Grading Ben Bernanke: Fail!

The great Murray N. Rothbard have presciently warned on this long time ago,

It is little known, however, that there is a federal agency that tops the others in secrecy by a country mile. The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nation's vital monetary system, is accountable to nobody — and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue.

Now, Professor Rothbard’s vindication as seen from the Daily Bail’s enumeration of Ben Bernanke’s failures

As you will hear in the collection of videos and stories linked below:

• B-52 failed to recognize asset bubbles of all types, and even encouraged irresponsible 2/28 mortgages and low teaser rates in 2007 at the start of the sub-prime implosion.

• Failed to shut off the free-money spigot still gushing from the Greenspan years.

• Failed to provide a framework for adequate regulatory oversight of Wall Street (yet Obama now wants to give the Fed more oversight and regulatory authority).

• Failed to control or even understand the build-up of risk within the system caused by derivatives and securitization.

• Failed to reform the inherently conflicted credit-rating structure that perpetuated the risk and securitization build-up.

• Failed to understand the nature of the crisis when it first broke in the Spring of 2007 (Bear Stearns sub-prime, hedge fund implosion). The famous meltdown clip from Cramer on Bernanke sums this failure up rather nicely.

• Failed to understand that housing prices might actually decline in value after such a dramatic rise (seriously, even my mother knew that banks providing new mortgages on massively-inflated housing was not going to turn out well)

• Failed to negotiate with AIG counterparties; instead choosing to pay all claims at 100 cents on the dollar without asking for any compensation (preferred shares) in return.

• Failed the American people with his decision to support and reward the failed banks and the bankers for their malfeasance, excessive risk-taking and criminality.

• Failed to protect taxpayer's interests in deals with AIG, JPM, and Bear Stearns, (withMaiden Lane I, II and III) and the still un-detailed asset guarantees given to Citigroup and Bank of America.

• Ultimately Benjamin Bernanke, the Chairman of the Federal Reserve failed by choosing to reward failure in others.

We can sum it up to: POLITICS—being accountable to no one, arbitrarily choosing winners and losers by using and exposing taxpayer money to unnecessary risks and the presumption of superior knowledge (fatal conceit) from which enables experimentation of untested policies that imposes unmeasured externality risks to the global economy.

The sham of independence.

I further include Bernanke’s policies of expanding the Fed’s balance sheets: (both charts from St. Louis Federal Reserve chart which ironically is under Bernanke’s umbrella)

has led to this:

which has done little to the economy.

chart from Money and Markets

But to bolster commodity prices…

and elevate inflation risks…

chart from tradingeconomics.com

…and of course, fueling worldwide excess speculation in financial markets which should bring about the imminence of another crisis.

Again to close with Mr. Rothbard,

It was not enough, however, for the new statist alliance of Big Business and Big Intellectuals to be formed; they had to agree, propound, and push for a common ideological line, a line that would persuade the majority of the public to adopt the new program and even greet it with enthusiasm. The new line was brilliantly successful if deceptive: that the new Progressive measures and regulations were necessary to save the public interest from sinister and exploitative Big Business monopoly, which business was achieving on the free market. Government policy, led by intellectuals, academics and disinterested experts in behalf of the public weal, was to "save" capitalism, and correct the faults and failures of the free market by establishing government control and planning in the public interest.

And thus the (big) banking industry, the US Federal Reserve and the government cartelized system.

Ben Bernanke on QE 3.0: Not Now, But An Open Option

Signaling channel is an esoteric tool used by central bankers to project future stance of monetary policy. The objective is to influence market expectations by transmitting the possible courses of actions that the central banks may undertake.

This exactly defines the current actions of US Federal Reserve chairman Ben Bernanke on the contingent option to exercise QE 3.0.

The other day Mr. Bernanke floated a trial balloon, today he demurs.

From Bloomberg, (bold emphasis mine)

Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank isn’t currently ready to embark on a third round of government bond-buying to stimulate the economy.

“We’re not prepared at this point to take further action,” Bernanke said today, in response to a question from Senate Banking Committee Chairman Tim Johnson, a Democrat from South Dakota. Johnson asked Bernanke why the Fed wasn’t immediately starting a new stimulus program given the weak economic recovery and rising unemployment...

In House testimony yesterday, Bernanke said the Fed still has tools to spur growth, and that “we have to keep all the options on the table,” driving share prices higher. Bernanke told Senators today that policy makers want to see if the economy rebounds as anticipated in the coming months, and that they are keeping a close eye on inflation.

