Friday, January 31, 2014
Bernanke: The Man Who Saved The World - And Got Almost Crucified For That
I remember the situation then very well. I was writing market comments for a German online service, 2 or 3 a day. And every evening I posted a Wall Street closing comment.
Early 2009 the market was ruled by panic. Almost everybody was extremely pessimistic. Stocks were totally out of favor. Many dumped their stock portfolios blindly out of fear of a coming armageddon. Short selling (borrowing stocks from the bank and selling them immediately in the hope to buy them later back much cheaper) was a viable business model. Herds of hedge funds and other speculators were attacking everybody who seemed vulnerable by short selling stocks & bonds and buying derivates which were bets on a bankruptcy of a company or a country. Thus the stock market was in a downward spiral which paralyzed the whole economy. Companies ceased investing & hiring.
Bernanke stopped the downward spiral. He and the Federal Reserve Bank broke the massive pessimism by pumping billions of dollars into the ailing economy. The massive stimulus programs - quantitative easing Q1,2 & 3 - and the zero interest policy of the Fed were necessary to squeeze the extreme paralyzing fear out of the markets.
Here some tidbits from Bloomberg (bloomberg): November 25, 2008 the Fed launched the first round of quantitative easing, or QE1, and announced to buy up to $500 billion in mortgage-backed securities (MBS) and $100 billion in housing agency debt. December 16, 2008 Bernanke & Co. cut overnight federal funds rate to between zero and 0.25%. March 18, 2009 the Fed announced they will expand QE1 with additional $750 billion in MBS, $100 billion in housing agency debt and $300 billion in Treasury securities. They also vowed for first time to hold short-term rates near zero "for an extended period."
It needed some time, but it worked: In June 2009 the U.S. economic recession ended! The 18-month downturn was the longest and deepest since the Great Depression.
Many criticize Bernanke that Q1,Q2 & Q3 started & fueled a massive rally on the global stock markets. But rising stock prices were necessary to restore confidence into the economy and to break the panic mood. Gaines on the stock market also lifted the wealth of many Americans and encouraged them to spend more for consumer goods (wealth effect). Thus Bernanke initialized a global economic recovery which is now self-sufficient and sustainable.
Bernanke is hated because he ruined the strategy of many hedge funds and other short sellers who tried to earn fortunes from a meltdown of the economy.