Friday, June 21, 2013

Why Did Obama Fire Bernanke?

Okay, President Obama didn't actually fire Federal Reserve Chairman Ben Bernanke.  But it felt like that when the President strongly hinted a couple of days ago that he wouldn't nominate Bernanke for re-appointment.  The stock market followed up with a two-day belly flop of almost 560 points.  Much of that drop was because the Fed announced that it would indeed, contrary to infantile market expectations, eventually take away the quantitative easing punchbowl.  But the backdrop to this announcement was Ben Bernanke's short remaining term as bartender-in-chief.  That creates enormous uncertainty.  The financial markets love Bernanke, even though not all market players will admit it publicly because he was a policy pragmatist (read heretic in the eyes of many purists).  He gave the markets lots of sweets and never let them pout or fuss for long.  He never met an asset class he didn't like and tried to puff them all up.  (That's why virtually all asset classes are dropping now--Sugar Daddy is leaving town.)  With Ben's helicopter thumping away toward the horizon, it gets a lot harder to predict what investments might have actual economic value, so investors renew their love affair with cash.

But why did Obama choose this moment to put Bernanke on the stagecoach going out of town?  Obama is no economist, so it couldn't have been for an economic reason.  The President is a consummate politician, though, so one has to entertain the sneaking suspicion that he did it for political reasons.  A not uncommon reason for pulling the rug out from underneath an incumbent is because you foresee the need to blame him or her for something.  Maybe the President was concerned that the eventual end of QE would cause the markets to fall, and he wanted to be able to blame Bernanke and say he didn't re-appoint him.  But the very act of leaving Bernanke behind in the dust aggravated into prophecy fulfillment the markets' inclination to swan dive.  So, if this was the President's thinking, he may have contributed to the problem he foresaw and could end up taking some of the blame for the market's hissy fit.

The President is having second-term hiccups in a variety of ways--the IRS, NSA, State Dept., and DOJ come to mind.  Is he losing his grip?  Bernanke was the last man standing when it came to federal officials doing something to boost the economic recovery.  Why ax the most highly regarded civil servant in the country?

The financial markets hate uncertainty.  And they've gotten a belly full of it recently.  That's why the last two days have been bad for 401(k) accounts from sea to shining sea.  And the picture probably won't get brighter for months.

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