The Great Distortion...

"To me Ben Bernanke is a great American hero", said once treasury secretary/Bernanke abettor Hank Paulson last week in a CNBC television interview. Like Superman saving the Earth from a rogue asteroid, the mild-mannered leader of the U.S. Central Bank turned man-of-steel in the eleventh hour and rescued us from ..... uh ..... what? The greatest recession since the Great Depression? Nope! That's precisely what occurred. Yet, according to Paulson, our greatest-recession-since-the-Great-Depression-experience was some super-human (or humane) monetary policy achievement. Bernanke, he proclaimed, saved us from the Next Great Depression. I strongly suspect that had we experienced the Next Great Depression, Paulson would herald Bernanke as the great American hero who rescued us from a Depression Greater than the Next Great Depression. Truly, there's no trough that can't be buoyed by a well-articulated counterfactual.

Okay, let's be fair, the greatest recession since the Great Depression indeed bottomed amid mammoth monetary stimulus, as did the stock market (after the major averages plunged some 50%). So did Bernanke save us from, say, a deeper bottom and, say, a 60% plunge in stocks? 70% maybe? Hmm.... I wonder what would've happened without the mammoth stimulus? Surely the economy would've bottomed, but sooner? Later? Deeper? As deeply? Surely the stock market would have bottomed as well, but sooner? Later? Deeper? As deeply? We can counterfactual till the cows come home but we'll never know the dates nor the depths. And we'll never know for sure whether central planners extinguished or exacerbated the Great Recession.

The Keynesian-hearted will credit the slightest growth to policy. The free-market-minded blame our historically-slight recovery on policy-induced uncertainty. What both sides should (but won't) agree on is that a great distortion in the pricing of bonds has resulted from Bernanke's (perceived) super-humane efforts. The question now is how will the markets ultimately correct this great distortion? And did last week offer up a sneak preview? Time will tell...