I was listening to MPR on the way into work this morning and was able to listen to the weekly Monday morning economics chat, which discusses the upcoming weeks actions in the markets. The conversation this morning revolved around the upcoming Fed meeting, and how it was expected that the Fed would acknowledge that there is a growing problem in the credit markets (thanks to the subprime mortgage fiasco), but that it would take no action and leave interest rates unchanged.
MPR’s economics editor stated that this was a major change in policy compared to the Alan Greenspan era, and that it signaled the end of the ‘Greenspan Put,’ were the Fed would take immediate action when the markets or major players were in trouble. The new Fed chairman, Ben Bernanke, appears to be taking a different tack and is allowing financial companies that get themselves into trouble to take the pain and either get through it or close their doors. Bear Stearns, for example, is a huge market player, and they have managed to get themselves into a pickle with a few hedge funds of theirs melting down in the last month or so. In the past, the Fed might have either lowered interest rates or stoked the market with huge infusions of new money, but now, the Fed appears to be saying “too bad, so sad” and letting the market punish companies for overextending themselves and making poor decisions.
Mr. Bernanke appears to be trying to differentiate himself from the Greenspan era, and so far, I think he’s done a serviceable job. If you look at the real numbers (instead of the happy talk in the media), the economy isn’t doing so hot: the dollar is losing ground against foreign currencies, the housing market is still in the doldrums, and while the stock market is hitting all-time highs, it’s an illusion based on most people not understanding how inflation affects market valuations…
The fact that we’re nearing the end of summer and the economy is still functioning normally makes me satisfied with his performance so far. It could have been a lot worse. It’ll be interesting to see how many more companies get voted off the island in coming months, since it appears that the Fed is content to let the market cull the corporate herd a bit more.