Diary

How To Give Americans Confidence In The Economy

While the Obama Administration flirts with the idea of bank nationalization–and bank stocks suffer as a consequence because of fears associated with the policy and because of the uncertainty concerning what the Administration will ultimately do–Ben Bernanke has taken it upon himself to calm some nerves:

Stress tests of big US banks that start this week are not likely to lead to any of them being seized by regulators and nationalised outright, Ben Bernanke told Congress during testimony on Tuesday.

Mr Bernanke said “none of the major institutions are subject at this point” to the kind of regulatory intervention used to address banks on the brinks of failure.

The Federal Reserve chairman’s comments provided the clearest signal yet that US authorities hope to support the major banks as going concerns – with partial nationalisation occurring as necessary.

Stocks rose in response. By the close in New York, the S&P 500 index was up 4 per cent from the previous session’s 12-year lows. Wells Fargo was up nearly 17 per cent, while Goldman Sachs was up nearly 15 per cent.

Mr Bernanke said he does not believe that full nationalisation makes sense today.

“I do not see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalise a bank when it just is not necessary,” he said.

The Obama Administration might learn something from this. Being forthright about the risks of nationalization and about the fact that it is not needed–intellectual fads in the world of punditry notwithstanding–will do a lot to boost troubled markets and with the markets, general confidence in the economy.

Why doesn’t the President place the Fed Chairman on speed dial so that the next time the President wants to make a speech about how the sky is falling, he can call the Fed Chairman beforehand and be talked out of the idea?