picture.
“Like a drug addict who stumbles upon a cache of powerful drugs, the market finally got its fix as Bernanke & Co. decided that the way to solve our economic problems is by lowering interest rates more than expected,” the Kirk Report moaned.
“Once in a while you get it right. One time in a row,” wrote Larry Kudlow, who has not been a big fan of Bernanke through the credit crunch. Apparently, this cut wasn’t enough to win him over.
Market Beat led off with a one word lede: “Kaboom.”
And longtime trader-blogger Random Roger just admitted he was caught off guard by the move. “Maybe I shouldn’t be, but I am shocked that the Fed went fifty on the Fed Funds rate,” he wrote.
The monetary central planners delivered an upside surprise of their own today, cutting both the federal-funds rate and the discount rate by 50 basis points. Stocks immediately surged when the numbers were released. The Fed had widely been expected to cut its main short-term interest-rate target by a quarter of a percentage point.
The vote was unanimous, and the statement is pure bull-feed. The words about market turmoil posing a threat to economic growth clearly indicate a Fed willing to respond to trouble on Wall Street even before there is clear evidence of a broader impact on the economy. The FMOC also signaled that further rate cuts could be coming. We can’t help but be reminded of those words from earlier in the decade. Shock and awe. Pre-emptive doctrine. Let’s Roll!
Some had said that the Fed might have to cut the target rate by at least 50 basis points, however, to have a real effect on the economy. For the past few weeks, the effective Fed Funds rate—the rate at which banks lend to each other overnight—has been well below the official target rate, prompting some to say there had already been a “stealth cut” in the rate. The argument was that if the Fed still viewed interest rates as posing a threat to the health of the broader economy, it would have to cut by more than 25 basis points.
Although the bulls charged into the market at the news, not everyone is happy about the decision. As the Wall Street Journal reported, many believe that the rate-cut is a bailout for speculators and Wall Street that poses a “moral hazard” problem. The words “Bernanke Put” are already on the lips of some.
“50 BPS=Fifty Bailout Points,” one bearish investor to us just after the cut was announced. “That sound you hear? That’s the sound of Ben flying over head in his helicopter.”
Ironically, the cut comes just a day after the Guardian quoted Alan Greenspan, who is perhaps most famous for holding down interest rates to historically low levels during his tenure as Fed Chairman, as saying the that “inflationary pressures are going to start to build.” (Hat tip Barry Ritholtz’s Big Picture.)
FOMC statement after the jump.
We’re ten minutes or so from the announcement of the Fed’s interest rate targets. Yesterday a majority of DealBreaker’s readers responded by saying that they predicted a 25 basis point rate cut. The next favorite position was no cut at all.
Rather than blather in the minutes before the announcement, we’re deciding to listen. Let’s make this an open comments thread for thoughts on the Fed, the markets and the economy.
It’s a strange Monday morning. Much of Wall Street is preparing itself for the news that will hit the tape later this week. The biggest news, of course, is the decision tomorrow by the Federal Open Markets Committee on interest rates. But we’ll also have earnings news from Lehman tomorrow, followed by a host of other Wall Street players.
There’s certainly a lot of mental energy being expended to guess what happens with interest rates tomorrow. There’s a clear consensus that the Fed will cut the target rate but no consensus about how far the cuts will go. The market for fed funds options implies a pretty even division of opinion. A recent survey of economists, however, found that 77% or respondents expect a 25 basis point cut, 18% expect a 50bp cut, and 5% expect no cut at all.
Mark Shivers, who writes “The Talking Fed” blog, has run through each of the members of the FOMC and tried to estimate their favored policy. His count reveals four voting members favoring a 50 point cut, two voting members favoring a 25 point cut and four whose views are murky because they haven’t spoken out recently. Interestingly, the non-voting regional Fed presidents seem most opposed to the deeper cuts, according to Shivers analysis. He counts five out of seven on the side of a 25 point cut, with the other two unknown.
A similar, if less conventional, survey has been undertaken by blogger “Johnny Debacle” on Long or Short Capital. He asks the pagan gods Neptune and Poseidon, as well as Sauron and a dragon, what they think will happen with interest rates. Sauron favors one cut to rule them all, while the dragon responds by breathing fire at the interviewer.
So what do you think? After the jump, vote your expectation in our Reader Poll.
Counting FOMC Votes [The Talking Fed]
Who wants a drink from the Interest Rate Hose? [Long Or Short Capital]
Earlier this week we pointed out that the so-called “stealth rate cut” was both damaging the Fed’s credibility and probably indicated that the Fed would have to cut by more than a quarter of a point if it intends to have a real impact on the markets and the economy. That idea seems to be catching on.
For about a month, netting out some very short term fluctuations higher, the effective federal funds rate has been well below the Fed’s target of 5.25%. Now from the Wall Street Journal’s blogs we learn that Tom Gallagher, of the ISI Group, has issued a note to clients saying that a quarter point cut would not achieve any monetary easing.
“All it would be doing is ratify the easing that had taken place for technical reasons… It does seem that if the Fed really does want to ease financial conditions, a quarter point cut in the target rate wouldn’t do it,” the Journal’s Real Time Economics quotes him as saying.
And on Market Beat, we learn that the credibility damage theory first explained to us by an anonymous credit industry veteran has been repeated by economist Robert Brusca. If the Fed is targeting one interest rate while achieving another, either they’re ineffective, incompetent or liars.
But since you’ve been reading DealBreaker all week, you already knew this. It’s just nice to see that other people are starting to notice this stuff.
Stealth Rate Cut? [MarketBeat]
Implications of Fed Funds Undershooting Target [Real Time Economics]
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