The Rise of Financial Populism

Although one can make reasonable arguments for the recent rate cuts by the Federal Reserve, there is the appearance that the Federal Reserve is simply responding to cries of help from Wall Street. Perception can often be more important than reality and if played out it can become reality. So even if the Federal Reserve was acting from an objective, fact-based perspective, its recent rate cut decisions may come to be seen as meaning the Federal Reserve has a new mandate to bail out Wall Street--it is simply too important to fail.

Some observers(here, here), however, take a even stronger position and assert that the recent rate cuts were not based on sound economic analysis, but rather on the Federal Reserve responding to panic-driven volatility in equity markets. Here, the Federal Reserve is consciously responding to the pleas of help from Wall Street. Both scenarios imply a troubling development. Robert Samuelson calls it 'financial populism' in a recent article. Some excerpts:

Jim Cramer -- the hyperactive, loud and opinionated host of CNBC's "Mad Money" -- is no fan of Federal Reserve chairman Ben Bernanke. If you'd tuned into "Mad Money" any time in recent months, you might have caught one of Cramer's outbursts against the ex-Princeton University economics professor. "Defend us from Uncle Ben Bernanke's relentless march to recession," went one rant. "You know what Bernanke is? He's the General Sherman of monetary policy. He's waging total war against the American economy."

Call this the rise of financial populism. Cramer is its biggest star and, in some ways, it has fundamentally altered the climate in which the Federal Reserve makes economic policy. Throughout its history, the Fed has rarely been popular (the peaceful period in the 1990s under Alan Greenspan was an exception). People often blame the Fed for recessions or high interest rates. But traditionally, politicians, business leaders and unions have been the most vocal critics.

No more. In recent months, the noisiest criticism of the Fed has come from Wall Street.

The rise of financial populism is certainly troubling. But if one makes the argument that the excesses from the past housing bubble and its related mess in credit markets needs to be sorted out, then financial populism becomes even more troubling since it aims to avoid the painful corrections needed. The always enertaining Daniel Gross raises this point in a recent article:

Wall Street traders are the infants and toddlers. They're the tykes who stage public tantrums, screaming and yelling and writhing on the floor until they get what they want. Since the markets began to buckle last summer, what traders want is interest-rate cuts and other government measures to bail out banks from reckless and disastrous lending and investment decisions. In response, Federal Reserve chairman Ben Bernanke has done what any exhausted parent does when a child screams for three hours straight: he gives in. In the past two weeks, the Fed cut interest rates sharply twice, taking the Federal Funds rate down from 4.25 percent to 3 percent.

Of course, "giving in to a tantruming child just reinforces the demand," says Dr. Wendy Mogel, a clinical psychologist in Los Angeles and author of the wildly popular parenting tome "The Blessing of a Skinned Knee." And each time you cave to a screaming child, it buys you less quiet. The Federal Reserve's latest attempt to calm the market's tantrums—the half-point interest-rate cut on Wednesday—bought about 90 minutes of market silence. Within hours, as poor economic news continued to materialize, the clamor for further rate cuts began to rise. Mogel puts it in starkly financial terms: "Indulge tantrums and you get short-term gains and long-term loss"...

The same might be said about Washington's current economic ministrations. The nation is now nursing a seriously skinned knee because of reckless behavior in housing and credit. But rather than force consumers, borrowers and bankers to face the consequences of their own actions, Washington is functioning as a helicopter parent. Harvard economist Ricardo Hausmann, who characterized America as "whiner of first resort," believes the rush to stimulus is being led more by a concern for Wall Street than a concern for Main Street. Rather than take their lumps after several years of exceptional returns, the banks are furiously lobbying for help. They're getting it.

The rise of financial populism suggests that Federal Reserve is becoming more politicized, even though it is designed to be independent from political pressures. Chalk one up for Jim Cramer and the other liquidity addicts of the world.