Bernanke and Dimon: A curious moment in Markets

While Jamie Dimon warns of recession, Ben Bernanke is picking up a Nobel Prize – yet the roots of the multiple crises threatening to overwhelm markets and topple capitalism lie in the solutions they led 14 years ago. They saved the world then – who will rescue it this time?

Blain’s Morning Porridge Oct 11th 2022 – Bernanke and Dimon: A curious moment in Markets

“The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis.”

This Morning: While Jamie Dimon warns of recession, Ben Bernanke is picking up a Nobel Prize – yet the roots of the multiple crises threatening to overwhelm markets and topple capitalism lie in the solutions they led 14 years ago. They saved the world then – who will rescue it this time?

There is a curious asymmetry to markets this morning.

Big News is a Warning from Jamie Dimon, CEO of JP Morgan these last 17 years: “Europe is already in recession, and the US will be there is 6-9 months”. He reckons the cracks will appear first in the credit markets, (In bonds there is truth), or “it might be ETFs, it might be a country, it might be something you don’t suspect….” He is hinting at a classic no-see-um moment. He is clearly a reader of the Porridge, commenting “if you need money, go raise it.” That’s one of my classic market mantras: Raise money when you can, not when you need to.

Time to go cash and gold?

Dimon is the last of the bank CEOs from the Global Financial Crisis of 2008 still standing – one of that band of banksters, regulators and central bankers who huddled round the financial crisis strategy tables, taking the big decisions about bailouts, letting Lehman go… while he snapped up Bear Stearns for a pittance.

Even as Dimon spoke, the market was learning Ben Bernanke has won the 2022 Nobel Prize for Economics. Along with Douglas Diamon and Philip Dybvig, his work on banking has “significantly improved our understanding of the role of banks… during financial crisis”, says the citation. For anyone under 40, (ie 60% of the financial markets), Bernanke was Chairman of the Federal Reserve 2006-2014 and is credited with leading that same rescue of the tottering World economy through in 2008.

As I’ve written so many times in the Porridge, Regulators and Central Bankers are so desperate to avoid the last crisis happening again, they often fail to see the next one coming.

It’s different this time. It’s all about consequences, consequences, consequences. The consequences of the last crisis. For every action in finance, there will be an opposite and equal reaction. Risk cannot be eliminated – it can only be transformed. For every winner there is a loser.

The coming crisis is very much a product of the way we solved the last one. A decade plus of ultra-low interest rates, quantitative easing, easy liquidity and the implied Fed Put to avoid “market instability” triggered unsustainable financial asset value gains – the longest, steepest market rally, but sustained on distortion and mispriced money. It’s been a factor in inflation (but not to the extent monetarists believe). A decade of monetary experimentation undermined the failsafe of the capitalist economy system – the importance of corporate and individual failure.

Bernanke and Dimon did what they had to do – they successfully prevented complete systemic meltdown in 2008/09. They deserve our praise. But now the bill is due….

The bailouts of 2008 triggered so many consequences in terms of transferring risk from banks to investors, from distorted asset values, to shifting investment from plant and jobs to stock buy-backs, to widening income and wealth inequality, the rise of fantabulous speculation and the gig-economy… Free market economies were twisted and distorted by the pernicious effects of mispriced capital.. All of it is unravelling now, and although its going to hurt… it’s got to happen.

On the threat board today is possible panic about how investors will handle the liquidity threats barrelling towards them: from UK pension funds trying to work out the real risk-free rate on their Gilts holding after an incompetent UK Chancellor triggered a run on the National Debt, to corporate bond holders figuring out what inflation and higher rates will do to default rates, or equity investors anxiously scanning US earnings looking for signs of just how badly the system is broken..

Meanwhile speculative shorts have built up to record levels. This means another of my market mantras is in play: The Market has but one objective: to inflict the maximum amount of pain on the maximum number of participants. It will no doubt kick in shortly, creating a short-squeeze rally that will fool many participants thinking we’ve touched bottom. Not yet. Steady…

Markets are about liquidity – and it has dried up due to regulatory change and the end of the QE Era. The biggest danger is not that markets collapse – that’s what they do. They go and up and down to reflect reality. The reality today is they are still overpriced. Real bond yields are still negative. When they are positive, let’s talk about value in stock markets. In bonds there is truth. In stocks there is speculation.

The biggest danger is we don’t let markets correct themselves. If Central banks intervene on a massive scale to address the market instabilities created by inflation, energy crises and war, then they will distort markets further – and the consequences will simply multiply. We will become that much more dependent on and addicted to fake markets. Capitalism will become more and more distorted, and loaded in favour of the rich, wealthy and greedy, sowing the seeds of its own ultimate destruction. It will die.

Yes. I am advocating letting markets free-fall and find their own level – as much as is possible.

The Bank of England has already hinted it is willing to make selective bailouts, doubling up on its Gilts liquidity rescue package yesterday. But if they are bailing out gilt holders, what about pension savers’ equity positions, or their losses on ETFs. If the ECB is preparing to bail out Italy and the rest of the Pasta Belt, why should Germans be expected to pay the consequences?

Going back to Bernanke’s Nobel Prize:

Bernanke’s expertise in banking served him well. In 2008 he swiftly perceived saving the banks and stimulating them to continue lending was the key issue necessary to avoid the Collapse of Lehman becoming the signal for general systemic loss of confidence and collapse around the global financial system.

