Testing Bernanke

Dishy details continue to leak about our Federal Reserve chairman. We knew he spent years at Princeton studying the Great Depression, which is like going to MIT to major in near-death experiences. We were cognizant of the fact that he applied his brain to the problem of Japanese deflation in the '90s. We learned that he urged on a band of younger academics to study bubbles (Wall Street Journal). And we now discover that this Bhudda-like figure (New York Times) had long hair, a handlebar mustache, half a Fu Manchu and studied in his messy little room as a Harvard freshman. Apparently, he had no dates, which explains why his year was "austere" (New York Times). And wait, there's more: His undergrad thesis was on deregulating natural gas, and it was great! (New York Times) He was ahead of his time, as if he'd a hung a disco ball in a fit of lonely prescience. He "squashed together two equations and made a model" (New York Times). And he graduated in the same class as Lloyd Blankfein of Goldman, Sachs & Co., who appeared in the yearbook -- wide lapels -- just beneath him (New York Times). They knew each other -- they shared a dining hall and library, which is like saying they shared planet Earth -- but, while they were acquaintances, they were not pals. Pity. Perhaps Lloyd lacked the requisite austerity. Conclusion: Our Fed chief apparently gets the '70s -- wage-price spiral, stagflation, bad clothes -- better than, say, Ashton Kutcher. It's unclear, however, when he grew that beard.

It's swell to realize that our Fed chairman has a deep knowledge of the '30s, the '70s, the '90s and bubbles, because he will clearly need them all. To save the markets and the world, Ben cut interest rates and opened more Fed windows than a spring housecleaning. But now he has stopped because a plunging dollar and spiking commodities (small stuff: food, gasoline) threaten to set off inflation and recession. Ben claims to know what he's doing as he shifts from the '30s (Bear Stearns et al.) to the '70s (stagflation), and he deserves the benefit of the doubt. But now, a faint chill of the '30s has returned. LIBOR, if you can believe it, is dancing again; the ABX is on drugs; credit-default swaps have the shakes. Lehman Brothers stock took a pounding, and there's talk of capital infusions, oh, for everyone. Foreigners and New Jersey are getting calls. This explains why a blue-suited Treasury Secretary Hank Paulson was pictured in the Times in what looked like an Arabic train station surrounded by Abu Dhabians in burnooses: he was pitching the U.S. as an investment destination. Meanwhile, everyone wonders, purely theoretically, what Ben will do if he has to come to another rescue.

It goes without saying that Lehman is not Bear Stearns Cos. It's bigger, less dysfunctional, less prone to naughtiness. Lehman is a viable, if troubled, business, but then, what's not? Lehman has been selling assets, and it's bought time (maybe) by tossing Erin Callan to the short-selling wolves. It has $6 billion extra dollars. And unlike Bear, Lehman has the Fed behind it, in the form of an open discount window. Which brings us back to Ben. In the Bear run, the Fed was the only entity with both the means and will to help. And, in fact, the decision was made rapidly and without an excessive amount of information, as to the consequences of the firm crapping out, short of knowing Bear had 750,000 credit-default swaps outstanding (the low-ball $2 a share bid was either overweening confidence that no one would challenge the imperial Fed or the belief that shareholders had no choice). But once the decision was made, the Fed found itself transformed. The Fed had more power, less independence -- every manager's nightmare. Would it continue to backstop all banks? How far would it go, particularly if it couldn't find a buyer for a failing firm? And could it resist the enormous -- really unquantifiable -- undertow of a market that no longer cares about grades?

These are issues that the past provides little insight into; they're not in any textbook. And that's one of the problems with the way we're handling the ongoing crisis: It's not Ben's fault, but everything is ad hoc and provisional. Neither markets nor players nor regulators have a clue as to what happens next or the will to fashion a response. Sometimes, often in regulatory matters, constructive ambiguity is a good thing. But this isn't a regulatory matter. This is an odd place where microeconomics, the fate of one firm, meets macroeconomics, the fate of everyone. It's policy for the moment and policy for the ages. And it's all on Ben. That's a tough spot, even for a Bhudda.