Should the economy turn out to be weaker than expected, the central bank may provide more monetary stimulus, Bernanke said. A third round of quantitative easing, or QE3, is an option if a recent economic slowdown persists and deflationary forces re- emerge, he said.

As part of policy communications, I don’t think that this had been meant to only test the market. I think this serves part of the mind conditioning where QE 3.0 will be used eventually. By laying down the QE option, the unstated purpose is to imprint the notion of access.

Yet it’s not a question of IF but a WHEN.

Economic slowdown or deflation has merely been used as justification. I see this ‘slowdown-deflation’ pretext as tied either to the US congressional vote on the debt ceiling (see earlier explanation here) or to the evolving political and market conditions in the Eurozone (see here).

Anytime a perceived risk to the banking system surfaces, whether in Europe or the US or in Asia, the QE option for central banks, has been the recently adapted standard.

Understand this.

Video: Ron Paul versus Ben Bernanke: Is Gold Money?

Ron Paul slugs it out with Ben Bernanke (hat tip: Bob Wenzel)

The best part of the exchange:

Ron Paul: Do you believe that gold is money?

Bernanke: No.

Ron Paul: Why do central banks hold gold?

Bernanke: It is an asset, like Treasuries. They're not money.

Ron Paul: Why hold gold, and not diamonds?

Bernanke: Oh, tradition, I suppose.

Photo of Pacquiao-Cotto fight from Regiekun Blog

Ben Bernanke Hints at QE 3.0

I told you NOT to call on the poker bluff being peddled by some analysts and officials who claim that there will be no extension of Quantitative Easing 2.0.

Chairman Ben Bernanke floats the trial balloon for QE 3.0.

From Marketwatch.com (bold emphasis mine)

While the Federal Reserve believes that the temporary shocks holding down economic activity will pass, the central bank is examining several untested means to stimulate growth if conditions deteriorate, including another round of asset purchases, dubbed QE3, Fed chairman Ben Bernanke said Wednesday in remarks prepared for the House Financial Services Committee. Bernanke discussed three approaches to further easing in his prepared remarks. One option, Bernanke said, would be for the Fed to provide more "explicit guidance" to the pledge that rates will stay low for "an extended period." Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to "increase the average maturity of our holdings." Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, "thereby putting downward pressure on short-term rates more generally." Bernanke was clear to stress that easing was not the only option under consideration and that the next Fed move could well be to tighten. At the moment, Fed officials see a recovery that "will likely remain moderate," Bernanke said, with the unemployment rate falling "only gradually." Inflation is expected to subside in coming months, he said

There you have it. QE 3.0 is on the pipeline.

Ben Bernanke Admits to the Knowledge Problem

“We don’t have a precise read on why this slower pace of growth is persisting,” the Fed chairman, Ben S. Bernanke, said Wednesday at a news conference. “Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”

That’s from the New York Times.

US Federal Reserve Ben Bernanke finally acknowledges to the “knowledge problem”, which again validates the knowledge theory of the great F.A. Hayek.

Of course, we’ve been saying that Ben Bernanke has had a string of inaccurate predictions.

Remember, Mr. Bernanke is backed by about 450 Federal Reserve economists, half of which are PhDs.

In essence, this is an admission of the grand failure of macroeconomics founded on econometrics.

Now for QE 3.0

Back to the same article, (bold highlights added)

Mr. Bernanke dismissed for now any possibility that the Fed would extend its efforts to stimulate growth, saying that the economy was moving in the right direction. The slow pace of the recovery justified the Fed in continuing its existing efforts, he said, but not more.

The Fed’s policy board, the Federal Open Market Committee, voted unanimously to maintain its two-year-old commitment to hold a benchmark interest rate near zero “for an extended period.” Mr. Bernanke said the language meant it would not raise interest rates for “at least two or three meetings,” pushing back to November the earliest moment rates could rise. Economists consider it likely that the central bank will hold interest rates near zero well into next year.

The board also voted to maintain the Fed’s portfolio of more than $2 trillion in Treasuries and mortgage-backed securities by reinvesting principal payments. The board did not indicate how long this policy would continue, a decision that Mr. Bernanke described as intentional. Fed officials have said that allowing the portfolio to dwindle is likely to be the first step when the central bank decides to begin the withdrawal of its aid programs.

