Interesting: IBD's take on Ben & Co.

Discussion in 'Psychology' started by paysense, Mar 18, 2008.

  1. J.P. Bernanke & Co.

    Posted 3/17/2008
    Economy: In markets, psychology is everything. Once spooked, investors can turn a market rout into a stampede, which can become a full-on panic. That's why the Fed's actions over the past two weeks are so important.
    Read More: Economy
    The past few months haven't been easy for the markets or the economy. Home sales and prices have tanked, stocks have plunged, the dollar has plummeted, gold has soared and oil has hit triple digits.
    Today, two years into his stewardship of the Fed, Ben Bernanke is spending his time cleaning up the messes of the previous occupant. It's a tough job, because the mortgage lending industry at the heart of the problem is regulated mostly by the states, not the Fed.
    Even so, Bernanke is doing all he can to end the current financial debacle and restore confidence.
    With its moves over the weekend, the Fed signaled again that it won't stand on convention in doing what's needed to halt the cascading losses from subprime mortgages.
    In one bold swoop, Bernanke broke 70 years of Fed tradition, extending Fed guarantees not just to commercial banks but to Wall Street investment houses. Bernanke has acted to restore capital and confidence to investment banks and engineered the buyout of troubled Bear Stearns by JPMorgan Chase & Co. at $2 a share.
    He also cut the discount rate a quarter-point to 3.25%, giving banks access to cheap emergency credit to bolster their reserves.
    "These steps will provide financial institutions with greater assurance of access to funds," Bernanke said Sunday night. For "assurance," we again read "confidence."
    This is important, both for reviving what Keynes called the "animal spirits" of the domestic economy and for reassuring foreign investors the U.S. is still a safe place to be.
    What some fear is a flight of foreigners from U.S. debt. Today, non-U.S. investors hold some 25% of our $9.2 trillion in public debt obligations. If they stop buying them, or decide they no longer want to hold them, U.S. interest rates will surge.
    So far, Bernanke has acted quickly and wisely in addressing the problems without printing money. President Bush has helped by talking up the dollar.
    Yet it's important to remember we've been this way before, many times. Indeed, by our count, we've had at least 16 episodes, major and minor, that would qualify as "crises" or "panics" since 1970.
    This time around, our troubles are in many respects reminiscent of the Banking Panic of 1907 — the event that helped create the Fed. A loss of confidence then led to runs on trusts and banks, causing the stock market to plunge. The panic fed on itself and, just as today, began hurting foreign markets.
    At the time, there was no Fed. So the government turned to financier J.P. Morgan, who organized new loans and cash infusions for troubled banks and began buying up shares on the open market. The panic quickly turned to calm.
    Today, the Bernanke Fed is playing Morgan's role. Maybe it's fitting that a century after the 1907 panic, Morgan's namesake firm is buying out Bear Stearns at $2 a share. We applaud Bernanke & Co. for taking swift action to calm the market. Somewhere, J.P. Morgan must be smiling.