By John Nyaradi
As the "taper on" or "taper off" rhetoric continues, it's time for investors to consider how much Ben Barnanke has been worth and what the cost might be should "taper off" become the new paradigm.
During last week's testimony by Federal Reserve Chairman Ben Bernanke before the Senate Banking Committee, many committee members took the opportunity to thank the chairman for his years of noble service during a particularly difficult era for the American economy. The props resulted from widespread expectations that Dr. Bernanke would be retiring from the Fed in the near future. The chairman did nothing to dispel those rumors.
Although it is a bit early to grade Ben Bernanke on his performance — particularly with respect to the financial crisis and its aftermath — many commentators are toying with the hypothetical question of where stocks and bonds would be today without the intervention agenda implemented by the Fed chairman.
Once the Fed began its intervention after the financial crisis, it began purchasing what eventually became trillions of dollars worth of long-term Treasurys and mortgage-backed securities. With short-term interest rates lowered to near zero, the Fed's bond buying focused on long-term Treasurys. Most economists agree that this move drove investors from the safe haven of bonds to higher-risk investments (such as stocks) in the quest for better returns. As a result, stock prices became more inflated as demand increased.
During Dr. Bernanke's testimony before the House Financial Services Committee on July 17, Congressman Mick Mulvaney of South Carolina used a chart which depicted growth of the Fed's balance sheet as it related to the rise of the S&P 500 Index. When the Congressman asked the chairman if the stock market was addicted to quantitative easing, Dr. Bernanke responded that rising stock prices reflected the strength of the economy.