Weekend Wisdom: Ben or Zen?

"All know the way, few actually walk it."  Bodhidharma (fl.526/527)

Ben, you know the way.  For the sake of all financial market participants and the long path that will be shared with you in years ahead, I hope that you will "walk it..."

The markets are certainly moving on speculation of the Fed's next move.  Arguably, the bigger story is how Ben Bernanke will define himself as he faces his first crisis as Fed Chairman.  Will Ben do what is right or do what is popular?  Will he allow the excesses of the financial markets work themselves out or will he follow in the footsteps of his predecessor and perpetuate the "Greenspan Put"?

The financial markets certainly gyrated this week as investors wondered what Ben's next move will be...

• First, investors grew uneasy about the Economy and the Fed minutes...
• Then, with some encouraging words from Ben, stocks rose again as bonds fell.
• Surely Ben knows that bailouts could bring disaster and that, for capitalism to work, failure is essential.
• An intriguing, if unpopular, thought... Could a U.S. economic recession actually be a good thing?
• Home buyers are turning away from Adjustable Rate Mortgages as rates surged higher.  It seems a farewell to ARMS would help work some of the excesses out of the financial markets without Ben's help.
• The U.S. economy expanded in the second quarter at the fastest pace in more than a year and stocks are only down about 5% from their July highs...  Are financial markets so frail that inflation will become a secondary concern to the Fed?
• The relationships weaving between interest rates, consumers, Wall Street, and the federal government can be quite complex.  Here's what you need to know.
• For investors, if history holds one lesson, it's that we never learn from it...
• To keep our perspective, keep in mind that most Bear markets do not begin with a "crisis" or sudden plunge in stock prices.

I hope that Ben will find his "Zen" when making the decision regarding interest rates at the next Fed meeting.  Do we need a Fed chief that bends at the whims of the market or a "financial philosopher" that does what is right -- not necessarily what is popular.

If Ben finds his "strength from within," and stands pat on interest rates in the face of criticism, I will be proud to be the first to call him "Zen" Bernanke...

Enjoy the long weekend...

TFPAuthor, Kent Thune, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mt. Pleasant, SC.

Comments

[Ana]

I think you are right, but again a rate reduction is so tempting. What would happen if he decided not cut rates? Isn't wall street too strong of an influence against one single man?

[The Financial Philosopher]

For Ben to find his "Zen" he must balance many things: The need for a rate cut vs. the demand for one; prudent economic practices vs. political pressure; logic vs. government; and promoting rationality vs. perpetuating greed, among other things...

A lot can happen (or not happen) in the next two weeks that can influence Ben and the Fed's decision. I believe Ben can achieve balance by cutting 25 points vs. the 50 points that Wall Street is hoping for while iterating his purpose to restore order as opposed to "bailing out" speculators. In other words, make a small cut but keep a neutral "bias."

As I said, failure is necessary with capitalism. Where someone or some entity fails, some other entity will pick up the pieces and make something better out of it. The Federal Government is not needed to make capitalism work. Just staying out of the way is best...

[Caravaggio]

I have to wonder if the world is ready for Zen Bernanke. In this complex world, doing what is right does not guarantee that all will be necessarily be well. Indeed, if he does stand firm, and if things were to get much worse, he risks being remembered as a poor governor...but that will be with hindsight, which I maintain can be cruel and deceiving, especially when dealing with matters of uncertainty.

[The Financial Philosopher]

Caravaggio:

You bring up a good point. Ben is in a federal position, which essentially means that doing what is "right" is not always what is "best." As for risking his legacy and being remembered as a poor governor, I would rather do what is right and be ridiculed than do what is popular or expected. After all, Greenspan did that and he is still highly ridiculed today.

We can't all be like Socrates, who allowed the government to put him to death before denouncing his own beliefs...

[Caravaggio]

I still have an admiration for Greenspan, as his intellect towers above mine, and I am led to wonder about the current accusations. I would like to think he made the best decision with the information available at the time, but I have no idea as to what other officials and the media were saying about his decisions. It seems too easy to blame one man.

Caveat - I always seem to be on the other side of the mass opinion and I often tend to get trampled on.

[The Financial Philosopher]

You summize my point very well. If Ben finds himself, as you, "on the other side of the mass opinion," then he will likely have done the "right" thing...

I, as well, admire Greenspan's intellect. In the end, we must expect criticism to prepare for following the right path...