The (Second) Summer of Bernanke's Discontent

Today must have been tough for Federal Reserve Chairman Ben Bernanke. In public remarks at a conference in Atlanta, he didn't say anything. For a Fed Chairman who has made a priority of increasing transparency, having no news to announce was bad news.

Bernanke repeated the Fed's standard litany of the past two and a half years. Short term interest rates will remain at zero for an extended time, and the Fed stands prepared to "respond as necessary" to developments in the economic recovery. This isn't news. His acknowledgement of the economy's slowdown shouldn't have been news, either, although it did seem to contribute to a market drop at the close. The big problem, though, was that Bernanke didn't promise to wear a red suit and come down the chimney imminently with another bagful of gifts. No QE3. No other legerdemain that would amount to money printing. No promise to support current asset values.

Let's face it. The market, and economy, are addicted to government bailouts and subsidies. Everyone wants a federal guarantee for everything. Businesses want the Federal Reserve money printing press running 24/7 before they'll add a single person to the payroll. Investors want to see truckloads of cash moving off the Fed's loading dock before putting a penny in stocks. The big banks want the government's too-big-to-fail subsidy, but not the increased capital requirements and regulatory compliance costs that logically come with the unlimited support of taxpayers. Bernanke wanted to encourage people to invest in risk assets, but in actuality he's accomplished just the opposite. No one truly wants to take a risk any more. There's an easier way to make money--get Washington to guarantee profits.

Bernanke offered talk therapy, predicting that the economy would grow in the second half of 2011. He may be hoping that, if he can't add more money to the financial system to buy a recovery, he can psyche Corporate America into hiring more. But we've been stagnant for too long, and the Fed's been wrong on its predictions too many times.

Without financial methadone from Washington, the withdrawal symptoms could be painful. Scant growth, a good chance of rising unemployment, and falling stock prices. If the Fed adds more stimulus, the spectral presence of rising prices would shadow its every move.

Across the pond, the Euro sovereign debt crisis will either end badly, or worse. Wealthy northern Europe will absorb profligate Euro bloc member debt (possibly with a few token pennies thrown in the pot by creditors) and greater political power will be centralized in Brussels, or the Euro will go down in history as a very costly example of wishful thinking. Whatever the case, there won't be any stimulus to the U.S. economy from Europe. Economies in Asia are also slowing. We're on our own. What will happen?

We've already seen this video. Last summer, the same problems were tossing the economy and stock market around like rag dolls in a tornado--fading federal stimulus, sovereign debt crisis in Europe and everyone on Wall Street looking for a federal promise of profits. Ben Bernanke stepped up to the plate at the Federal Reserve's annual August conference in Jackson Hole, promised QE2, and hit what looked for a while like a home run. It's curving toward the foul pole now, but we don't yet have an official ruling from the umpire. If this summer follows the same path of economic stagnation and malaise in the stock markets, expect the Fed to step up to the table, bet its chips on a hard 8, and roll the dice one more time.