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Bait & Switch Ben: Was the Bernanke Put Just a Ruse?


The Greenspan put - the idea that Fed Chairman Alan Greenspan would bail out any financial crisis by opening the Fed's floodgates of cheap money - was based in solid fact:

In 1987, after the Black Monday crash, Greenspan quickly lowered interest rates and assured financial markets that the Fed would stand by as the lender of last resort. The result was that the stock market recovered its massive losses and hit record highs within a few years. In 1994, when Orange County became the nation's largest municipal bankruptcy, Greenspan lowered rates again, resulting in the rip-roaring bull market from 1995 - 2000. In 1998, when the hedge-fund Long Term Capital Management (LCTM) nearly collapsed, Greenspan acted quickly, slashing rates three times in succession, in spite of a booming economy. The result was the dot.com bubble. When that went bust, Greenspan lowered the Fed Funds rate from 6.5% to 1%. The result was the housing boom and subsequent LBO and hedge-fund explosion that is just now bursting.

But now that the market thinks it's time for another dramatic rate cut, there's a new guy sitting in the Chairman's seat. Everyone assumed that the Greenspan put had been seamlessly been rolled over into the new Bernanke put. After all, Bernanke was the one talking about printing presses and helicopter drops of money before his appointment. That kind of talk made him sound like just the right man for the job - Helicopter Ben, they called him. After a little initial trepidation, all markets - not just the stock market - cheered his appointment. Stocks went up, bonds went up, gold went up, housing went up, and hedge funds sprouted like mushrooms. Everyone liked the easy money policies of the new Fed, same as the old.

But now it looks like we've got a genuine crisis on our hands. All eyes turn to the Fed. We all know what Greenspan would have done - he had a solid track record. But is Bernanke going to pull the trigger on a rate cut, or pull instead a bait and switch?

The stock market is on the verge of collapse due to a staggering liquidity crisis. Word is that lots of hedge funds are going to go under as a result. Bernanke remains oblivious and unperturbed, choosing instead to focus on the specter of inflation (More on this next time - sign up here for updates). How bad is it on the street? Just ask Jim Cramer, who is nearly brought to tears in this rant in which he pleads for the Fed to open the discount window.

Cramer:
This is about Bernanke...Bernanke needs to open the discount window - that's how bad things are out there...Alan Greenspan told everyone to take a teaser rate and then raised the rate 17 times! And Bernanke is being an academic. This is no time to be an academic! It is time to get on the Bear Stearns conference call...LISTEN...open the darn Fed window. He has NO IDEA HOW BAD IT IS OUT THERE. NO IDEA! HE HAS NO IDEA!

I have talked to the heads of almost every single one of these firms in the last 72 hours, and he has no idea what it's like out there. NONE! And Bill Poole has no idea what it's like out there. My people have been in this game for 25 years, and they are losing their jobs these firms are going to go out of business and he's nuts! They're NUTS! They know nothing! This is a different kind of market and the Fed is asleep!


Cramer is livid: This is about Bernanke - Bernanke is being an academic!

Interpretation: Greenspan was a good old boy who knew how to take care of his friends. The last time we faced a situation similar to this one - the LTCM crisis in 1998 - Greenspan bailed out his buddies and made sure they didn't lose their shirts - or their lavish lifestyles. The MSM would have you believe that Greenspan dramatically took action to save the global economic system from the brink of collapse.

No, he just wanted to help his friends out of a jam. (Thanks to my friend Charles for pointing this out to me.)

Cramer is right - Bernanke has no idea what it is like on the street. His resume reads like that of a professor - Harvard, MIT, Stanford, NYU, NBER. Oh, right - he is a professor. I doubt Ben is friends with many in the hedge fund manager crowd that Cramer runs with. Oh well, their loss.

Later in the interview, Cramer's counterpart says she's talked to a few people at banks and they're not worried. They say that what's going on is just repricing. Cramer replies:
Oh great. Let them be calm [on the phone to you] and then let them call me on the way home like they do every night and tell me 'Cramer, what are you going to do about it? Are you going to help us? Or are you going to stand on the sidelines like everybody else and say that it's fine? Will somebody come on TV and tell the truth about how bad it is?'
That is about as plain as it gets. The multibillionaires are in trouble and they want the Fed to bail them out. But what will the consequences be if they're not bailed out? And what will Ben do?

The irony of this is that Bernanke got his current job in part because he is an expert on the Great Depression. Ostensibly, he was brought in to prevent another one, as the economy still looked like it might drown in a deflationary spiral at the time. He famously admitted that it was the Fed that caused the first depression, but assured us that they wouldn't do it again.

But to paraphrase Jesse Livermore: The Mistake family is large. Even if you never meet the same Mistake, you're liable to meet one of his brothers, uncles or cousins.

Ben is in a bind - one that I certainly don't envy him for. He won't want to jeopardize his budding reputation as an inflation hawk by lowering rates. On the other hand, he doesn't want to cause a credit collapse, either. A severe collapse might herald the long awaited global cascading chain of cross defaults, followed by pervasive deflation, and the start of the second great depression. The irony would not be lost that the expert on the first great depression inadvertently wound up causing the second.

How bad is it really, and what will Ben do? Stay tuned for updates.

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