Bernanke: a mad hatter or a pro?

PUBLISHED : Sunday, 30 October, 2005, 12:00am
UPDATED : Sunday, 30 October, 2005, 12:00am

Local analysts differ on their views of the new Fed chairman and his commitment to fighting inflation

The nomination of Ben Bernanke as Federal Reserve Chairman has drawn a mixed reaction among Hong Kong's financial community, with some casting a wary eye on the man who will become de facto chief over local monetary policy.

Among the most pointed commentaries circulated last week came from CLSA chief strategist Christopher Wood who welcomed the man about to become the world's most powerful central banker in the GREED & fear newsletter: 'There is now the risk of a mad hatter running the Fed ... [our] view is that Bernanke's selection as Fed chairman is a fundamentally dangerous appointment. His public speeches in recent years have revealed a dangerous obsession with the naive notion that printing money can solve all problems.'

Mr Bernanke is expected to take the helm in January when current chairman Alan Greenspan steps aside. Although the nomination must be approved by the Senate, most observers believe it will pass with few hiccups.

Unlike his predecessor, Mr Bernanke favours inflation targeting, which would bring a more rule-based policy approach to the Fed versus a Greenspan era noted for an intuitive understanding of the market. Mr Bernanke was criticised in international banking circles for his 2002 comments to the effect the Fed possessed an electronic printing press and could resort to unconventional policy if faced with a Japan-style bust. At the time, deflation was considered a threat, however many viewed the comments as irresponsible and in conflict with a central bankers' role as a guardian of sound money. The statement coincided with the Fed's ultra-aggressive interest rate cutting programme that eventually saw mortgage rates decline to generational lows.

Mr Wood sees a gloomy future ahead for dollar-based economies. He says it's hard to fathom Mr Bernanke, a former Princeton university professor, will stray from established Fed policy after so many years at Mr Greenspan's side. 'That Bernanke is associated with 'easy money' seems clear from Wall Street's exuberant reaction to news of his appointment,' Mr Wood says. 'With Mr Bernanke at the helm, the prospects of a long term breakdown of the US-dollar paper standard becomes much more likely.'

'[We are] even more committed to the long held view that gold and gold mining shares remain essential investments or insurance for owners of financial assets globally.'

Wall Street closed out a week of volatile trading as investors juggled mixed corporate earnings reports and renewed interest-rate worries. Stocks rallied sharply Friday, with the Dow Jones industrials gaining 172 points on better-than-expected gross domestic product growth last quarter despite the disruptions caused by hurricanes Katrina and Rita. All major indexes finished an erratic week higher.

The Commerce Department said the US economy grew 3.8 per cent in the third quarter, besting economists' forecast for a 3.6 percent gain and the 3.3 per cent advance for the April-June period.

Bill Belchere, regional economist for Macquarie Bank believes Mr Bernanke's comments were misinterpreted and that he may turn out be a better inflation hawk than is widely assumed. 'He has built his academic reputation as an inflation targeter, Mr Greenspan was more relaxed on that score,' Mr Belchere says.

One outcome could be a US central bank poised to react faster to changes in the economy. That means interest rates in Hong Kong could move up and down more quickly, magnifying changes in asset prices. Mr Belchere expects strong economic growth globally next year backed by an upturn in corporate investment. Regionally, he expects the asset-price reflation trend to continue. 'The China factor seems to be a one way upward push for Hong Kong asset prices and economic activity,' he says. The abundant liquidity flows have ebbed in recent months, but the dip is likely temporary. 'We've had a pause here, but the way I look at things, valuations across Asia are still very compelling,' he says.

Vincent Kwan, chief economist for the Hang Seng Bank, says Mr Bernanke's baptism of fire may come in the form of stronger inflation than the market currently expects. There are no easy answers to what lies ahead, but Mr Kwan says the doubling of energy prices in the span of a few short years is likely to appear in the broader consumer price level at some point. The ability of China as low-cost producer to cushion the world from higher goods prices may also be coming to an end thanks to rising energy and wage costs on the mainland. He says the incoming chairman may be forced to raise interest rates at a faster pace and to a higher level than many market participants believe.

'At this stage the risks to the economy are on the downside for sure,' he says. 'One risk is that the interest rate might go up more than people expect.'

But if you're worried Mr Bernanke will put the brakes on easy money flows, breathe easy says Mark Konyn, chief executive of Allianz Global Investors. Having occupied the co-pilots' seat during the Greenspan credit boom, Mr Bernanke has a deeply ingrained growth bias which should play out in the form of a continuing boom in Asian real estate and other regional assets.

The policy mistake of the 1970s was to increase interest rates to curb inflation, a bad idea that led to stagflation, Mr Konyn says. Most likely Mr Bernanke will borrow from the Greenspan play book, gas the credit channels and aim for fast economic growth to overcome any bumps along the way.

'For Hong Kong that pro-growth bias that he's [Mr Bernanke] got is very positive because it means he will be fairly cautious in running the risk of over tightening, which means he will be willing to let growth come through,' Mr Konyn says. 'As long as mistakes aren't made early on, it should be a fairly smooth transition.'