Korelin Business Report interviews GATA''s Murphy and Silver Investor''s Morgan

A Greenspan put -- for now?

By John Brimelow
CBS.MarketWatch.com
Monday, March 8, 2004

a href=http://cbs.marketwatch.com/news/story.asp?guid=%7B56871710%2DB442%http:/...
2D47AC%2D800D%2DC3D8B39F620A%7Damp;siteid=mktw

NEW YORK -- More shock and awe from Ben Bernanke?

Careful study of this rising Federal Reserve governor's March 2
speech suggests there might really be a quot;Greenspan putquot;
underpinning the stock market -- great short-term, but
ominous long-term.

Bernanke emerged from an obscure existence amongst the
footnotes of arcane economic history texts only in August
2002, when first appointed to the Federal Reserve Board.

That November he began his shock and awe campaign by
asserting that, rather than accept deflation, quot;the U.S.
government has a technology, called a printing press (or,
today, its electronic equivalent)quot; that would be used to
generate rising prices.

This inflationist speech arguably triggered the gold's
subsequent breakout. But Bernanke was never qualified
or even questioned by the Fed.

Subsequent, equally decisive speeches have made
Bernanke the most significant Fed leader after Alan
Greenspan -- more significant, indeed, for those who
prefer intelligibility. Any future president may have
difficulty not appointing Bernanke Greenspan's
successor.

Bernanke's adult life has been spent soaking in the
history of the Great Depression. That event, it is now
generally agreed, was essentially the fault of the
Federal Reserve and other central banks.

That Bernanke's expertise in central bank mishandling
of new policies was apparently his main qualification to
become a governor might suggest that the Fed now
regards itself as once again an innovator.

This latest speech is titled quot;Money, Gold, and the Great
Depression.quot; On its face it is a characteristically taut
and elegant discussion of the 1930s. At a deeper level,
it is a commentary on the aspirations of the modern Fed.

The speech displays:

-- Extreme solicitude for the banking system. Bernanken
ridicules the quot;liquidationistquot; viewpoint that closure of
weak banks was healthy, and emphasizes the damage done
by the credit contraction caused by bank failures.
Problem: the opposite policy, arguably in effect now,
leads to quot;moral hazardquot; -- promiscuous risk-taking --
and privileges the management of financial intermediaries.

-- Suspicious sensitivity to stock market levels. Bernanke
criticizes the Fed (probably correctly) for pricking the
stock market bubble of 1929. But he then argues that the
subsequent market crash itself did real economic damage.
This type of thinking is what causes observers to believe
that the Fed will try to prevent any serious market decline
-- the rumored quot;Greenspan put.quot;

-- Excessive collegiality with other countries' financial
elites.

Bernanke has a fine understanding of international economic
relationships. Thus, unusually, he notes that in the 1920s
France, by undervaluing the franc and hogging gold, may
have materially contributed to world deflation. Nowadays
the Fed tolerates the undervaluationist echelon of Asian
states currently led by China, which recycle their reserves
by buying U.S. government paper. Which may be great from
the perspective of the Fed, Wall Street, and Washington.
But it ignores Main Street America, eviscerated by
underpriced completion.

Alarming preoccupation with the Fed's institutional power.
Bernanke amp; Co. always blame the gold standard for the
1930s disaster. Gold standard defenders would see this
as blaming bullet wounds on the gun. The concept was
mishandled in important ways in the '20s, in part because
of the aftermath of World War I. Bernanke acknowledges
all this -- but still prefers to disparage the gold
standard, thereby giving central bankers more freedom.

Bernanke's speech suggests Fed ambition on a scale
not seen since the era of 1960s-style fine-tuning.

It's currently good for importers, Wall Street, and other
financial intermediaries, and the Chinese.

But it means a mounting risk of an anti-business reaction
from its Middle American victims, 1970s-style exchange
rate turmoil -- and a return to the P/Es of that miserable
time.

* * *

John Brimelow is a stockbroker and a brother of Peter
Brimelow, who is a CBS MarketWatch columnist. He can
be reached through www.johnbrimelow.com.

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