Home > Uncategorized > 2013/09/22: COMMENTARY: Is Bernanke’s Flub Yellen’s Drub?

2013/09/22: COMMENTARY: Is Bernanke’s Flub Yellen’s Drub?

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COMMENTARY: Sunday, September 22, 2013, 16:30 CDT

[The Weekly Calendar is also already available via the link in the right-hand column.]

While many folks thought it just fine that the Mr. Bernanke’s FOMC left the much anticipated QE ’taper’ for another day last Wednesday, that delay does raise certain issues. And while we have many more to be covered shortly in another post, one of the most critical in our mind is the degree to which this will be a burden on Mr. Bernanke’s successor. And that’s not some esoteric consideration for a far future date: the man is stepping down in January after all.

YELLENspeaking-130921And one of the key aspects we noted in our assessment of what transpired Wednesday was clear even from the title of our Thursday post “Taper to come under Yellen, so Mr. B. spikes the punchbowl.” There’s probably something to be said for passing along the potential pain of a risky action to your successor.  But just as it was with the lack of any rate increase at the end of Greenspan era (when one was so obviously in order), this is turning this into regular (if very broadly spaced) style at the Fed.

Maybe it is just a matter of leaving their successor some latitude to demonstrate their mettle


…but given the potential for diminished Quantitative Easing to unsettle markets, in this instance it doesn’t seem fair, or even generally enlightened. As we noted at the end of that previous post, “Mr. Bernanke seems terrified by the prospect of seeing what happens when his baby is put to bed. Sad, because he should at least be giving the next Fed Chairman the opportunity to see what happens across a reasonably lengthy time so they can assess how they will need to manage it after he is gone.”

And that doesn’t even take into consideration the political backlash against a Fed that increasingly seems to want to act as a sole support for a politico-economically dysfunctional US economy. The QE3 joke was that it was becoming QE-Infinity. Suddenly doesn’t seem so funny.

And while the lack of effectiveness is clear, we will be tackling those issues in that future post. For now this is just going to make the Next Fed Chairman’s (likely Janet Yellen) passage through the nomination process that much more contentious.

And we aren’t the only ones who think so. After we expressed our concerns on Thursday, what should turn up in Friday’s Financial Times but an extensive article Fed’s decision raises heat on Yellen.” One of the most telling comments came from one of the most respected real businessmen in the US Congress. Republican senator Bob Corker (Tennessee) said, “I hope the decision to continue purchasing assets at the same pace doesn’t mean the Fed has gotten itself into a trade it can’t get out of, which over time will create a whole new set of problems.” It’s very simple. Conservatives see this unlimited accommodation as fostering bubbles and (even if that is not apparent in the current economic situation) potentially stoking inflation.  

The QE tapering timing is now totally up in the air. Trick or Treat right in front of Halloween at the end of October? When the President’s announcement of his nominee for the post is in the air? Right into the holiday season on December 18th? Nope, those won’t be optimal either. They might have been good windows to adjust that QE tapering which had been instituted last Wednesday, but as a starting point they are even more fraught.

And as many see Ms. Yellen as at least as dovish as Chairman Bernanke, there will most likely be difficult questions for her from conservative members of the Senate banking committee at any confirmation hearing. The problem is that her answers will all be hypothetical now in the wake of no tapering likely being instituted prior to those hearings.

There is also an admitted component of the Wednesday decision that the Fed was hesitant to taper into what might be the next US government funding crisis at the end of this month. Yet, as we noted on Thursday, “If the US political class not getting its act together is a reason to continue extreme accommodation, it will be here unto infinity.”

From here it appears the two primary influences were in the first instance the degree to which Mr. Bernanke is still carrying out the Democratic Party missive from last summer (delivered by Senator Schumer), “Get to work Mr. Chairman.” That raises the question we’ve been asking for a while on when the Fed takes the training wheels of the economic bike, and tells Congress they need to learn to ride it again without extreme accommodation that acts as cover for political failure.

The second, and maybe even more telling, issue is what in the world presumptive nominee Yellen will actually be able to say at those hearings? If there’s been no tapering, the impact will still be purely hypothetical. And here’s the final insult to injury from Mr. Bernanke: After he leaves his post, both protocol and plain old etiquette dictate that he can’t say anything for a good long time about the actions or performance of his successor.

Interesting, isn’t it, that the architect of what has become (according to Warren Buffet and many others) the “world’s largest hedge fund” will not be able to say what he thinks about how his baby is being managed. Is this a quirk of circumstance, or at least tacitly by design? It all tends to reinforce our suspicion (noted on Thursday) that the current Fed Chairman “is just another academic who is frozen in fear at the throttle of a program he is terrified to unwind.”

No matter how well intended and effective QE might have been back in a crisis in early 2009, the serial expansions have led the Fed to a place nobody is sure how to exit. And that will weigh heavily on the next Chairman, both as nominee and once they assume the job.

Thanks for your interest.

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