The Ben Bernanke Effect and Market Subjectivity

The Ben Bernanke Effect and Market Subjectivity



It is very likely that 70% of Americans could not identify Ben Bernanke in a line-up or identify his role in American government. However, for the traders and analysts mulling around Midtown and the Financial District, every word that leaves Bernanke’s mouth is as precious as the stocks and commodities being traded.

Bernanke, a native of South Carolina and graduate of Harvard and MIT respectively, has served as Chairman of the Federal Reserve Bank since February 2006. For Bernanke and the rest of America, this summer has served as the definition of economic uncertainty.

However, unlike most Americans, Ben is one of the few who can quell the uncertainty. Hence, “the Bernanke Effect”: When he speaks, the market receives stability. When he is quiet (creating state of uncertainty), it oscillates up and down. And when he beats around the bush (perpetuating uncertainty), it only goes down.

The Ben Bernanke Effect and Market Subjectivity

This week, while each market player is waiting for “the other guy” to pull out their wallet and make long-term investments (especially employment), market analysts and finance journalists were glued to their television screens as Bernanke delivered an address this past Thursday (Sept. 8th) at the Minnesota Economic Club.

In the speech, a lot was said. However, that which is most important can be summed up in one line delivered by the chairman: without significant policy changes to address the increasing fiscal burdens that will be associated with the aging of the population and the ongoing rise in health-care costs, the finances of the federal government will spiral out of control in coming decades, risking severe economic and financial damage.”

It is just this sort of “significant change in policy” that has been missing from not only the rhetoric in Washington DC, but in that of Ben Bernanke himself and the rest of the Federal Reserve.

In this speech he delivered in Minnesota, Bernanke did an excellent job of identifying core market hurdles to economic recovery, such as “the weakness of the housing sector and continued financial volatility.” However, Bernanke only “re-hinted” that the feds would keep “the low levels for the federal funds rate at least through mid-2013,” would continue to “provide additional monetary stimulus,” and would provide “specific forward guidance about its expectations for the future path of the federal funds rate.”

The Ben Bernanke Effect and Market Subjectivity

In effect, Bernanke and the Fed will be doing just more of the same and nothing new. Hence market conditions will be the same provided a continued congressional legislative stalemate. All of this leaves investors in the same place of relative uncertainty that they were in before the speech.

They’re only certain that Bernanke is going to do nothing new.

Given the premise of the Bernanke effect, his beating around the Bush in Minnesota only made the market dip. As cited by Margot Habiby of Bloomberg News, oil dropped two percent the day after Bernanke’s speech, which “didn’t give any further insight into stimulus measures.” Joanne Frearson of Reuters echoed this sentiment: “Investor concerns grew after a speech by Federal Reserve Chairman Ben Bernanke on Thursday failed to give any hints about the Fed taking any new monetary stimulus measures.”

Thus we continue to be assured of only one thing in this time of uncertainty: the Bernanke Effect. Although a bit over-simplistic, it serves to highlight the dangerous subjectivity of America’s objectively ominous economic challenges.

Hence, despite the verdict: any word from Bernanke is a good word.


Read Bernanke’s address at the Minnesota Economic Club.

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