Thursday, February 7, 2008


An old saying in the financial circle goes “as the party gets raucous, the central banker’s job is to pull away the booze”. In emerging markets it seems like despite the pipeline being squeezed, booze (read credit) is still being supplied and countries like India and China are still not showing signs of a meaningful slowdown. But this policy has worked in the U.S. and many fear overkill for the economy.

Has the fear of this ‘Overkill’ permeated into the Federal Open Market Committee (FOMC), which has just slashed rates faster then you can count the alphabets in the name of our classmate from Madurai. The FOMC, chaired by the governor Ben Bernanke, is a 12-member Federal Reserve authority, which has the arduous task of setting the interest rates. The panel sets, or sets targets for, short-term interest rates, which in turn affect interest rates paid by consumers and businesses on loans of all types. One fateful week in January, the FOMC decided to slash the target rate from 4.5% to 3% in two meetings, one of which was an emergency meet. Such a drastic cut has not been witnessed since the fed was formed in 1913.

If you had listened to news from Wall Street on that fateful week, you would have sensed panic. This could be the Big One, traders thought, a deep recession of the sort last seen when then-Fed Reserve Chairman Paul Volcker was raising interest rates to break the back of inflation 25 years ago. Volcker’s tenure had seen very high interest rates especially burdening the construction and farming sectors. There were many wide scale protests including one in which farmers blockaded the fed’s offices with their tractors.

Greenspan’s Nineteen years of fed chairmanship brought with it a certain kind of hawkish demeanor which helped him get through many tough times like the 1987 crash and dot com bubble, though he is seen as having sowed the seeds of the Housing bubble. But that calamity was hatching for his successor, Bernanke who has already made a large goof up in May 2006. At a Fed press meet dinner, he casually mentioned to CNBC super anchor Maria Bartiromo, that the market had mistaken him for being dovish. That single statement was enough to send our beloved Sensex hurtling 30% in a week. He was then called Helicopter Ben because of his sometime hawkish and sometime dovish attitude. Today he is called Uncle Ben, reference being to the rich uncle next door eager to give dole-outs to spoilt market participants who have the habit of crying every time they see a new bully (crisis) round the corner.

But Uncle Ben has a very tough road to negotiate - try to keep everyone happy and also to keep the economy in check. With the U.S. budget set to hit a deficit of $ 410 billion, fall in jobs and inflation threatening to start an upward spiral, Uncle Ben has a lot of burden on his
shoulders. Can he carry it through? The world is watching.

Azmat I Khan

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