Action speaks louder than words.

True, QE may not be immediate, as QE 2.0 has been activated five months after the completion of QE 1.0, but to maintain the $2 trillion balance sheet by ‘reinvesting’ principal payment for an indefinite period signifies transitional QE.

Given the current political institutional framework, QEs signifies a strong force in keeping this arrangement intact.

Besides for an economy that has been artificially propped up by a tsunami of liquidity, obviously a withdrawal or non addition would trigger a meaningful regression—the risk prospect of which, based on their guiding ideology, should be sternly avoided.

This means that the door for QE is wide open, (which I think is part of the mind ‘conditioning’ communication tools applied by the FED)...

Now the Fed is standing back again to see if the economy can grow without constant prodding. “A little bit of time to see what’s going to happen is useful in making policy decisions,” Mr. Bernanke said. He allowed, however, that the Fed could take additional steps, from declaring a longer period of near-zero interest rates to buying even more assets.

Ben Bernanke admits that the he and the rest of US Federal Reserve can’t read the economy, but then he believes that his set of tools works.

What a contradiction.

Finally because of some political backlash on the Fed’s polices, the asset purchasing (money printing) program may come in a different form and or under a name.

Ben Bernanke on Debt Ceiling: Only I am Allowed to Dabble with Politics!

US Federal Reserve chairman Ben Bernanke warns that the US debt ceiling should NOT be used as a bargaining chip.

Yet he goes on to talk down on the supposed nasty implications of NOT raising the debt ceiling

From the UK’s Telegraph,

Federal Reserve Chairman Ben Bernanke said the US could lose its AAA credit rating and create a new crisis in the financial markets if it does not raise the cap on government debt.

Mr Bernanke warned that if the $14,300bn (£8,784bn) debt ceiling was not lifted quickly there could be disastrous consequences.

"Even a short suspension of payments on principal or interest on the Treasury's debt obligations could cause severe disruptions in financial markets and the payments system, induce ratings downgrades of US government debt, credit fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the longer term," he said.

American journalist and libertarian H. L. Mencken once wrote,

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

By putting pressure on the opponents to raising the debt ceiling, Mr. Ben Bernanke is essentially saying,

I am the only person entitled to do politics, because I am the expert and everybody else does not know what they are talking about.

Apparently Mr. Bernanke is using 'fear' from 'hobgoblins' as leverage to reach a political compromise.

Of course, we also know how much of an expert Mr. Bernanke is considering his highly inspirational track record.

Quantitative Easing and Shadow Banking Liabilities

I have repeatedly been arguing that the US banking system cannot last in an environment without inflationism or money printing or Quantitative Easing or “cupcakes” (as Jim Rogers would call it) unless the US government would allow for a violent deflationary unwind (yes another crisis of greater proportion compared to 2008).

The latter seem as a NO OPTION—for ideological and political reasons—or a Hobson’s choice.

Zero Hedge’s Tyler Durden points out that the collapsing liabilities of the shadow banking system have essentially been offset by the recent US Federal Reserve’s QE programs. In short, to stave off a continuing meltdown that would negatively affect the US banking system requires continued rounds of QEs.

Mr. Durden writes, (bold highlights mine)

And the most important chart: consolidated financial liabilities (total credit money) and the sequential change. Note that in Q1, courtesy of QE2, we have just experienced a jump in this series of a whopping $343 billion. Absent this jump the economy would have plunged into a deflationary collapse... And Ben Bernanke knows this...

Which leaves just one option: the Federal Reserve... Whose ongoing boost in excess reserves (its Liability) for the pendancy of any monetary easing episode, results in an increase in Reserve assets at Commercial Banks (their asset), but more importantly, a boost in Commercial bank liabilities, be they US (which is not the case) or (foreign) which we have now proven twice is what is happening. Simply said, absent the ongoing transfer of credit money liabilities, so critical to keep the economy growing, from the Fed to private institutions, there will be no marginal growth in the consolidate financial system's liabilities. Which in turn means outright deflation.

And you can bet your bottom fiat piece of linen and cotton that Ben Bernanke knows this all too well.

