Is Bernanke our latest American hero? Only time will tell but at least the Fed’s move on Friday told us they are in the fray. I can’t shake the association with Paul Revere, corny as it is, and how one day we’ll sit around and tell the young industry fledglings about the day Bernanke saved us from ourselves…
Listen my children and you shall hear
Of the midnight ride of Paul Revere,
On the eighteenth of April, in Seventy-five
Hardly a man is now alive
Who remembers that famous day and year.
Strains in the market had been mounting for weeks but the events that unfolded on August 16th showed a dramatic change requiring quick action and nerves of steel. The following “day in the life” is a synopsis from today’s in-depth article in the Wall Street Journal entitled, “How a Panicky Day Led the Fed to Act”. These shocks made for one of the most perilous days in the history of the global credit market.
Dawn in London - $45.5 billion in short-term IOUs were maturing and had to be rolled over. Traders usually have buyers for such paper by lunchtime in London (7 AM in New York). “On this morning, demand had dried up, and it would take the whole day to sell less than half of it.”
7:30 AM, New York - The largest maker of mortgages in the U.S., Countrywide Financial Corp., said it was tapping $11.5 billion in bank credit lines – bad news, they could no longer raise money in the financial markets.
Noon, New York – The yen surged against the dollar, rising 2% in just minutes. Many unsuspecting currency-market players were crushed by the sharp move.
Noon, EST - the London trading floor of Goldman Sachs Group Inc. - Salesmen wielded two phones at once, others shoving and grabbing to get in front of traders, shouting orders to execute trades.
Afternoon - Investors start jumping into short-term U.S. Treasury securities, considered safe because they're backed by the U.S. government. The gap between yields on T-bills and corporate commercial paper widened sharply. "It was an extraordinarily violent move," said Jason Evans, head of government-bond trading at Deutsche Bank. "It became clear that the market was at a point of distress and expected a response from the U.S. Federal Reserve.”
On the opposite shore walked Paul Revere.
Now he patted his horse's side,
Now he gazed at the landscape far and near,
Then, impetuous, stamped the earth,
And turned and tightened his saddle girth;
Evening – Conference call convened by Fed Chairman, Ben Bernanke.
And lo! as he looks, on the belfry's height
A glimmer, and then a gleam of light!
Friday Morning – Only 10 days after declaring that inflation was still its predominant worry, the Fed declared “downside risks to growth have increased appreciably”. The Fed hinted that it may soon cut its target for short-term rates. In an unusual move, it also encouraged banks to borrow directly from the Fed and made such loans more attractive.
You know the rest. In the books you have read
How the British Regulars fired and fled,---
Bernanke has been accused (complimented in my book) of being an academic instead of a market insider but that may just be what brought us relief. During Bernanke’s days as a Princeton professor one of his personal sources was a book entitled “Lombard Street” written by a British journalist, Walter Bagehot in 1873. The following passage is very familiar on this side of 8/16, “In times of ‘internal discredit’ -- when uncertainty leads private players to pull back -- the prescription to the central bank is: Lend freely.”
And further, "A panic...is a species of neuralgia, and according to the rules of science you must not starve it," Bagehot wrote. "The holders of the cash reserve" -- today's central banks -- "must be ready...to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to 'this man and that man,' whenever the security is good."
Through all our history, to the last,
In the hour of darkness and peril and need,
The people will waken and listen to hear. . .
So many answers lie in history and Bernanke seems to be a man who can apply lessons learned through history. “In the Panic of 1907, the stock market crashed, the U.S. slid into recession and bank runs broke out across the country. Famed financier J.P. Morgan organized other bankers to direct credit to troubled banks, secure international lines of credit and buy stock, and calm was restored.”
In a January speech, Bernanke noted that the Fed was founded "in response to the periodic episodes of banking panics and other forms of financial instability that had plagued the U.S. economy during the 19th and early 20th centuries." After the Federal Reserve was founded in 1913, banks were able to access the discount window, the same mechanism the Fed is now using to stimulate a willingness to lend.
A cry of defiance, and not of fear,
A voice in the darkness, a knock at the door,
And a word that shall echo for evermore!
“This week, the Fed will find out if it did enough to bolster the confidence that was in such short supply last week, when investors refused to buy or accept as collateral securities that in normal times would be of unquestioned worth.”
The Fed "really wanted to drive home the point that if [bankers] were complaining about not being able to borrow money against liquid, high-quality securities -- mortgages -- we have no more basis for complaint. We were all given a clear message," says one banker.
The people will waken and listen to hear
The hurrying hoof-beats of that steed,
And the midnight message of Paul Revere.
September 18th will be the next day of reckoning. Much is at stake.
Longfellow’s “The Midnight Ride of Paul Revere” was obtained from Amy Ridnour’s National Center Blog, a Project for the National Center for Public Policy Research. Definietely worth checking out. Not only can you find poetry as evidenced above, you can also find such esoteric postings as:
"Possibly Non-Existent Mouse Shatters Family's Dreams"
A Wyoming family's dream to build an indoor horse-riding arena on their property is on hold because the area on which they want to build is designated critical habitat for Preble's Meadow Jumping Mouse - whose existence as a separate, identifiable species is being debated.
Amy is the mother of 3 second graders, which might explain the esoteric part, and the President of the National Center for Public Policy Research. Where does she find the time?