Groundhog Day - Or Why Change Is Not What We Need At the Federal Reserve

It's like Groundhog Day: one major bank's stock price is falling like a stone, another banking behemoth is getting money and/or guarantees for toxic loans from the Treasury, investors are piling into super-safe Treasurys, the euro is getting pummeled against the dollar and the yen. It's Jan. 14, 2009, but it feels like any day in September or early October 2008. Or late-June 2008. Or March 2008. Or August 2007. It's clear we're stuck in the depths of the woods and there's very little light shining through the mountains of bad loans sitting on bank balance sheets to show us the way out. And that is why, amid all the many pressing issues he has to deal with, President-elect Barack Obama should announce now that he plans to re-nominate Ben Bernanke as Federal Reserve chairman when his term expires next year. There are several reasons why he should do this so far in advance:

-There's enough uncertainty in financial markets and the broader economy to keep us all awake at night for the next couple of years - the last things these markets need are jitters, rumours and chatter about who will lead the central bank as it attempts to steer us out of this mess without causing greater problems down the line. And you can bet your bottom dollar that sometime in the summer, the guessing game will start.

-Let the best man (or woman) win: Bernanke is hands down the best choice for this job. He's the foremost scholar of the Great Depression. His communication skills are impeccable and inspire trust (take a look at the speech he gave this week in London - chockablock full of information, expressed so clearly that the text could double as the basis of an introductory course on financial crises at any college).

-It's the Bernanke Fed's programs and actions that have helped pull credit markets back from the brink - just look at the impact of the mortgage bond purchase plan; it was the Fed's announcement of this plan that finally got mortgage rates to budge. They were well above 6% for a 30-year fixed rate mortgage at that point back in November, now they're just above 5%, thanks to the boldness of the program; a committment to buy $500 billion - equivalent to an entire year's worth of net new supply - within six months.

-Given the depth and intractability of the financial system's problems, come next year, the Fed will very likely still be the main counterparty and risk-taker in the credit markets. Confirming Bernanke now means stability at the helm of the markets lifeline provider - a great help in the current chaotic times. No central bank has ever attempted what the Fed is currently aiming for. There is no upside to switching drivers mid-race in this case.

Obama was elected on the wings of change. But for the sake of the U.S. economy - and with it, the global economy - he should seek not change, but continuity, at the Federal Reserve.

Beware The Cheerleaders

The search is on for a silver lining - see today's NYT (Jan 3, 2009), which managed to juxtapose "Stocks Rally, Will January Be An Omen?" and "Manufacturing Suffering In All Corners" in a feat of considerable irony, to name but one. We'd all do well to reread The Great Crash by JK Galbraith as a reminder of how the desire to see an upturn just around the corner blinded so many of the socalled experts and reporters (the book also has a fine Madoffian cast of crooks and criminals, speculating bankers - and accords leverage a prime role in the crash - a blueprint for the events of 2008...)

Let's not forget that without massive infusions of cash from the Fed and the government, there would be no markets at all for anything except U.S. government bonds. Mortgage rates are only so low because the Fed said it would buy this year's entire net new supply of mortgage-backed securities; I've given up trying to count the number of times a recovery in the commercial paper market - where only highly-rated companies can borrow anyway - has been forecast - it's been on life support for the past three months, and is likely to stay on life support from the Fed for the whole year. The Treasury announced a program Friday that implies it will guarantee any bank's bad debts - along the lines of the Citigroup rescue. The government bond market is wondering who on earth is going to buy $2 trillion of supply - there are already more than $5 trillion outstanding.

The world is coming off a massive debt binge - and yes, it is a global issue: the big export nations were just living off the U.S. consumers' reckless spending. Rebalancing the global economy is going to take much longer than six months - and any recovery in the economy, so necessary for a sound basis to any longer-term uptrend in stocks, is going to be a messy, volatile process. The big difference this time around lies in the interconnectedness of all markets across all regions, and the complete breakdown of the financial transmission mechanisms - trade finance has evaporated. How the wealthy Asian exporters and the large oil exporting nations weather the current storm matters a lot more than it did in the 1980s - they're the ones with current account surpluses that need to be reinvested, but some of them also face very fragile domestic outlooks. The euro doomsayers will be proven wrong, but that doesn't mean there won't be strains in the euro zone, the European Union and neighboring countries. Russia is walking a tightrope, yet again.

Rather than hunting around for silver linings on the basis of one day's trade, we might do better to seriously consider just how much it is going to take to resolve this mess - in terms of global political leadership, government spending and sheer luck.