Category: Jeremy Siegel

Siegel: Don’t blame the central banks; thank them

Jeremy Siegel, the ubiquitous perma-bull academic and best-selling author, gave his imprimatur to the Bernanke Fed (and all central bank “injections of liquidity”) with this classic on Yahoo Finance today.

Siegel subscribes to the fireman theory of central banking. Every now and then, a brush fire will flare up (e.g. the recent subprime melt). The central banker’s main job, if not to put the blaze out, is to keep it contained.

Don’t get me wrong. I am not saying that central banks can completely prevent the boom and bust cycles that have plagued market economies from time immemorial.

There was very little that the Fed could do to prevent the 1990 recession caused by the real estate bust and soaring oil prices triggered by Saddam Hussein’s invasion of Kuwait. Nor could the central bank prevent the 2000 recession caused by the popping of the technology bubble and 9/11. But central banks have reduced the severity of recessions by preventing a financial panic from developing into a full-blown economic collapse.

According to the Smokey the Bear school of thought, the 1930s Fed made the fatal error of allowing a few smoldering ashes to turn into a full blown inferno:

It is very important to understand how significant this Lender of Last Resort function is. In 1929 a stock market crash turned into a liquidity crisis when depositors worried about the loans banks made against the stock market. But the Federal Reserve and other central banks did not lend money to the banks that were besieged by depositors. The Fed had claimed at that time that the banks that made bad loans should fail and should not be bailed out.

Of course, those who blame the Fed for actually enabling and encouraging these perpetual forest fires are all wet:

Critics claim that the Fed is “bailing out” the sub-prime lenders and encouraging risky lending. But these fears are misguided. In no way do the central bank’s actions “bail out” the sub-prime lenders. Those that bought these securities through the capital markets will suffer the full impact of their imprudent actions, as central banks offered no reserves to lenders outside the banking system. And those banks who made bad loans will also suffer impairment of their capital base.

So don’t worry children, Fire Chief Ben is on the case this time!

The world’s other central banks have also acted accordingly by supplying all the liquidity needed to keep credit costs under control and assure the stability of their banking systems. Thanks to their concerted actions, the sub-prime crisis should not turn into a recession.

My comment: The Bernanke Fed is pouring gasoline on a fire the Greenspan Fed created with its misguiding attempt to “contain” the tech bust from 2001-2004. Yet sycophants like Jeremy Siegel are telling the kiddies this is a great opportunity to gather around the camp fire, roast weenies and toast marshmellows.

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