So much for the myth of the maestro.
Federal Reserve Chairman Ben Bernanke last week gave the U.S. economy its most decisive interest rate reduction in a generation, slashing a benchmark rate by three-quarters of a percent.
The cut in the federal funds rate to 3.5 percent means that Bernanke has chopped rates by one-third in just five months, while also making it easier for banks to get emergency loans from the central bank.
But rather than being seen as decisive, Bernanke is being derided -- the clueless guy who told everyone housing wouldn't hurt the economy until it started a financial panic in August and who then finally panicked himself this month.
Bernanke even led the list of Esquire magazine's 2007 "Dubious Achievement Awards," with the magazine zinging him for this March quote: "The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
Esquire's appraisal: "Forecast of the Year."
Bernanke will get another chance to affect the economy this week, when he and the Federal Reserve hold their next regular meeting. Many Fed watchers expect another rate cut as added insurance to spur lenders back into action.
Whatever move Bernanke takes, the past year has shaken the myth that an all-seeing Fed has special insights into what's ahead and the power to spare the U.S. economy from shakes, rattles or slides.
That myth reached its zenith toward the end of Alan Greenspan's term as Fed chief, with Greenspan famously made the subject of a book titled "Maestro" for his supposed ability to keep the economy in hand.
Greenspan's reputation now is in the hands of revisionists. His decision to cut the federal funds rate to 1 percent and leave it there for more than a year early this decade is considered the root cause of the housing bubble that led the economy to its current problems.
Maury Harris, chief economist at the New York office of UBS, a financial services firm, thinks Bernanke has been the victim of unrealistic expectations.
"It could have been smoother if they had perfect foresight. I'm saying that sarcastically," Harris said. "They've been Monday morning quarterbacked to death."
Overall, he believes Bernanke's Fed has more often been right than wrong.
"So they didn't get an 'A'? A lot of what I've heard gives them a "C" or "D," Harris said. "It's not that bad."
Economist Roger Brinner isn't as charitable.
He said Bernanke, sworn in as Fed chairman in February 2006, has made a series of "rookie mistakes."
Bernanke "now looks like a scared and confused leader who is acting out of panic rather than out of a confident assessment of the impacts of policy on the economy," said Brinner, chief economist at the Pantheon Group, an economic consulting firm in Boston.
Bernanke held interest rates too high for too long, Brinner said. In his view, the risk of inflation, central to that policy, always was less pressing than the odds of stalling economic activity.
Looking over 50 years of statistics, Brinner said past Fed leaders held interest rates at their high for a particular cycle only for three months. In contrast, Bernanke's Fed held the key federal funds rate at its recent peak for five quarters.
The federal funds rate, the price bankers charge each other for overnight loans, was 5.25 percent from June 2006 to September 2007. The rate, after a round of recent cuts, today is 3.25 percent. Markets indicate that traders expect another half-point cut in the months to come. Nariman Behravesh, chief economist of the forecasting firm Global Insight, predicts short-term rates will drop another full percentage point by the end of April.
"There's always the tendency, when you come in as a new central banker, to prove yourself to the fraternity that you're an inflation hawk," Brinner said. "Ben was doubly inclined to do so with his misguided ideas on inflation targeting."
Overshoot the other way?
Now the Fed may be on a path to overshoot in the other direction, Brinner said. Bernanke, he noted, was a member of the Fed Board of Governors from 2002 to 2005. In June 2003, the federal funds rate was cut to 1 percent and left there for more than a year. Brinner and many other economists believe the rock-bottom rates contributed to what became rampant speculation in housing, the cause of many of the current problems in the economy.
Peter Kretzmer, senior economist in the New York office of Bank of America, said Bernanke may have been overly confident about the course of the U.S. economy in early 2007, but many of his peers were also misguided.
Bernanke, he said, can take "a little bit of solace to know there's almost no agreement and you're being criticized on both sides."
"When the problems first hit, the way in which they spiraled through the financial markets last summer was unexpected by almost everyone," Kretzmer said. "Economists and market participants look stupid," he said.
"The Fed in general, predating Bernanke, underestimated the housing bubble," said Keith Hembre, chief economist at First American Funds, a division of U.S. Bancorp. "The Fed totally underestimated the extent to which housing was going to go down. Correspondingly, that led to a wrong call for the economy and the financial markets."
But Hembre has sympathy for Bernanke's dilemma, balancing inflation worries against the odds of slowing economic growth.
"In fairness to the guy, he came in at a pretty tough time," Hembre said. "The Fed raised rates 17 times. He was responsible for three of them."
Could the Fed have steered the U.S. economy away from the drama of recent months?
"I don't know the answer to that question," said Randell Moore, executive editor of Blue Chip Economic Indicators. "A lot of people think they do. But they really don't."
Moore, whose Blue Chip newsletter polls 50 leading forecasters every month, noted that over the years, the official Fed forecast for U.S. economic performance varies little from the consensus of independent outlooks. The year 2007 was no exception.
What Bernanke was saying six months ago is not much different than what private forecasters would have said at the time, Moore said.
"The funny thing is that growth in the second half of this year doesn't look like it's going to turn out a whole lot different than what people were thinking in July 2007," he said.
Mike Meyers • 612-673-1746