With QE2 ending just as Q2 ends, we are convinced that the next Z.1 report, due out in early September, will show another massive jump in liabilities... And that's it. It's all downhill from there. Unless, of course, the Fed comes up with another Fed to Commercial Bank liability transfer program, which the Fed can call it whatever it wants. The point is: it is critical for it to materialize soon or else, the economy, without a marginal source of new debt, will plunge in the deflationary abyss that the $5.1 trillion plunge in shadow liabilities would have created had it not been for Ben Bernanke.

Take away the money printing or the “cupcakes” and the entire house of cards collapses.

Ben Bernanke seems trapped from his own actions. And that’s unless one believes that a Deus ex machina (god out of the machine) would emerge to save the day.

Exposing Ben Bernanke’s Fatal Conceit

In Fatal Conceit : The Errors of Socialism, the great F.A. Hayek wrote the following:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

Below is a collection of some of US Federal Reserve Chairman Ben Bernanke’s monumental blunders which essentially validates Hayek’s observations.

From Center for Economic Policy and Research (all bold highlights mine, italics original) [ht Bob Wenzel]. Behold the wonders of analysis derived from econometrics.

10/1/00 – Article published in Foreign Policy Magazine
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily.

7/1/05 – Interview on CNBC
INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

7/1/05 – Interview on CNBC
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

10/20/05 – Testimony before the Joint Economic Committee, Congress
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

11/15/05 – Confirmation Hearing before Senate Banking Committee
SEN. SARBANES: Warren Buffet has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?

BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable… With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions.

3/6/07 – At bankers’ conference in Honolulu, Hawaii… as delinquencies in the subprime mortgage sector rise
The credit risks associated with an affordable-housing portfolio need not be any greater than mortgage portfolios generally.

3/28/07 – Testimony before the Joint Economic Committee, Congress
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

5/17/07 – Remarks before the Federal Reserve Board of Chicago
...we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.

8/31/07 – Remarks at the Fed Economic Symposium in Jackson Hole
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.

1/10/08 – Response to a Question after Speech in Washington, D.C.
The Federal Reserve is not currently forecasting a recession.

2/27/08 – Testimony before the Senate Banking Committee
I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.

4/2/08 – New York Times article after the collapse of Bear Stearns
“In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.”

6/10/08 – Remarks before a bankers’ conference in Chatham, Massachusetts
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.

7/16/08 – Testimony before House Financial Services Committee
[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.

9/24/08 – Response to a question after JEC testimony… during the TARP debate, two weeks before the Fed initiates its liquidity facility for commercial paper markets
I see the financial markets as already quite fragile. The credit markets aren’t working. Corporations aren’t able to finance themselves through commercial paper. Even if the situation stayed as it did today, that would be a significant drag on the economy.

3/16/09 – Interview on CBS’s 60 Minutes
It’s absolutely unfair that taxpayer dollars are going to prop up a company (AIG) that made these terrible bets, that was operating out of the sight of regulators.

5/5/09 – Response to Questioning at Senate Joint Economic Committee Hearing
The forecast we have is for the economy, in terms of growth, to begin to turn up later this year, but initially not to grow at the rate of potential, which means that unemployment and resource slack will continue to rise into 2010. We think that the unemployment rate will probably peak early in 2010 and then come down relatively slowly after that. Um, currently, we don’t think it’s going to get to 10 percent, we’re somewhere in the 9’s, but clearly, that’s way too high.

7/21/09 – Testimony before the House Committee on Financial Services
A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.

Bernanke’s Comments Mirror Those of Pre-QE 2.0 in 2010

Bernanke’s comments seem as writing on the wall for QE 3.0

This is from yesterday’s comment by Ben Bernanke. From the Bloomberg, (bold emphasis mine)

Federal Reserve Chairman Ben S. Bernanke said record monetary stimulus is still needed to boost a “frustratingly slow” recovery and repeated that a rise in inflation is likely to prove temporary.

“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke said today in a speech to a conference in Atlanta. At the same time, the Fed “will take whatever actions are necessary to keep inflation well controlled,” he said.

Recent data showing weakness in the economy, including a rise in the unemployment rate to 9.1 percent in May, have increased the odds the Fed will hold the benchmark interest rate near zero into next year. Bernanke said growth is likely to pick up in the second half of the year as fuel prices recede and disruptions of parts supplies dissipate as factories in Japan recover from an earthquake and tsunami.

“Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.”

Here is Bernanke’s pre-QE 2.0 statement in March 2010

From Bloomberg, (bold highlights mine)

Federal Reserve Chairman Ben S. Bernanke said the U.S. economy still needs low interest rates and that the central bank will be ready to tighten credit “at the appropriate time.”

