Oh, the agonies and the ecstasies of being Ben Bernanke. What an emotional roller coaster he must be on, and all the while he controls, more than any other man, the fate of the economy.
That kind of power must be a heady thing. Yet he must use that power against extraordinary challenges. How would it have felt to have the power to save Lehman Brothers (or not), to save AIG (or not), and then have to make and live with the decision? Today, more than a year later, half the world blames him for saving AIG with taxpayer dollars, and the other half blames him for not saving Lehman. You just can't win.
This week, he was named Time magazine's "Person of the Year" -- a tremendous honor. Yet, as he fights for re-appointment to another four-year term as chairman of the Federal Reserve, he must abase himself before a bunch of nitwit senators who hold in their hands the fate of the man who holds in his hands the fate of the economy.
The seemingly nearly-senescent Jim Bunning, the lame-duck Republican senator from Kentucky who sits on the Senate Banking Committee, which holds life-and-death power over Bernanke's re-appointment, insisted that Bernanke answer in writing 70 questions -- yes, 70! One can imagine the beer bust that Bunning's staff must have had while coming up with all those questions (let's seeâ?¦we need one moreâ?¦how about boxers or briefs?).
And poor Bernanke actually answered them. He had to. Once every four years, he has a boss -- the U.S. Senate.
By the end of it, Bernanke must have been hallucinating from sheer exhaustion. Some good will come out of it. When he returns to Princeton someday to teach economics again, maybe he'll have mercy on his students during final exam time. There's another good as well. We investors get to read his answers and get a deep look into his mind -- from hallucination, truth!
I was particularly intrigued by one answer. I'm going to reproduce the question and then the answer in full here. Both are slightly technical. But if you'll follow along with me, I think you'll learn a lot about the way Bernanke is going to approach the next year or so of Fed policy. That will give us some important pointers about how to make money in markets.
Here's the question:
In a scenario in which unemployment remains uncomfortably high but the dollar continues to fall and commodities, including oil and gold, continue to rise, what would the Fed do? At what point do market signals take priority over hard-to-measure statistics like the output gap?
Let me explain. Bunning is getting at the idea of the Fed's so-called "dual mandate" to deliver both maximum employment and price stability (that is, low inflation). He's wondering what would happen if inflation warning signs -- like the falling dollar and rising oil and gold prices -- started to emerge at the same time when the Fed might want to run an extremely easy policy in order to boost employment. Would the Fed ignore the warning signs and rely on the theory of the "output gap," which is that low employment itself will keep inflation low no matter what those other signals are saying?
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