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The Bernanke Put

It will be interesting to see how Fed Chairman Bernanke’s rescue of the stock market works out. It may be easy to compare his approach with a less activist approach, since all the other central bank governors appear to be resisting the temptation to rescue their stock markets. The Bernanke put seems to have replace the Greenspan put, allowing big investors to maintain an option to sell their stocks at a higher price if the market goes down too much. In essence this administration has said that it will rescue the rich investors immediately, and maybe later it will do something for the small fry.

The Europeans so far seem to think that the stock markets and the rich investors can take care of themselves. If they make some bad investments, they should have to live with them. This runs the risk of being a drag on the economy in the short term, but it gets the trash out of the financial system and creates a foundation for future growth. Bernanke and Greenspan are acting in the present, but are they mortgaging the future? Greenspan had twenty good years, which argues that his approach may work out. But the turmoil we have today is at least in part due to Greenspan’s decision to keep credit cheap and let the good times roll.

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