Bernanke and Obama Foresee a Brighter Future
Apparently the words of Federal Reserve Chairman Ben Bernanke carry a little more weight with Wall Street these days than those of the Commander in Chief. Bernanke gave his reassuring prognosis to Congress last month that the recession could end before the close of 2009, and Wall Street reacted with a steadier day. But the volatility of the market and the economic bad news continued through February and into March, despite the White House efforts to stay positive about the economy.
Then Bernanke spoke up again on 60 Minutes this past weekend and his words of wisdom on everything from rate cuts to AIG seem to have a calming effect on the markets. Wall Street had started to rally on the profitable news of Citigroup and JPMorgan Chase, and that rally continued into this week. As 60 Minutes put it: “Ben Bernanke may be the most important Fed chairman in history. The question is, can he help lead America out of this deep recession and when?”
While most analysts expect the market to remain volatile for the foreseeable future, it is hoped that a little good news in this gloomy economy can go a long way. President Obama began stressing this month the importance of not focusing solely on the bad economic news. A White House spokesman stressed this past weekend that the fundamentals of the American economy are sound.
Unfortunately for the White House, this tact has been met with skepticism and derision. Some pundits have compared President Obama’s latest attitude with that of Senator John McCain, who was ridiculed during the campaign for seeming out of touch with his sound assessment of the economy at the end of 2008.
A month after stating in his address to both houses of Congress that “We will rebuild, we will recover and the United States of America will emerge stronger than before,” President Obama’s optimism has done little to bolster the markets on his own.
When asked by Scott Pelley on 60 Minutes if Bernanke thinks the recession is going to end this year, he said, “In the sense that this decline will begin to moderate and we’ll begin to see leveling off. We won’t be back to full employment. But we will see, I hope, the end of these declines that have been so strong in a last couple of quarters.”
Bernanke stressed that the key to the country’s economic recovery is the banking system. Investors and analysts have been waiting to hear definitive plans from the Obama administration on how it will solve the baking crisis. As those plans have become clearer in the last two weeks, the markets had remained largely unimpressed.
Ryan Larson, head of equity trading at Voyageur Asset Management, said the market is looking for insights into the Treasury Department’s plans to “stress test” the banks and remove the toxic assets from their books.
As Bernanke explained, “…we are doing a stress test right now, where we’re looking at what the positions of the banks are under a tougher economic scenario than the one that we currently expect. And what we plan to do is to say how much capital would each bank need to be well capitalized. Not just solvent, but well capitalized, even in these more adverse scenarios.” Bernanke believes the government has a responsibility to stabilize these failing financial institutions by gradually taking them apart. The sold off subsidiaries of institutions like AIG would be used to pay back the government.
In the months to come, Wall Street’s reaction to the government’s efforts to stabilize the banking system will be interesting. Bernanke makes the road ahead sound logical and reassuring, despite the continued bad news and the illogical behavior of bailed out companies like AIG.