My good chum Economist Stuart Trow, formerly of the EBRD, describes it well in a Bloomberg article this morning:

“Unlike many of his peers, Bernanke grasped what was at stake. Bank collapses involve losing valuable information about borrowers that can’t be recreated quickly. The credit creation process is best handled by banks, but when they are weighed down by nonperforming loans and a lack of capital, they can’t perform that vital role.

In Europe, measures to support the banking sector were less structured and comprehensive, with the emphasis as much on “punishment” of these perceived to have been culpable for the crisis. As a consequence, Europe’s undercapitalised banks played no useful role in the post-crisis recovery. Instead, many countries remained in or near recession, ultimately leading to a series of sovereign crises, the echoes of which are still apparent today.”

US banks are up 65% since 2008. European banks are still 70% on where they were pre-crisis. But it’s the response to the GFC of 2008 that haunts us today.

Before he became Fed Head, Bernanke was a proponent of the Great Moderation; the theory the amplitude of business cycle volatility has been tamed by effective central banking and the application of modern macroeconomic policy. In terms of a Doh! moment it was right there with UK premier Gordon Brown’s hopelessly optimistic pronouncement the days of boom and bust were over. Both men learnt from their mistakes.

Five Things To Read This Morning

BBerg – The Most Powerful Buyers in Treasuries Are All Bailing at Once

FT – It’s not all about a Fed Pivot

FT – Pensions schemes’ rush for cash shakes UK corporate debt

WSJ – Two Fed Officials Make Case for Caution With Future Interest Rate Raises

Torygraph – This may be the calm before the storm…

Out of time, and back to the day job…

Bill Blain

Strategist – Shard Capital


  1. Great post – thanks. My very simplistic (non-economist) take is that as much money has to be destroyed as was injected into the system through QE etc before one can begin to talk about fair value being in sight. A very unpleasant prospect if true – it would imply we’ve a long way to go. Down.

  2. Great post – thanks. You’re right about the roots of the next GFC being in the response to the last one. The can gets kicked down the road, not abolished. My very simplistic, non-economist take on this is that as much capital will have to be destroyed in the downturn as was injected into markets through QE etc before we can start to talk about fair value being visible.

    • Not quite the same amount of capital, but not dissimilar. There has been modest growth and some productivity gains. The assumption was growth and productivity would match anything the market grew – how quaint and foolish a notion.
      But the key issue is how most of that created financial asset notional value is concentrated within a very small number of very wealthy people. We probably need to “Eat the Rich” to balance it.
      Yes, I’m thinking Try a little Priest from Sweeny Todd:

    • Jeeez… don’t go there with Iceland. That would have been a giggle and squirts.. But look at how Iceland has come out of it – successful again. Shows how small nations can thrive, while the big ones are mired in orthodox bureaucracy!

      • Excellent point Mr. Blain …. “big ones mired in orthodox bureaucracy” … think USA, China, Europe.

  3. ‘Bernanke and Dimon did what they had to do – they successfully prevented complete systemic meltdown in 2008/09. They deserve our praise.’ I am really sorry but I do not agree with this and on the same page with Philip (earlier) on this. The taxpayer bailed out the banks. As always, when it gets hard for the banks they taxpayer bails them out, when it gets hard for the taxpayer the banks couldn’t care less. At present BOE rate is 2.25% yet, for the first time buyers is now over 7% and rising.
    If you would ask me to bail them out I wouldn’t do it again! But I’m afraid the average taxpayer hasn’t got much of a say in this …

    • It was a terrible mess, but I will stick to view Central Bankers avoided a systemic crisis becoming a massive depressionary event. Yes, it cost tax-payers, but would have cost them even more if they hadn’t acted.
      Problem is – its even less stable today as a consequence of what happened then.

  4. In bonds there is truth? Pray tell where have all those truth tellers been for the past decade?

    In an era of Fake News we now are being influenced by fake facts. There is no intersubjective truth.

    Recognizing that, tomorrow’s PPI and the next days’s CPI will be viewed as cause for a Central Bank Pivot. Markets will soar and the Fed will be flummoxed. By the end of the week the euphoria will have reversed itself and the markets will tank.

    Much money to be made and/or lost in a few days.

    • Chuck
      The point is the beautiful truth of Bonds has been distorted by the effects of unwise monetary experimentation. When you fiddle and distort the risk free bond rate than underlies financial investment, then the outcome is price distortion across every financial asset, which eventually spreads into real assets. Central Banks know that – hard lesson to learn – which is why they will resist calls to reopen the QE free money spigots.

  5. Legend has it that Bernanke sought extra powers from Congress in the darkest hours of the GFC to avert an imminent seize up of much of the global economic system. Even after he carefully explained the dire consequences of not being given them immediately, and that things were unravelling by the hour, politicians held out while they tried to pork barrel other funding into the legislation.
    We can say what we like about central bankers, any success they have is rarely achieved with the help of politicians. That’s one thing that hasn’t changed.

  6. Bill:

    Thank you for the response.

    Perhaps that beautiful truth was communicated by Bank of England chief Andrew Bailey when he told UK bond investors that they have “three days left” until the British central bank phases out emergency bond-buying efforts.

    That statement reminds me of Colonel Jessup’s soliloquy in A Few Good Men:

    You want the truth? You can’t handle the truth!

    It would appear that the BOE has put its fiddle back in the case and is now playing a big brass instrument.

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