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Tuesday, 23rd April 2024
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Comment from the editor
Fed reacts at last
Since coming into office in February 2006 as chairman of the US Federal Reserve, Ben Bernanke, the successor to the formidable Alan Greenspan, has been determined to prove how he differed from his predecessor. While Greenspan was known as ‘Mr.Moral Hazard’, for his assistance in bailing out such debacles as the collapse of hedge fund Long-Term Capital Management, Bernanke has been seen to take a more ‘academic approach’. But has Bernanke’s ambition to be the ‘anti-Greenspan’ seen him mess up his first major challenge?

An inauspicious first few months saw Bernanke make a major gaffe in May 2006 when in a private conversation with CNBC broadcaster Maria Bartiromo he implied that the Fed had not stopped raising interest rates. Bartiromo went public with the remark on her show, leading to a major sell-off on the financial markets - and much embarrassment for Bernanke.

Since then, Bernanke has worked hard on his image and is taking a tough stance on inflation, favouring rate hikes since his assumption of office. He also made it clear a few weeks ago that while the central bank would ‘act as needed’ to limit fallout, it would not bail out investors and lenders.

But one thing remains clear - now is not the time to prove he isn’t Greenspan, and Bernanke’s reluctance to act as Greenspan would have done, is raising the ire of both industry and commentators in the US and internationally. 'We have had a long history of financial panics and if we have learned anything, it is that you shove money at them,' said David Wyss, chief economist at Standard & Poor's in New York. In August, US economic commentator, CNBC’s James Cramer, lambasted the Fed chairman for his seeming indifference to the housing correction and the subsequent credit contagion affecting the credit markets, and in a rant on his ‘Mad Money’ programme, he shouted that ‘the Fed is asleep’!

With the US housing market in freefall, and contagion the ‘nom de jour’ from New York to London to Dublin, the Fed did indeed ‘wake up’ on September 18th. However, its 50 bp rate cut - the first in four years - while welcome, is seen by many as being too late to have an effect in stemming the credit crisis.

The fear now is that the difficulties which saw a bank run on Northern Rock as thousands of depositers rushed to retrieve their money both in the UK and Ireland, may spread to other banks. While no Irish bank depends as much on the wholesale markets for funding as Northern Rock, some, like Irish Life & Permanent may be vulnerable. Moreover, as the story on page 1 reveals, as the credit crunch deepens, the price of credit is becoming more and more expensive - for banks and corporates alike.

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