RealMoney Silver - Bernanke's Tarnished Legacy

Bernanke's Tarnished Legacy
By Jay Somaney
RealMoney.com Contributor
1/23/2008 9:45 AM EST

In my opinion, Ben Bernanke has lost all credibility abroad with his panic-stricken 75 bips cut Tuesday. Before you flood me with hate mail, hear me out.

Last week, Big Ben (I have some much-less-flattering names I use for him on my blog/site, but that is a different story altogether) said inflation was still a concern and that risks were mostly equally weighted between inflation and an economic slowdown.

Did we get any data point between Tuesday and last week that indicated things had changed? No, we did not. What happened was that while we were celebrating the MLK holiday, Asian markets totally fell apart (Asian markets were down anywhere from 10%-18%) in the two trading days before trading began here stateside Tuesday morning.

Faced with a 500-point drop in the Dow to begin our trading week, which would have most likely worsened as the day went on given what was happening in Europe and what had already happened in Asia overnight, our "brilliant" Fed Head blinked rapidly like Mr. Magoo and announced his magnificent 75-basis-point cut. The futures initially cheered, but the Dow still opened down over 400 points.

I would have paid good money to have been in the same room with Big Ben at the open. His expression must have been priceless. I can just imagine him looking at his minions and saying, "Uh oh, we waited too long." However, the trading gods were good to him, and we managed to close well off the lows, albeit still in negative territory.

I spoke to some of my contacts in Asia and they are absolutely livid. You have markets, like Shanghai, that in two trading days (Monday and Tuesday) were down almost 13%, the Hang Seng was down 13% or so, the Sensex was off almost 14%, and the Nikkei saw a two-day drop of 8% and change. You get my point.

Our markets escaped with losses of 1.06%, 2.04% and 1.11% for the Dow, Naz and S&P, respectively. That would be fine in and of itself were it not for the fact that the subprime mess was created within our borders and peddled across the world by our financial institutions, and more importantly, fed (forgive the pun) by Easy Al keeping his foot off the brakes too long and then raising rates 17 consecutive times. This was followed by Big Ben having trouble finding either the brake or the pedal (staying pat) for too long as well. Two consecutive stumbling and bumbling idiots, indeed.

The right thing would have been for Big Ben to have cut rates more than a week ago (a month, in my humble opinion), thereby avoiding this nasty situation in Asia altogether, as well as coming across as a panderer to the U.S. markets which he has eventually turned out to be. That may not be the view here in the U.S., but it is definitely the case outside our borders, where he is beginning to be widely viewed as a weak and completely ineffective and indecisive central banker, albeit, of the world's largest economy.

Rate cuts are no instant cure, which is a well-known fact and often touted by the Fed themselves. This cut was only to relieve the psychological pressure being felt by the markets. The markets threw a hissy fit Tuesday morning and Mr. Magoo II caved in. Long forgotten (mostly by himself) were his now terribly embarrassing words from last week that the Fed is not there to bail out the excesses in the market.

I am not saying these cuts were not needed. They were needed a long time ago, actually. What I am saying, though, is Bernanke's legacy will now forever be "Panderer to the U.S. Markets," which is a shame for a guy that had a certain level of promise when he first started on the job.

Until the next time, happy investing.