Watching the Sunday morning talk shows on the US networks is always an entertaining experience for the politically inclined. No matter what the issue being discussed, both sides are advocated with verbal vigor.
This past weekend, one particular show was asking the panel whether President Obama’s economic policies are responsible for stabilizing the economy and the financial markets. The White House has been expressing its opinion that its stimulus program, jobs bill and various other policies are starting to have an impact.
What is interesting is that in the heat of political debate, there is one person who does not seem to get any credit and that person is Ben Bernanke. As head of the Federal Reserve, he was confronted with a financial crisis that was unprecedented in scope. The policy making playbook needed some instant updating as events were seemingly spinning out of control.
While the level of fiscal policy coordination amongst the major economies was certainly helpful in instilling confidence to help turn the tide, Bernanke led the charge from the monetary policy side of the rescue effort.
Watching the political pundits kick the issue around while missing key facts in their discussion is sometimes frustrating. For example, if we look at the stocks that comprise the S&P 100 Index (an index of the 100 largest members of the S&P 500 stock market index) we can see that the share prices of 29 of these 100 companies bottomed either before the 2008 Presidential election even took place or before Obama even officially took office.
The point is that the markets – as they so often do – are able to discount the future into stock prices well before consensus logic prevails in declaring an end to an economic crisis.
If we look at the S&P/TSX 60 Index (which is comprised of the 60 largest companies in Canada that account for the vast majority of Canadian stock market capitalization), we see that 33 of these 60 companies touched their low points before Obama was even sworn in as President.
The objective of pointing out these observations is not to advocate one political viewpoint or another. Rather, it is to inject another perspective that is hopefully devoid of political bias and is able to add some objectivity to the debate.
Another factor we can look at is the TED Spread. The TED spread is defined as the difference between the interest rates on interbank loans and short-term US government debt. In a normally functioning market environment, banks lend funds to each other for short periods of time. But when Lehman Brothers collapsed, fear was prevalent and interbank lending ground to a halt.
As a result, the TED spread rose quickly. Taking the lead, Bernanke launched unprecedented policy measures in coordination with other major central banks in order to get financial institutions to begin lending to one another again. As fear began to recede, the TED spread dropped.
(Click on chart to enlarge – Data Source: Stockcharts.com)
While it may not make for good TV on a political talk show, the answer to whether or not President Obama is responsible for easing the panic that had gripped the markets is: “He might have helped but Ben Bernanke and his magic bag of monetary policy tricks deserves the lion’s share of the credit”.
Having noted the above, it is still not clear what the impact of Bernanke’s measures will be in the future. Some believe that he has helped to create bubbles in other areas of the economy and will eventually result in a spiralling of inflation and the demise of the US dollar.
At this point, perhaps the pragmatic viewpoint is that Bernanke did what he had to do in the short term by stabilizing the markets. In future, we can only hope that he and his fellow central bankers are equally as successful at ensuring inflation does not take root in the economy.
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