A "Tell" from Bernanke?

I did a piece on Saturday about Central Bankers and the words they use to influence markets and economies. I said, “Beware the Subtleties”. I ended with the following regarding announcements in the coming year from the Federal Reserve:

“We’re going to get a ton of the ‘subtle’ stuff. It’s the subtle stuff that worries me. That will move markets too.”

One day later and the first example of Fed Speak 2010 is available. Chairman Bernanke gave a speech Sunday morning in Atlanta. It was long winded. It did not read well either. Possibly being in the audience and watching the slides may have helped. After all he is the Man of the Year. See if you can wade through this.

My read of the speech was that it was (A) an attempt to defend Federal Reserve monetary policy decisions during the critical years 2002 – 2006 and (B) a suggestion that the absence of regulatory oversight was the primary source of the housing bubble that occurred during that period.

On the issue of the, “Just right” monetary choices made in this period the Chairman concluded:

“policy during that period--though certainly accommodative--does not appear to have been inappropriate, given the state of the economy and policymakers' medium-term objectives.”

And on the need for the regulatory side of the equation to be the front line force on Bubbles he ended with:

“we have strongly advocated financial regulatory reforms, such as the creation of a systemic risk council, that will reorient the country's overall regulatory structure toward a more systemic approach.”

But what scared the pants of me was the following:

If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach.

Put these together. Bernanke is trying to convince us that bubbles are not caused by monetary inflation. He is so convinced of this that he will delay, for as long as possible, the return to ‘normal’ monetary policy. He will only use monetary policy as a tool if all other regulatory efforts have been exhausted.

2010 is an election year. That being the case it is unlikely that any legislative steps will be initiated that would have any meaningful impact on the formation of future bubbles. Bernanke knows D.C. and knows ’10 is a dead year. So he throws this out on the first day of this year and says, “I’ll wait to revert to normalcy and give you legislators a chance”. What are the chances we get this Systemic Risk Council thing up and running anytime soon? About zero. But Ben is prepared to wait while that runs its course.

This is the weakest possible a position a Central Banker could take. Mr. Bernanke believes that monetary policy should be used only as a last resort measure when economic bubbles are forming? I think Mr. Bernake just gave us a “tell.” This speech was a way for him to validate the choices he has already made. Ben will not be taking away the punch bowl away anytime soon.