“The economy continues to require the support of accommodative monetary policies,” Bernanke said today in prepared testimony to the House Financial Services Committee, repeating parts of a statement to the panel from last month. “However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus.”

The central bank chief and his colleagues have been outlining their strategy for tightening credit in time to prevent the recovery from stoking inflation. Officials are concerned that the federal funds rate, their main policy tool for 20 years, isn’t as effective as before in influencing borrowing costs.

“As the expansion matures, the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” Bernanke said in the text of remarks. “We have full confidence that, when the time comes, we will be ready to do so.”

See that poker bluff?

First Bernanke talks ‘weakness’, then he talks of the need for policy accommodation to justify their proposed implied actions and lastly assures the public that the Fed knows how to go about with the ‘exit’ approach. It’s all signaling channel or the conditioning of the public for an upcoming move.

Finally here is Bernanke’s speech in October 2010 or a month before the activation of QE 2.0

From the US Federal Reserve, (bold emphasis mine)

Despite these challenges, the Federal Reserve remains committed to pursuing policies that promote our dual objectives of maximum employment and price stability. In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee's actions are contingent on incoming information about the economic outlook and financial conditions.

Sounds very much like QE 3.0 is underway.

UPDATE: I don't expect QE 3.0 to happen immediately. The span of QE 1.0 and QE 2.0 was around 5 months, i.e. end of QE 1.0 in June 10 and the activation of QE 2.0 on November 2010. That's why there will be more managing of the public's 'inflation expectations' over the interim.

The US Stock Markets As Target of US Federal Reserve Policies

The US stock markets have been target of US Federal Reserve policies!

This is what I’ve repeatedly been saying all along since 2008! And have been validated anew.

First, Fed officials deny it.

Reports the Wall Street Journal Blog (bold highlights mine)

For many years, central bankers have declined to comment on the performance of stock markets, and have instead justified their actions in purely economic terms. To the extent financial markets entered into it, central bankers were most mindful of bond markets as the mechanism that translated changes in monetary policy into credit availability for businesses and households.

The stock market only entered into the picture in times of deep market disruptions, or as part of broader discussions about the “wealth effect,” wherein rising stock prices are thought to make households feel richer, and spend accordingly. Of course, stock market operators have always spoken of the a Fed “put,” in which the central bank will ease policy to arrest sustained stock market declines.

All of that has changed since the Fed restarted late last year a program to buy $600 billion in longer-dated government bonds, in a bid to spur higher levels of growth and get the unemployment rate down faster than would otherwise be the case.

Then they confirm it.

Again from the same WSJ Blog (bold highlights mine)

It isn’t clear whether Bernanke’s shift in focus represents a change in how the Fed does business, or whether his comments represent an effort to justify a policy that hasn’t worked as planned, leaving the chairman to support it in whatever way he can. It’s a potentially dangerous policy stance, because if stocks were to undergo an extended period of losses, it could argue for the Fed to keep policy easier than it may want to.

For Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, the increased prominence of asset prices as a focus of monetary policy is not so much an enduring shift in how policy is made, as it is a recognition of what caused the huge economic and financial problems of recent years.

“This recession and the relatively slow recovery we’ve gone through, a lot of it can be traced back to net worth,” Kocherlakota told reporters after a speech in New York Wednesday. “The fall in net worth is what drove us into recession” and “in those circumstances you can see why asset values, both for land and for stocks, are really going to be a central ingredient in the recovery process,” he said.

To ensure the recovery will take hold, it’s important for the Fed to help re-flate asset prices and given households and businesses a chance to rebuild and rebalance their respective financial positions, the official explained.

“In this kind of post financial crisis, post net worth driven recession, it makes sense to be thinking about asset value as a way to try to generate more stimulus than you do in a typical recession,” Kocherlakota said.

I earlier quoted Ben Bernanke in November 2010 who already validated my views... (bold highlights mine)

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

This has long been Chairman Ben Bernanke’s guiding principle since he was a professor at the Princeton University (unfortunately the link to foreignpolicy.com has been removed, nevertheless can be found in Wikipedia) [emphasis added]

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

If the imperatives of the “wealth effect” or that the Fed sees the importance “to help re-flate asset prices and given households and businesses a chance to rebuild and rebalance their respective financial positions” then ending QE, given current fragile "asset price" conditions, would mean that the FED will overturn her priorities. This would signify as a bizarre logic.

