This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Ben Bernanke: The Gradualist Fed Chairman

Ben Bernanke has been chairman of the President's Council of Economic Advisers since June 21, 2005, and this may have been, in effect, his job interview for the Federal Reserve chair. Prior to his CEA appointment, he served as a member of the Federal Reserve Board of Governors between Aug. 2, 2002, and June 21, 2005, and may have been the architect of Fed policy during this tenure.

Bernanke believes in a monetary policy that is pre-emptive against a possible deflationary cycle, as "prevention of deflation is preferable to cure." Bernanke believes in gradual steps to raise and lower the federal funds rate. Most economists say that Bernanke will conduct monetary policy through inflation targeting. These are the issues that today's questions from the Senate Banking Committee should focus on.

While most Wall Street economists view Bernanke's Federal Reserve policy background positively, I have my reservations.

On Preventing Deflation

While Bernanke was a Federal Reserve Board member, he gave a speech on Nov. 21, 2002 titled, "Deflation: Making Sure 'It' Doesn't Happen Here." This timeline is significant, as the FOMC became concerned about deflation shortly after this speech and pushed the federal funds rate down to 1% in June 2003 to thwart that threat. What concerns me is that Bernanke's ideas had the Federal Reserve manipulating market yields, not the market forces of capitalism.
  • To prevent deflation, Bernanke would have the Fed announce explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). This would be reinforced by unlimited open market purchases of the targeted securities at prices equivalent to the targeted yields. Capitalism is based upon market supply and demand forces, and controlling this is manipulating a basic market principle. What happens when the Fed decides to exit this strategy -- who will be left holding the bag?
  • A second policy option Bernanke cited to prevent deflation would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets as eligible private sector debt (including, among others, corporate bonds, commercial paper, bank loans, and mortgages). The problem with this is what happens to the companies that don't make the list? The Fed would thus become the rating agency. This is another red flag, raising the major question of how the Fed would exit this strategy.

In my judgment, the policy that pushed the federal funds rate to 1% in June 2003 was influenced by this speech by Bernanke. A story from the Associated Press this morning agrees with this: "Heeding the warning, the Fed ended up pushing interest rates even lower."

When the Federal Reserve pushed the funds down to 1%, they pumped up the bubbles in crude oil, commodities, and real estate. The FOMC hence franchised commodity and real estate speculation.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,804.71 -238.19 -1.40%
S&P 500 1,946.16 -26.13 -1.32%
NASDAQ 4,422.0850 -71.3050 -1.59%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs