Liz Rappaport
Also, credit crunches and market weakness do not have to lead to dire economic weakness, and that doesn't have to require the Fed to unleash liquidity into the system, the economists say.
Bianco recalls that the Fed hiked rates from 2.75% to 3% in the spring of 2005, when high-yield bond spreads widened dramatically and stressed the credit system after General Motors'(GM Quote - Cramer on GM - Stock Picks) debt rating was cut to junk status. Lonski recalls that after the WorldCom bankruptcy in 2002, investors lost total confidence in financial statements, and credit spreads widened to 1,000 basis points over Treasuries, even as profits improved and the default rate declined. He also notes that in 1998 through 1999, defaults did rise from a low of 2.2% to 6% by the end of 1999, all while quarterly GDP growth averaged over 4%. As for the idea of a "Greenspan put" -- the notion the Fed will come to the rescue of financial markets -- it's important to note that Greenspan is no longer the Fed chairman. It's ironic, says Bianco, that market players nicknamed Bernanke "helicopter Ben" when he became chairman in February 2006, based on the idea he would be quick to drop liquidity into the system. "He's nowhere near a helicopter." Neither are his deputies. Two bankers nominated to serve on the Fed's Board of Governors underwent confirmation hearings in Washington on Wednesday, and both Fed Governor Randall Kroszner and Elizabeth Duke reiterated the Fed's role in staving off inflation and maintaining maximum employment. There were comments about subprime problems getting worse, but no indication that the Fed should cut rates or rescue the credit markets. "Not that the Fed won't react, but it has to get a lot worse," says Bianco, suggesting the Dow would have to drop thousands of points, not just hundreds. "If there is a 'Bernanke put', the strike price is a lot higher than with Greenspan," he says.
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