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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.
By :
Michael A. Nystrom
Bull not Bull
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