In his latest weekly letter, John Hussman offers up this real crowd-please of a line regarding Ben Bernanke:
Why does the Fed want this? Simple. Chairman Bernanke believes that by creating a bubble in speculative assets, people will “feel” wealthier and keep consuming – regardless of the fact that real incomes are stagnant and debt burdens are already intolerable, and despite the fact that there is extremely weak evidence for any such “wealth effect” in the historical record. Undoubtedly, it would be difficult for Bernanke to refrain from these reckless policies when everyone is crying “do something!” But the willingness to tolerate short-term criticism in the interest of long-term benefit is part of what separates leadership from cowardice.
A couple things here.
First a very minor thing: Hussman is talking his book, as Hussman has been betting against this whole rally. So Hussman has his own reasons to chide Bernanke for being a coward.
The bigger thing is that Hussman gets the “coward” move totally wrong.
Based on Bernanke’s own writing (from before he was Fed chairman), he probably knows that the proper thing to do is ease A LOT more than he is doing now. Almost every economist seems to think that if Bernanke were still an academic he’d be urging way more pumping than what’s currently going on.
But now that he’s the Fed chair, politics and “credibility” come into play, and so Bernanke is probably being more reserved than he otherwise would be.
As Paul McCulley has been arguing, the Fed desperately needs to start acting reckless, in a way that’s traditionally not been what central banks do. But for Bernanke to really start getting reckless, he’d risk the wrath of politicians and market participants calling him a bubble-addicted fool. He might also risk the future independence of the entire Fed.
But the willingness to take this kind of criticism is exactly what “leadership” would be right now. As economists like Karl Smith have argued, the biggest risk to the economy is that the Fed gets too jumpy about criticism, and tightens prematurely.
In fact, Hussman is probably wrong about everyone crying “do something.” The vast majority fo the stuff we read from Wall Street (including a lot of buy-side investor stuff) is that Bernanke is distorting the market and blowing bubbles. It’s the academics, who don’t seem as motivated by market swings, urging him to “do something.”
If there is a cowardice move, it’s being too conservative, and simply going with the popular idea that easing is bad.
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