October 5, 2007


Anatomy of a Fabulous Fed Flip-Flop: Bernanke’s major-league monetary makeover changes everything. (Larry Kudlow, 10/05/07, National Review)

Using the Freedom of Information Act, Ken Thomas, researcher and lecturer at the University of Pennsylvania’s Wharton school, was able to get Bernanke’s calendar of phone calls and meetings at the time the flip-flop occurred. He found that a day after the Fed’s August 7 decision to keep rates steady and maintain a focus on inflation worries, Bernanke received a phone call from Citigroup’s Robert Rubin, the Wall Street powerhouse and former Clinton Treasury secretary. Thomas does not know the content of the Rubin call, but subsequent calls and events suggest that Bernanke rapidly changed his mind on August 8 and 9, after which he began steering the Fed towards a series of massive money additions to the banking system.

According to the Bernanke logs, a 5 p.m. Rubin call on August 8 was followed by a 7:30 a.m. next-day breakfast with Bush Treasury man Henry Paulson and an 11 a.m. meeting with legendary mortgage expert Lou Ranieri. (It was Ranieri who pioneered mortgage-backed securitizations, the very bonds that were collapsing as a result of the subprime mortgage virus that had already begun infecting the financial system.) At 2 p.m. that day the Fed chair met with Ray Dalio, head of Bridgewater, the fourth-largest U.S. hedge fund, along with other hedge-fund magnates. At 4:30 p.m., Bernanke was on a conference call with his fellow FOMC members, undoubtedly to discuss a Fed change of heart.

In fact, over the next few weeks, Bernanke participated in no fewer than thirty-five separate conference calls with fellow Fed operatives — a complete departure from his earlier no-conference-call style. And he got the liquidity ball rolling. As we now know, the Fed started pouring liquidity into the system on August 9. Then, on August 17, it slashed its base discount rate for member-bank loans by 50 basis points. Finally, on September 18, it enacted a shock-and-awe liquidity-adding half-point drop in the federal funds rate.

With a reputation as a dove, Mr. Bernanke has kept rates artificially high in order to establish credibility at an institution whose sole purpose is to defend against inflation. With financial heavyweights giving him the green light he, thankfully, reverted to form.

Posted by Orrin Judd at October 5, 2007 7:25 AM

My Occam's razor just tells me Bernanke was really wrong for a while, now he's getting it right. Of course, I don't have to backfill for a year of getting Bernanke totally wrong...

Posted by: Palmcroft at October 6, 2007 4:51 PM

The great thing is that he's getting it right based on what was apparently a totally bogus job number.

Posted by: oj at October 6, 2007 8:00 PM