Why The Market Doesn’t Trust Bernanke

Times have changed since the beginning of the decade. Back in the day, the Fed Chairman, Alan Greenspan, would make offhanded comments on ‘irrational exuberance’ and the market would plunge. Similarly, if he signaled an interest rate cut, a rally commenced. People trusted Greenspan. Optimism also undergirded the market. Since 1987, this combination helped create two (or three) multi-year bull markets. The last of those rallies ended over a year ago.

The Rise of Web 2.0

Since 2000, another important event happened: the rise of Web 2.0. This technology empowered the ‘democratization’ of the web. Sure, anybody could throw up a website in eight years ago, but it was difficult and not very interactive. Today, people can start their own blog in a few minutes, then comment on other websites with ease. Everyone has a voice on today’s web.

This technology uncovered a skepticism that has been simmering for years. For instance, we the people may not have believed the President, but the common man could not broadcast dissent effectively. Now that anyone can write their opinion online, voices clamoring against the establishment have been growing stronger. We don’t want to hear filtered news from major outlets. We distrust spokespeople and now measure everything politicians say. This even includes political appointees who chair the Federal Reserve.

This Ain’t Greenspan’s World, Ben

Current Fed Chairman, Ben Bernanke, does not enjoy the same privileges as Alan Greenspan did. The valuable commodity of trust has been diverted from the Fed. Not only do business channels enjoy our attention, but countless blogs (like this one), and other pundits distract attention away from the Chairman. His words – and even actions – do not carry the same weight as Greenspan’s once did.

I’m not saying Bernanke isn’t a smart man. He taught himself calculus, supposedly missed one question on the SAT, and has a PhD from MIT. By many accounts, Bernanke is the perfect person to guide the Federal Reserve, and thus the U.S. economy, through the current financial crisis.

To make matters worse, this crisis is bigger than anything that Greenspan faced. Ben and company are attacking a systemic problem. It’s difficult to understand the issue, much less how to fix it. Bernanke is in a tough spot.

Global Interest Rate Cut Falls on Deaf Ears

Yesterday, it became even more evident the market doesn’t trust Bernanke and company to protect the economy. The Federal Reserve’s biggest weapon is their mighty interest rates. By sliding rates up and down, they control the cost of money to banks – thus affecting how banks lend.

In conjunction with the European Central Bank, the Bank of England, the central banks of Canada, Sweden, Switzerland, and China, the Federal Reserve cut interest rates by half a percent. This move was unprecedented! Never before have these banks acted in concert in such a dramatic fashion. Surprisingly, this otherwise bullish move fell on deaf ears. The market closed down over -1%. Today looks like it will be even worse.

Out of Ben’s Hands

Whatever’s going on in the market, the Fed can’t (or won’t?) stop it. The market doesn’t trust Bernanke’s maneuvering, much less his coordinated global rate cuts. Just like crude oil, the stock market’s bottom is nowhere to be found. The people have spoken. They no longer believe the Fed chairman’s offhanded comments or actions. The market has spoken. It demonstrated its distrust by falling even further.   

Time will tell where we land. Investors are subject to overwhelming fear fed by countless voices on the web. We no longer trust Bernanke, but that begs an important question. If we can’t trust Ben, then who do we trust?