Where Chairman Bernake Adds Value - 3 / 16 / 2009

You want to know how bad our economy is? Here is the answer..So bad that the Fed Chairman Ben Benanke and most certainly President Obama decided he better give an interview to the American people, not their congressional representatives as was tradition until last night. Why would Bernanke risk the Fed's reputation and the inevitable market response by going on 60 Minutes this past Sunday night? We'll get to that answer. But for now let's take a minute to discuss what I like about this Chairman.

He is good at plain english. He is does not use jumbled prose approved by lawyers when answering questions. He addresses the financial markets with a consistent message, like it or not, and it would seem with reasonable honesty. He has no opinion, other than he believes in the ability of the US financial system to mend itself and become stronger over time. Leadership and consistency are the two main ways a chairman or CEO can add value to any enterprise be it a small company or the largest economy in the world.

We received none of this from Greenspan. Recall when CNBC thought it was part of the game to decipher Greenspeak? What they and the WSJ should have been doing was calling for Greenspan to speak plainly to the world and to our business leaders. Certainly after his second major economic bubble fiasco there can be no doubt as to why he spoke so mysteriously to congress. The result of Greenspeak was that Congress and the financial media spent more time trying to interpret what he said, and less time predicting the results of the Fed's decisions under Greenspan. Greenspan knew he had made mistakes, and under his leadership he chose other mistakes to fix them. The Fed under Greenspan gamed the American system. They hoped that the financial system, when given enough get rich opportunities, would create its own solutions to the systemic problems it created. We discovered this recently when Greenspan stated "We thought they would regulate themselves." Unbelievable. It was as if he was trying to prove he was more clever than every other financial professional each time he testified.

In all honesty, the greater business minds I know were always very suspect about the Fed's policies since 1998 and the "soft landing".

So why has Bernanke decided its ok for him to do a prime time interview? First it's because this man knows that he himself is a terrible liar, he's definitely not a salesman, and so his style can only convey honesty to the public. It also conveys that transparent disclosure policy that the President has been a champion of. I don't know Bernanke yet, but I do know a great many great economic and business thinkers, and his style - straight, unemotional talk, comes from years of economic discipline and study combined with real world successful application. I suspect that if we looked into his policy writings during his time under Greenspan, we would find that he was both very accurate and very simple to understand. The best leaders have the ability to distill the simple, most valued truths from complex ideas and in so doing give direction to their employees for implementation.

Did Bernanke accomplish this last night? Here are his most important quotes:

"..No doubt the unemployment rate is going to go higher than it is, but i think again if we do succeed in stabilizing the financial system we will begin to see a slower pace of decline and eventually a stabilization that will set the basis for a recovery"

speaking on the Fed itself, "It's an institution that the people don't hear much about, but it's a very important one. It manages monetary policy for the country, its one of the main tools we have for managing our economy and keeping our prices stable....its original purpose was to deal with financial crisis which is what we are dealing with right now."

"The Fed can not put money into companies. It can only lend money against assets."

"In October I spoke to a congressman who said to me that bankers and business owners in his district were no seeing the problems that [secretary Paulson] and I were addressing. And I turned to him and said, They will."

"[The Fed] has been effectively printing money and we need to do that because our economy is very weak and inflation is very low. When the economy begins to recover ....that will be the time we need to reduce the money supply, raise interest rates, to ensure we have a recovery that does not involve inflation."

I believe that Bernanke accomplished the mission of a good leader in times of crisis. Tell the bad, tell the good, be honest to a fault. This becomes the infrastructure for businesses and employees to build on once again. I'll note I was pleased to hear him say that with regard to AIG and other financial institutions recieving huge government aid (citigroup) this Fsed will begin calling its loans when these companies have stabilized and then require the sales of assets and subsidiaries to pay back those loans.

Essentially this is the model vulture or distressed investors use. Invest in companies at deep deep historic discounts. Next determine which parts of the business are valuable. Wait until the business stabilizes and then sell off these parts of the business to recoup the invested / loaned amount. Hopefully leaving a better managed, more focused enterprise in which the investors can participate in the upside value that comes with business growth. The difference of course is that the Fed can print money that ensures they won't be diluted by money invested in subsequent financing rounds should it take much longer than anticipated to restructure and make valuable these businesses.

The Fed - Building Value every day? - If congress lets them I think they will.

Brad van Siclen.