This only gives further clues that the Fed will continue to inflate the system, in spite of the current rhetoric about exits and the culmination of the QE which for me signifies as another episode of poker bluffs.

Incidentally, US household ownership of stocks has been on a big decline since 2007.

According to Gallup,

Even as stocks have returned to lofty heights from their March 2009 lows, the percentage of Americans saying they hold individual stocks, stock mutual funds, or stocks in their 401(k) or IRA fell to 54% in April -- the lowest level since Gallup began monitoring stock ownership annually in 1999. Self-reported stock ownership has trended downward since 2007 -- before the recession and financial crisis began -- when 65% of Americans owned stocks...

Americans still have still been enamored to properties.

Again the Gallup, (emphasis added)

The financial crisis and the losses it produced for many investors have combined with government bailouts and Wall Street scandals to turn many Americans away from investing in stocks. Even as stocks have surged over the past couple of years, it has been hard for most Americans to understand what is happening on Wall Street and why, leaving them hesitant to invest in the stock market.

On the other hand, housing and real estate have also experienced sharp losses in recent years and show no signs of significant recovery; still, many Americans see real estate as the best investment for the long term. In part, this may be because depressed prices in the real estate sector make it a relatively attractive investment when investors hold it for the long term. It could also be that Americans feel more comfortable with and better understand real estate as an investment compared with stocks and Wall Street.

My final two cents.

Rising equity prices seen in the backdrop of falling US household ownership means that the equity gains have primarily been benefiting financials companies, since nonfinancial corporations have also been sated with cash.

Chart from Wall Street Journal Blog

This is the obvious effects of the redistribution of wealth from the households to Wall Street and other Washington cronies.

Two, I doubt Americans see real estate as “best investment”. I’d rather surmise that falling real estate represents cognitive biases of “loss aversion” and the “endowment effect” where homeowners have been reluctant to realize or accept losses and instead hold out on their properties based on hope.

Maybe they are hoping that the crash would just go away soon. Or maybe that Fed policies could relieve them.

Either way, if asset prices has been the essential determinant of spending, as proposed by Fed officials led by Ben Bernanke, then obviously inflationism will be expected to continue.

And this seems one good reason why the campaign or war against commodities has intensified.

QE 3.0: How Does Ben Bernanke Define Change?

News reports say that Federal Reserve Chairman Ben Bernanke is considering the next round of quantitative easing.

From the Bloomberg,

Federal Reserve Chairman Ben S. Bernanke said the economy is barely expanding at a sustainable pace and that it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month to spur growth.

This is really no news for us.

Nevertheless the following looks like the kicker…

From the same article, (bold emphasis mine)

The Fed’s policy of purchasing Treasury securities shouldn’t be considered simply printing money, Bernanke said.

“The amount of currency in circulation is not changing,” he said. “The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.”

Let me repeat: The amount of currency is NOT changing (chart above and below from St. Louis Federal Reserve)

Also, the money supply is not changing in a significant way.

Given the above graphs, the question that intuitively pops into my mind is how does Mr. Bernanke quantify change?

Like this?

That’s “change” in terms of the exponential growth in currency during the Germany’s Weimar Hyperinflation (chart from nowandfutures.com).

And above is the chart of how the hyperinflation unfolded.

For bureaucrats, change seems like an abstraction. (this applies to politicians as well).

Federal Reserve Tightening: Exit Experiment or Bernanke's Confirmation Insurance?

Austrian economist Professor Gary North recently suggested that the Federal Reserve has been tacitly tightening.

He offers three charts as proof

The adjusted monetary base (which fell by November but has now recovered)

M1 Money Stock

M2 Money Multiplier

Here is Professor North,

``Why is the FED deflating? I offer these suggestions.

``It is testing the waters to see if unwinding will cause a crisis: a secondary recession.

``It is giving itself some wiggle room in case commercial banks begin to lend, which threatens to let M1's expansion force up consumer prices.

``It is providing visible confirmation for an announced policy that it cannot follow without creating a true depression.

``It has begun to unwind, as promised." (read the rest of Professor North's article here)

Perhaps.

But I'd like to add more to his charts and his theory

As seen in the table of the Cleveland Fed, the Federal Reserve has been unloading some of the US treasuries it recently bought as part of its quantitative easing program, since December 9th.

