With global investors running scared, he had to protect Brand America, says EDWARD HELMORE
The Great Depression is the subject of US Fed Chairman Ben Bernanke's considerable scholarship. "If you want to learn about seismic activity, you study earthquakes, not tremors," he is apt to say. But as an expert on how to prevent crises from spinning out of control, his emergency rate cut of three-quarters of a point before breakfast on Tuesday was puzzling.
With no new economic data to act on, it looked to many like a purely political manoeuvre designed to reduce volatility in the market. Yet Bernanke prides himself on being an academic above the fray of politics. So why send such panicky signals just as world leaders gather at Davos?
The answer is he had no choice. Few believe that President Bush's $150bn economic stimulus package will have a long-term effect. Nor is it likely the US economy (70 per cent of which is domestic consumer spending) can be tricked into higher gear: consumers who propelled growth during Bush's war-spending, tax- cutting presidency, are tapped out. The Dow Jones, some believe, could drop 5,000 points to 2001 levels over the next 18 months.
What unnerved Bernanke was that Monday's global sell-off was driven not by small and retail investors but by investment banks and hedge funds. Faced with what amounted to a wholesale depreciation of US foreign-held assets, Bernanke and Treasury Secretary Henry Paulson Jr simply abandoned decades of monetary fiscal policy that preached fighting inflation foremost, and decided to protect Brand America.