Bernanke Changes Tone On Bailout Terms, Hints On Rate Policy

Fed Chairman Ben Bernanke sounded more confident today in his presentation to the Joint Economic Committee in Washington D.C.  It seems as though he did not want to repeat the mistakes he made yesterday today.  Today, Bernanke is trying to convey the message that the government should not consider the $700 billion bailout and rescue package as a purchase rather than as an expense. In short, he wants the senators and congressmen to think of it as an investment rather than a loss.  He is also stating that the government won’t overpay for distressed assets.  That is a marked difference over concerns about what Treasury Secretary Hank Paulson was discussing. 

We covered yesterday about the fears of above market risk and addedtaxpayer risks.  Yesterday, Bernanke was discussing buying assets at closer toa "hold to maturity" price rather than at fire sale prices.  Many assets now can only be sold at fire sale prices.

Bernanke says this plan won’t have an impact on inflation, and he isalso saying that if the markets stabilize the Fed might raise ratessooner.  In short, he is signaling the FOMC has to keep rates steadyand low for the near future.  But when he was asked about cuttingrates, Bernanke said the Fed will weigh risks versus growth andinflation.  So rather than committing to any solid rate direction, thisalso signals that the FOMC doesn’t want to cut rates if it can avoidit.  Its holding rates steady last week was unanimous.

Earlier this morning, Warren Buffett said this bailout plan is not comparableto the RTC of the early 1990’s.  A rescue and bailout package is likelygoing to pass.  Everyone knows something needs to be done to keep the financial markets relatively healthy. 

Whether or not they should just let the chips fall and allow the failures to come is another matter entirely.

The markets are now mixed to lower rather than being up on the day. Until this would-be bailout package actually comes, Wall Street and Main Street are having a hard time pulling the voting lever.

Jon C. Ogg
September 24, 2008