Photo:slopjop123, Creative Commons, Flickr
It is human nature to look towards religion or a higher power to help us overcome circumstances that are beyond our control. History is rich with examples where gods have been created to try to understand the mysteries of nature. As long as we believe that there is a higher power watching over us, providing us with direction and answers, we feel empowered to overcome the irrational forces of nature. It is only appropriate to compare the last two weeks of market volatility to an irrational force of nature, and markets are now looking towards a higher power – the Fed – for guidance. I’m too young to have been around for the 1987 crash, or “Black Monday” as Wall Street veterans recall. The crash served as a baptism of fire for the new Fed chairman at the time, a certain Allan Greenspan. In contrast to Bernanke’s reaction to the current turmoil, Greenspan rushed to cut rates in 1987, creating the legacy of the “Greenspan put.”
In the same way that the ancient Mayans may have looked to the heavens and asked the sun gods for their blessing, stock markets were comforted by the notion that the Fed would always be there to bail them out with a rate cut if the going got tough. Investors took it for granted that they would be protected by the powers that be, in the form of the Fed, if market turbulence threatened their survival. In God (or the Fed), they trusted.
Greedy investors that took on unjustified risk have now come to the realization that the gods (or the Fed) have abandoned them. Bernanke has succeeded in breaking the market’s assumption that market convulsions lead to automatic rate cuts, but some suggest that he has damaged the Fed’s credibility. How could they not have seen this coming? Shouldn’t the Fed be proactive and not reactive? I don't agree with this argument. It isn't Bernanke's job to keep the U.S. out of near-term recession at the expense of long-term stability.
After my third cup of coffee for the morning I’m starting to feel like the madman in Nietzsche’s Gay Science. In the passage, the madman is described as running through a marketplace shouting, “God (or the Fed) is dead! God (or the Fed) remains dead!” People cannot yet see that they have killed the idea that God (or the Fed) can act as a source of any moral code.
Those who have lost money in the recent market chaos will keep blaming the Fed for their losses, saying that the central bank is “behind the curve” and that “they know nothing.” Remember Jim Cramer’s meltdown on TV? To these investors, God (or the Fed), is dead. They have killed God (or the Fed).
It is worth pointing out that Nietzsche believed there could be positive possibilities for humans (in our case, financial markets) without God (or the Fed’s “Greenspan put”). The recognition that “God (or the Fed) is dead” would be like a blank canvas. Let’s hope that some hedge funds and other risky investment vehicles price risk properly in the future, without the assumption that a higher power will always bail them out.
Disclaimer: Thank you to Alden Cass, whose article served as inspiration for this piece. I have no exposure to the current market turbulence.