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3 big trends will haunt Bernanke
The new Fed chief will take over with the housing market cooling, the cheap-money era ending and inflation on the rise. And he won't have Greenspan's clout to help deal with it.
By Jim Jubak
Good luck, Ben. You're going to need it.
After all, there's nothing you can really do about the biggest problem you'll face when you take over as chairman of the Federal Reserve in January 2006. That problem: You're not Alan Greenspan.
 Bernanke will inherit all the problems created by Greenspan's 18-year legacy of loose money, problems that are finally building toward some kind of crisis. But what he won't inherit is Wall Street's overwhelming faith that Greenspan will defuse any potential market bomb before it blows up. The financial markets, while wishing Bernanke success, will be nervously waiting for him to foul up. Nervous markets, of course, have a tendency to turn a minor blip into a major crisis of confidence.
If you read this site regularly, you'll know that columnist Bill Fleckenstein isn't a big Greenspan fan. In his Oct. 4 column, in fact, he called him "the worst Fed chairman, ever."
Unfortunately for the stock and bond markets, for investors and for Ben Bernanke, Wall Street doesn't agree. Think how much easier Bernanke's job would be if everyone on Wall Street thought like Fleckenstein? The investment bankers, the brokers and the traders would still be out cheering President Bush's announcement of Bernanke's nomination. Thank God, the market would be saying, we're getting rid of that Greenspan turkey.
Forget about the 170-point rally that occurred as news of Bernanke's nomination leaked to the press on Monday morning. We'd be looking at 500 points up on the Dow Jones Industrial Average ($INDU, news, msgs), no sweat.
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But the prevailing opinion on Wall Street is exactly the opposite from Fleckenstein's. According to the majority view, Alan Greenspan is the best Fed chairman ever.
Greenspan to the rescue
His fans point to Greenspan's record since he took over as Fed chairman in August 1987. Start with the recession and inflation records. There's been only one recession (defined by many economists as two consecutive quarters of negative economic growth), when the economy shrank by 3% in the fourth quarter of 1990 and 2% in the first quarter of 1991. There was also a soft patch from 2000 through 2001 with three down quarters out of five, although none were consecutive. Contrast that to the record of the prior 18 years, when the U.S. economy went through four deeper recessions. The recession of the fourth quarter of 1981 through the first quarter of 1982, for example, showed back-to-back economic declines of 4.9% and 6.4%.
And Greenspan has built this growth record while keeping inflation below 3.5% every year since 1991.
But it's really Greenspan's record of intervening in the financial markets to stave off panic or collapse that has earned him his god-like status on Wall Street.
Just a few months after he took over as Fed chairman, he supplied the liquidity that prevented the stock market crash of 1987 from turning into a prolonged financial crisis. Greenspan and the Fed stepped in to stabilize global financial markets in 1997 amid the Asian currency crisis of 1997, in 1998 after the failure of the hedge fund Long-Term Capital Management, and again in 2000 after the market bubble burst. Add in Greenspan's role in providing liquidity during the savings-and-loan meltdown and in preparation for a Y2K crisis that never appeared, and you can see why the financial markets believe so deeply in the powers of the Federal Reserve and its chairman.
The Greenspan put
There is another way of looking at this record. Greenspan is handing over to Bernanke a problem that the financial markets jokingly call the Greenspan put. In the options market, a put is the right to sell a stock or other financial instrument at a specific price. It has a value if the current price of that asset falls below the selling price guaranteed by the put. And when the current price falls through the floor, a put can suddenly become very valuable. Think how much you'd pay for the right to sell a stock at $75 when it has fallen to $40.
The Greenspan put is the market's name for a belief, based on all those market interventions by Greenspan's Fed, that the Federal Reserve will always act as the buyer of last resort. If prices fall fast and hard enough, the Fed will supply cash to prop up the market.
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