The Final Days of the Bernanke Fed

 | Jan 28, 2014 | 5:30 PM EST
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New-home sales fell to the lowest level in three months in December as homebuyers balked at higher mortgage rates. The falloff in sales had already been foreshadowed by the 10% year-over-year decline in mortgage purchase applications.

The housing market has been a bright spot in the economy, but signs suggest that the recent back up in rates could lead to a cooling-down period. (Just as an aside, I was in the gym the other day and overheard several people talking excitedly about apartment flipping here in the city. It has been a while since that kind of talk was heard around water coolers (or treadmills as the case may be), and it's probably indicative of some kind of excess in the real estate market, at least in the short term.)

This coming Thursday and Friday will be the first Federal Open Market Committee meeting of the year and the last for Chairman Ben Bernanke. After this, he is out and probably headed to some think tank, and I hear that one potential place may be the Brookings Institution.

I'd give Bernanke a solid B-plus for his work at the Fed over the course of his tenure. He would have gotten a higher grade from me were in not for the fact that in the past year and a half, while making his regular appearances in front of Congress, he started talking about how we need to get our long-term fiscal picture in order, otherwise interest rates are going to rise and there could be trouble servicing the debt. This is just crazy talk, and Bernanke knows better. Still, it's sad to hear this coming from the guy who presides over the very institution that sets rates, and he has the power to set rates anywhere along the yield curve that he pleases.

I'll also excuse Bernanke for the early mistakes he made during the financial crisis, when he was caught a bit like a deer in the headlights. I am speaking about how, early on in the crisis, the Fed was demanding AAA-rated collateral for short-term loans to banks, even though all collateral at banks is already "pre-approved" by regulators (the Fed, the Federal Deposit Insurance Corp. and the Controller of the Currency) and therefore acceptable at the Fed's window at all times.

It took several months for him to realize that the Fed needed to lend on an open-ended and unsecured basis in order to prevent a contagion of bank runs. Eventually that happened, but there were needless causalities, one being the failure of Wachovia, which went down not because of a solvency issue but rather because of a plain old-fashioned liquidity issue (i.e. a bank run), and it never should have happened. You may remember that Wells Fargo (WFC) came in and swooped up Wachovia's assets, but only after an earlier deal that Citigroup (C) had made was waiting to be finalized. That was not Bernanke's doing, it was Sheila Bair's, as she was running the FDIC at the time.

Bernanke aside, there are now researchers at the Fed who have finally started to catch on to the fact that quantitative easing and other monetary measures were far from the inflationary "stimulus" so often proclaimed by some of the very members of the FOMC. Numerous papers have since been published that discuss the true nature of these programs and how they are ultimately deflationary through the removal of income from the economy.

All in all, however, Bernanke did a pretty decent job. I would have liked to see him be a little more forceful with Congress, especially on the need for greater fiscal stimulus and the folly of austerity. He did make half-hearted attempts to inform the members, though it's hard to take a guy seriously when, in the next sentence, he's talking about the need to get the fiscal house "in order." The message is really lost.

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