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Five Things You Need to Know: Bernanke's Jackson Hole Gets Deeper


Credit expansion comes with a cost, and Bernanke's Jackson Hole isn't deep enough to bury it.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

It was a full year ago while speaking at the Kansas City Fed's annual symposium in Jackson Hole, WY, that Fed Chairman Ben Bernanke explicitly outlined The Bernanke Put. But reading news stories previewing Bernanke's upcoming Jackson Hole speech, it seems few really listened to last year's version. "A year after speech, Bernanke may have to eat his words," says USA Today. No he won't. Let's review.

1. What Did Bernanke Say Last Year?

Speaking at the last year's symposium in Jackson Hole, Bernanke sought to reassure financial markets that The Bernanke Put remains firmly in place and that the Fed stands ready to limit damage to consumer spending and economic growth from a deepening housing recession.

The full text of last year's speech here.

2. What Was the Primary Concern Last Year?

Remember all that stuff about subprime mortgage issues being "well contained"? Well, that was wrong. and Bernanke admitted it.

"The financial turbulence we have seen had its immediate origins in the problems in the subprime mortgage market, but the effects have been felt in the broader mortgage market and in financial markets more generally, with potential consequences for the performance of the overall economy," Bernanke said.

What happens when risk aversion grows? The velocity of money slows. In other words, the key engine of our economic growth begins to sputter.

"More generally, investors may have become less willing to assume risk," Bernanke noted.

Of course, the role of the Federal Reserve as it is seen from within, is to push risk assumption without letting it get too carried away.

"Some increase in the premiums that investors require to take risk is probably a healthy development on the whole, as these premiums have been exceptionally low for some time," Bernanke acknowledged. "However, in this episode, the shift in risk attitudes has interacted with heightened concerns about credit risks and uncertainty about how to evaluate those risks to create significant market stress."

In other words, risk aversion at this time last year had spilled over into credit markets generally, threatening the whole ball of wax.

3. The Bernanke Put Clarified

In last year's speech, we learned quite a bit more about The Bernanke Put. Let's take a brief step back, what is the Bernanke Put?

Back in May, 2007 (Only One Thing You Need to Know: The Bernanke Put), in prepared remarks before a conference on bank structure at the Chicago Fed, my take is Chairman Bernanke essentially absolved the Fed of playing any role whatsoever in the subprime loan debacle, declared the subprime problem "isolated" from "responsible lending" and then waved around a gigantic put option just to let everyone know that, regardless, the Fed will step in and clean up whatever mess is left over. CONTINUED...

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