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Bernanke may need to save the day ... again

September 26, 2013: 1:06 PM ET
Before Ben Bernanke can ride off into the sunset, the market may need him to come to the rescue one more time.

Before Ben Bernanke can ride off into the sunset, the market may need him to come to the rescue one more time.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Fed chairman Ben Bernanke has a lot of critics. But let's be honest here. Nobody should really be complaining.

If you're an investor, you should have nothing but fond memories of Bernanke. The S&P 500 was at about 1,280 the day before his first term started in February 2006. Today, it's hovering around 1,700.

Of course, it's hardly been a smooth ride up.

But considering what happened in 2008 and 2009, it is nothing short of miraculous that stocks have recovered this quickly.

Now the economy itself is growing more slowly than all of us (including Bernanke) would like. At risk of sounding like a broken record, I've been calling this the low and slow barbecue recovery since 2010. And that's too long. (h/t Billy Joel and "Captain Jack.")

Still, it's possible that the economy would be in far worse shape if Bernanke had not pulled out all the stops to keep the financial system afloat.

Time and time again, Bernanke came to the rescue. And guess what? The market may need him to do it one more time before he heads off into the proverbial sunset. (And back to Princeton?)

The Fed pulled a Cassius Clay and shocked the world last week by deciding to keep its program of $85 billion monthly bond and mortgage-backed securities purchases in place.

In hindsight though, the decision to not taper shouldn't be that big a surprise. The Fed doesn't just react to economic data in the rear view mirror. It needs to be like Wayne Gretzky. It has to skate to where the puck is going to be. (Two sports references in two paragraphs. @metalkaren is going to kill me.)

And there are two big, fat question marks looming on the calendar next month. They're both in Bernanke's back yard too.

The government may shut down on October 1. Next Tuesday. Then there's the issue of the debt ceiling. Treasury Secretary Jack Lew has said that the country may not be able to pay all its bills if there's no deal to raise the borrowing limit by October 17.

Investors are not too worried about the shutdown. But they should be very scared about what might happen if the government defaults on its debt. There could be a repeat of August 2011.

Related: Wall Street is ignoring Washington

And even though Congress did wind up raising the debt ceiling that summer to avoid default, Standard & Poor's downgraded the credit rating of the United States anyway. Stocks plunged on that news.

At the time, S&P "said the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges."

Translation: Elected officials, who I like to refer to as our least and dimmest, are a bunch of petulant children who put partisan interests ahead of the nation's economic health.

And nothing has changed in the past two years. Here we are at the brink of another credit rating downgrade, or worse ... an actual default.

Related: Fed considers contorted exit strategy from stimulus

So it's no wonder that Bernanke wants to keep quantitative easing going for at least another month.

"The Fed carries the big stick of QE," said Bernie Williams, chief investment officer of investment solutions for USAA. (He's not the former Yankees outfielder. And yes, he said he gets asked that all the time.)

"The Fed could delay the taper again in October if Congress still needs to work through issues with the budget and debt ceiling," Williams added.

Bernanke has a history of keeping stimulus in place (perhaps longer than necessary) to ensure that the markets don't tank. Even though the Fed has just two legal mandates of maintaining price stability and trying to foster full employment, keeping stock and bond investors from wetting their pants is the unofficial third one.

Look at what happened a year ago for example. The Fed launched its third round of QE last September. It was clear that fears about the looming fiscal cliff of tax hikes and budget cuts (remember that?) was a big reason for this added boost of liquidity from the Fed.

And a year before that? Bernanke unveiled what is now known as Operation Twist, a plan to exchange short-term bonds for longer-term bonds to keep interest rates low, in September 2011. That was just a month after the S&P downgrade.

Related: Fed's Dudley says economy still too weak to taper

So what could Bernanke do for an encore? One market strategist suggested that if the unthinkable happens ... that the U.S. defaults on its debt ... Bernanke could completely throw away the plans to taper before the end of the year.

"If the government shuts down for an extended period and there is a default that leads to a big, negative impact on the economy, the Fed could increase QE," said Lance Roberts, CEO of STA Wealth Management.

Roberts stressed that he seriously doubts there will be a default. And he believes that the Fed has to taper sooner rather than later.

But even though the Fed has mostly talked about scaling back QE lately, Roberts pointed to what the Fed said in late July. It was "prepared to increase or reduce the pace of its purchases" depending on what happens to the economy.

So if we get a bad jobs number on October 4 and more debt ceiling drama, Bernanke may have no choice but to boost QE.

Again, that's a lot of ifs. But the one hallmark of Bernanke's tenure as Fed head is that he would rather be too late to pull away stimulus than risk the fragile recovery by taking it away too soon.

"Hopefully, the debt ceiling debate will be a non-event," Roberts said. "But every time there has been an emergency, the market's first thought is always that the Fed is going to be buying. And that's good."

So before Bernanke hands over the keys to the Fed helicopter (to Janet Yellen presumably?) the market can probably expect that he'll keep a close eye on the lunacy on Capitol Hill.

He's not going to unwind QE and risk jeopardizing his legacy as the Fed chairman who kept the economy from the brink unless it's painfully clear that Congress and the President don't kill the economy with their silly, political games.

Reader Comment of the Week! I teased today's column on Twitter with my line about Bernanke riding off into the sunset. One follower appreciated the Western film theme and responded with a parody of one of that genre's most famous quotes.

Ha! Bernanke sort of looks like Alan Ladd. Okay. He doesn't. And there's not enough cute, crying kids in the world to convince Bernanke to return ... or President Obama to ask him back for that matter.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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