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A week ago, the wild-eyed masses were calling for Tim Geithner’s head. The newish US Treasury secretary was being blamed for everything from the deepening banking crisis to bonuses at defunct insurer AIG. Across Washington, meanwhile, Federal Reserve chairman Ben Bernanke basked in the market’s positive reaction to the central bank’s intention to begin quantitative easing. If only Tiny Tim could be as bold and commanding as Big Ben.
What a difference seven days can make. Following an abysmal first attempt in February, and under immense pressure, Mr Geithner must have been shaking in his boots on Monday as he announced the Treasury’s latest bail-out plan. But investors loved it, sending the S&P 500 index surging 7 per cent. With seemingly a new lease of life, the next day Mr Geithner argued for sweeping new powers to wind up bank holding companies. Then on Thursday, he recommended a wholesale reshaping of the entire financial system.
Now it is Mr Bernanke under the greater pressure. After leading the world in cutting rates aggressively, the Fed’s move to throw the monetary handbook out the window by the unsterilised buying of government bonds and other assets, has dramatically raised the stakes. Mr Bernanke risks trapping himself. If quantitative easing is not done on a sufficient scale relative to the massive issuance required to fund America’s ballooning deficit, fixed-income investors will shrug it off and Treasury yields will keep rising. That seems to be happening now.
If, on the other hand, he convinces markets that the Fed will keep pumping for as long as it takes, concerns may soon turn to inflation and the dollar. Ideally, of course, the world needs both men’s stock to be high. Messrs Geithner’s and Bernanke’s tasks are equally Herculean. Confidence in both is crucial for sentiment. In the end, they will succeed or fail together.
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