“Let the genius figure it out”

Yesterday I went shopping, buddy, down to the mall
Looking for something pretty I could hang on my wall.
I knocked over a lamp, before it hit the floor I caught it,
A salesman turned around, said, “Boy, you break that thing you bought it.” –Bruce Springsteen

In early 1929, despite the “Boom-Times” on Wall Street, the U.S. and the rest of the world were sitting in a precarious state. The nation’s Midwest farm-belt had been in the grips of a drought and depression for years. The failure of farms (back when we were still, to some extent, an agrarian economy) was causing weakness in the nation’s banking system. The global economy was already shaky, and signs of overheated financial markets were glaring. In fact, President “Silent Cal” Coolidge began expressing concern about banks’ lending generous margin loans to investors to buy stocks. What if stocks—God forbid—went down?

At the time, preparations were being made for a new Presidency as Calvin Coolidge was ready to turn the reins over to fellow Republican Herbert Hoover. There was no love lost between President Coolidge and President-Elect Herbert Hoover. Back in those days, the new President didn’t take over until March (as opposed to January). It was rumored that President Coolidge was questioned by a friend about the precarious state of what we would define today as a bubble. The story goes that Silent Cal replied, “Let the genius (Hoover) figure it out.”

This story makes us think about the leaders of the Federal Reserve Ben Bernanke (2006-2014), Janet Yellen (2014-2018), and Jerome Powell (2018-present). While these three leaders are far more collegial and supportive of one another, the current Chairman (or maybe The Chairman after him) has the same Gordian knot to untie as Herbert Hoover did. Once the Fed went down the road of extraordinary monetary policy and supported and inflated financial assets in 2008 (everyone has been looking far-and-wide for inflation since 2008, it was and continues to be in financial risk assets), they may not have “broke” the financial markets, but they bought certainly bought them. The question for the last decade is how to reverse our extraordinary monetary policy and let the financial markets return to normal. For a while in 2018 and 2019, it seemed the growing economy was giving the Fed the ability to return to normalcy. The tensions with China were becoming a stumbling block, but nothing compared to what came in March 2020.

 

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