Grading BB

In August, 2006, I wrote an article titled, “B is for Bernanke”. This was an arbitrary grade that I awarded the Federal Reserve Chairman for his first six months on the job. With the passing of his second anniversary, I thought it might be worthwhile to revisit his performance.

In retrospect, the article was printed at the cusp of a changing interest rate cycle. The Fed under Ben Bernanke (BB) had just finished the tightening cycle (a total of 17 hikes started under Greenspan) that were intended to control inflation. Rising interest rates were indeed the necessary antidote to the real estate bubble sweeping the country, but like all cycles, the timing is rarely perfect and the outcomes of bubbles are never tidy. With the benefit of hindsight, it appears that the Fed waited too long to drop interest rates and as a result, the US economy is now on the precipice of at least a major slowdown, or even a recession.

If I had written this article at the end of 2007, I would have dropped BB’s grade from a B to a C-minus. From August to early December, I, along with many other investors, started to lose confidence in BB and for good reason. Bernanke’s central bank was slow to understand the broader implications of the housing-induced credit malaise and therefore was slow to respond. Even worse, Fed rhetoric from the various governors was uninspiring, confusing and divergent at times, all of which sowed the seeds of the market’s discontent.

My worries started to diminish when the Fed (in coordination with other central banks) implemented an original and effective way to help ease the global credit crunch. The Term Auction Facility (TAF) was a program in which the Fed auctions term funds to depository institutions—in essence, the TAF allowed the Fed to inject liquidity into the system that had come to come to a grinding halt. BB followed up the introduction of TAF with 125 basis points (1.25%) of fed funds rate cuts in January, which means that the Fed has returned to aggressive easing. Unfortunately, one of the unintended consequences of the Fed’s “surprise” moves is that they contribute to an already-volatile market.

Many believe that BB’s actions came too late. According to a survey conducted by the Wall Street Journal, economists are “faulting him [Bernanke] for what they said was his poor management of Fed communications and being overly attentive to fluctuations in the stock market. The overall grade they gave Mr. Bernanke dropped below 80 for the first time.”

My personal grade for BB is C+, with hopes that it will rise as BB continues to improve his performance on the job. Of course, now that Bernanke is acting in a more traditional manner, that means that the central bankers are likely to overshoot rate cuts, keep rates lower for longer to ensure economic recovery, potentially creating another asset bubble, but that’s a discussion for a future performance review!