Bernanke Critics and Rate-Cut Proponents Quiet after French Banking Scandal
Bernanke can’t catch a break these days – whether it is people like CNBC “Mad Money” host Jim Cramer screaming Armageddon if the Fed doesn’t cut rates or if it is politicians in Washington up for re-election demanding rate cuts to avert an economic downturn.
On January 22, the Federal Reserve made an emergency 75-basis-point rate cut in the Fed funds rate after European stock markets plunged – fearing this would spur panic in the economy.
However, on January 24, it was revealed a rogue trader cost the French bank Societe Generale (SocGen) (EPA:GLE) $7 billion. Some speculate this heavy loss by SocGen caused the European stock markets to plunge – around 4 percent in Britain, Germany and France. Some think that plunge influenced the Fed’s decision to make the emergency rate cut.
“[W]hat’s interesting is there are a lot of people who are saying it was the SocGen trader who caused the stock market to fall and that Ben Bernanke overreacted,” Brian Wesbury, an economist for First Trust Advisors, L.P., said on CNBC’s January 24 “Kudlow & Company,” “These are by the way, a lot of the same people that said he hadn’t acted fast enough, so this guy can’t win and I really feel bad for Ben Bernanke right now. He’s getting beat up when he shouldn’t get beat up.”
One of Bernanke’s most vocal critics, who regularly rails against the Federal Reserve Board of Governors not slashing interest rates, Jim Cramer, hasn’t been as vocal about the possibility this emergency rate cut was over-the-top in the wake of the SocGen scandal. But Cramer was willing to dole out criticism, especially about Wall Street Journal Federal Reserve reporter Greg Ip, for not conveying the true sentiment of the Fed in his reporting.
Wesbury has been a long-time critic of the Fed using interest rates to manipulate the economy. He said again on January 25 the Fed was spurred on by panic. This panic was propagated by the media and that definitely included CNBC loose-cannon Cramer.
“I don’t want to defend necessarily these massive rate cuts,” Wesbury said on CNBC’s January 25 “The Call.” “I don’t think the economy is in as bad as shape as many people believe. But you know, it’s kind of interesting we’re blaming the Fed for panicking when I think it is the markets that panicked. Everybody who sold because SocGen was fixing their books also panicked. And so, in a sense, I think there is way too much panic.”
The focal point of this hyped economic downturn/recession constantly parroted in the media has been the housing woes brought by the subprime mortgage crisis. But Wesbury pointed out this is a very small part of the economy – especially when you consider just how small it is in the terms of a global economy.
“I think people need to calm down and realize that the whole subprime loan problem is at most $200 or $300 billion,” Wesbury said on “The Call.” “That’s it. We have a $100 trillion in assets in the U.S. economy alone, double that or triple that around the world. It’s too small of a problem to cause all this panic. I think it is Wall Street in general and traders in general that are panicking.”
