Bernanke takes his final bow
IT IS easy to forget that when Alan Greenspan stepped down from the Federal Reserve after two decades running the US central bank he was greeted as the greatest hero in financial history.
Some ten years on, the Greenspan legacy, for all its high points, lies it tatters amid the debris of the sub-prime mortgage bubble and the Great Panic.
One has to be very careful, then, about overdoing the praise for Ben Bernanke, who last night chaired his last session of the interest ratesetting Federal Open Markets Committee. Bernanke lowered interest rates to just 1pc in 2003, allowing market conditions to run away with themselves and helping to keep alive a housing bubble with its roots in decisions taken in the Clinton White House.
However, when the credit crunch came in 2007, Bernanke turned out to be the right man in the right place. Ridiculed as ‘Helicopter Ben’ for flooding the financial system with dollars, his actions were proved right. Central banks across the world discovered the wisdom of quanti- tative easing when interest rates cannot fall any further.
Most importantly he was a calm head, determined that the presidencies of George W Bush and Barack Obama were not equated with those of Calvin Coolidge and Herbert Hoover, the authors of the Great Depression.
Bernanke recognised the need to recapitalise the banking system. He extended the Fed’s remit to rescue insurer AIG and to fund big corporations such as General Electric that were being dragged towards the abyss by their financial arms. Unprecedented amounts of bonds, of all kinds, were bought by the Fed as it effectively took over the role of keeping the world’s largest economy afloat.
The departing Fed chairman recognised that such an operation could not be engineered behind closed doors. The publication of minutes was speeded up, there were regular press conferences and eventually – as recovery became the goal – along came forward guidance.
None of this was without controversy. Critics on the right accused him of assuming too much political power and debasing the currency.
Some argue that it was the Fed’s willingness to finance the enormous government deficits that was responsible for fiscal profligacy on a giant scale. They fear that all Bernanke has done is stoke new bubbles to replace the old.
Better, however, that a full-scale banking collapse and mass unemployment was avoided, than a repeat of the 1930s.
Eddie’s precedent
ONE of the most memorable speeches of the late Eddie George was his Mais lecture of 1997 when the then-governor of the Bank of England warned he was nervous of introducing the euro ‘at a time of very high and very different rates of employment across Europe’.
He suggested that the Maastricht rules, forcing common fiscal criteria, might make matters worse.
George’s intervention, in a largely political debate, was given huge weight not least by then-Chancellor Gordon Brown. He went on to create the five tests, that fortunately for us all given what has happened in euroland, kept Lord Mandelson, Tony Blair and the other European enthusiasts in Labour’s first rank at bay.
Mark Carney’s Edinburgh speech must be regarded with much the same authority as that of George’s Mais lecture.
His description of it as a ‘technocratic assessment’ was designed to remove it from the realm of politics. Yet everything he had to say suggested that while Alex Salmond may have once have been chief oil economist at the Royal Bank of Scotland, he has not fully thought through the consequences of a currency union between an independent Scotland and the rest of the United Kingdom.
The two states would be tied together by commons fiscal rules, a single interest rate and credit policy and a common regime for supervising the banks, providing liquidity and acting as lender of the last resort in times of crisis.
If these conditions were not met there would be the risk of an almighty crisis – not very different to that in the eurozone.
Qatar watch
NOW that Justin King is hanging up his grocer’s coat, what will be the reaction of Qatar Holdings, the company’s biggest shareholder?
In the past it has been happy to sit on the near-25pc stake and be kept up to date with developments. Indeed, the first signs that something was afoot emerged in the past few days with some heavy activity in J Sainsbury’s stock, which some market sources suggest was Qatari related.
One theory is that Qatar, which has a liking for retail assets, may use the uncertainty created by the departure of King as an opportunity to tighten its grip.
Do British shoppers really want a state that supports radical Islamic causes in charge of their weekly shop?