Fed signals intent to ward off slump

Bernanke calm, upbeat in House remarks

March 01, 2007|By Joel Havemann | Joel Havemann,LOS ANGELES TIMES

WASHINGTON -- With his message to the markets not to panic, Federal Reserve Chairman Ben S. Bernanke in effect signaled yesterday that the central bank would again stand ready to try to head off any major financial crisis, analysts say.

Bernanke told the House Budget Committee that the economy was in good shape and that the Fed was monitoring the markets in the wake of Tuesday's global stock sell-off.

Stock market operations "seem to be working well," he said, adding that "there's a reasonable possibility that we'll see some strengthening of the economy sometime in the middle of the year."

Analysts saw his words and calm body language as an apparent signal that the Fed would be ready to provide cash or other support in case Tuesday's plunge escalated into a meltdown that threatened the global financial system. That would continue a practice under Bernanke's predecessor, Alan Greenspan.

Under Greenspan, the Fed had provided financial support to ease the impact of several crises, including the 1987 stock market crash, the 1997 Asian financial crisis and the 1998 collapse of the giant hedge fund Long Term Capital Management.

The 1987 market crash, which greeted Greenspan just two months into his term and drained the stock markets of nearly one-quarter of their value in a single day, was widely thought at the time to be a precursor of recession. But the Fed chairman, beginning to establish his reputation for working miracles, avoided the inevitable by guaranteeing to pump enough money into the economy to keep anyone from going broke for lack of cash.

In today's context, such a safety net - called a "Greenspan put" under his chairmanship because it implied that investors didn't have to buy protective put options to cushion themselves from a market tumble - could defuse a potential crisis in the subprime mortgage market, where the housing slump has been accompanied by an increasing number of defaults.

But it could also backfire by encouraging big investors such as hedge funds to take undue risks, knowing they or the financial system would be bailed out in the end, some experts say.

Many analysts said Tuesday's market sell-off was primarily the result of a realization that investors globally were already taking undue risks.

Greenspan himself, in a satellite hookup to a business conference in Hong Kong over the weekend, said, "We do not and cannot look into history without being very concerned when you see the absence of awareness and concern about risk that we see today."

Most analysts and investment advisers agreed that Bernanke's demeanor helped to minimize the risk that Tuesday's stock sell-off would snowball.

Nariman Behravesh, chief economist at research firm Global Insight Inc. in Waltham, Mass., said Bernanke's stance - soothing, but with no explicit promise of injecting new money into the financial system - was just right for the situation.

"We're a far cry from 1987, when the Fed was facing a 23 percent drop in the markets in just one day, with another big drop to come four or five days later," he said. Tuesday's 416.02-point drop in the Dow Jones industrial average amounted to a much smaller 3.3 percent.

"Bernanke exudes calm, he plays the role well," said Mark Zandi, chief economist at Moody's Economy.com. "He's clearer than Greenspan and articulates his points in clear terms."

Joel Havemann writes for the Los Angeles Times. Times staff writer Molly Hennessy-Fiske contributed to this article.

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