And this appears to coincide with the firming of the US dollar from which markets instantaneously interprets as having the same dynamics as the 2008 episode. Hence all these signs may perhaps point to a tightening in spite of the Federal Reserve's continued QE.

While correlation may not be causality, I'd offer an added perspective in terms of why the Fed could have been experimenting- a possible conspiracy theory based on a political agenda.

The issue is connection with Ben Bernanke's confirmation.


As you can see from the Intrade prediction markets the Fed Chair Ben Bernanke's confirmation only surged by mid to late November.

Moreover, until mid January, there had been lingering doubts whether his tenure would be mandated since it appeared that opposition to his reappointment had been growing. It even took President Obama to personally endorse Mr. Bernanke, as per Businessweek ``Obama called some senators yesterday, including those in the leadership, to ensure Bernanke’s confirmation won’t be derailed."

In short, Bernanke's reappointment wasn't in the bag until the last minute.

Could it be then that the tightening shown by Professor North was actually an insurance policy taken by Mr. Bernanke?

By portraying that markets would be anxious over the uncertainty of his mandate, as enunciated by Connecticut Democrat Senator Christopher Dodd who said ``I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination" [as earlier discussed in US Trembler: Volcker Rule or Bernanke Confirmation?], his appointment would now be the "key" solution to the market's stabilization?

So like hitting two birds with one stone, the Federal Reserve could have been tightening to work for Bernanke's political interest BUT camouflaged by the experiment with 'exit' strategies.

Now that Bernanke has attained his goal, could we see the attendant easing to boost markets anew?

One must remember that market responds to policies with a lag, hence if this theory is correct, then markets should start to reflate over the next 2-3 months.

It's all about the boom bust cycle anyway.

US Trembler: Volcker Rule or Bernanke Confirmation?

``What we do want, what we insist upon, is that no longer will decisions that carry so much economic weight be made in absolute secrecy. We want to know what arrangements the Fed makes with other governments and central banks. We want to know who is benefitting from the actions of the Fed and what deals are being made. The Fed is already reacting to pressure by scaling back its liquidity facilities and returning to more traditional monetary policy through direct asset purchases. With nearly $800 billion in mortgage-backed securities on its books already, $800 billion in Treasury securities, and no real limit to what the Fed can acquire, there is a tremendous opportunity for malfeasance. We need to know who the Fed deals with, what they buy, how much they spend, and who benefits. As good as any step towards Federal Reserve transparency is, anything less than full disclosure at this point is unacceptable.”-Congressman Ron Paul, Anything Less Than Full Disclosure is Unacceptable

The meltdown in the US market’s have largely been attributed to the proposed Volcker Rule, where US President Barack Obama endorsed Former Fed Chair Paul Volcker plan to overhaul the banking sector’s risk taking activities by restricting in house trading activities or proprietary trading and by preventing them from also investing in hedge funds or private equity operations.

While reducing the banking system to its original function of warehousing (deposit safekeeping) and loan services (acts as intermediary to finance business undertaking) would seem pretty ideal, the radical approach to “cleanse” the banking system of the so-called “greed” appears to be in reaction to the massive political capital loss suffered by President Obama at the hands of Republicans in the recent Massachusetts senatorial election, reportedly one of the main bailiwicks of liberal forces in the US.

The electoral loss signaled Obama’s health reform bill as losing popular support, which may likewise translate to a mighty comeback for the GOP (Grand Old Party) in the upcoming 2010 senatorial elections. The prospects of the Republicans back at the helm of the Senate risks enervating Pres. Obama’s programs, hence like all politics, desperate times calls for desperate measures.

The massive loss of political capital meant that President Obama had to piggyback on a popular issue, which at this point has been no less than to bash on the highly unpopular banking sector to regain some points.

Nonetheless while we mentioned that reducing the banking sector to its basic function should have been ideal, the Obama-Volcker tandem has merely been passing the buck.

They’ve fundamentally ignored the role of government failure that led to the recent two boom bust cycles, which essentially had been due to easy money policies, albeit for the recent housing bust these should have included the skewed capital regulations that encouraged excess leverage and regulatory arbitrage, housing policy that pushed home ownership by subsidizing mortgages and regulators sleeping at the wheel or in cahoots or captured by the industry, as well as, tax policies that encouraged debt take up.

Policymakers frequently deal with the superficial, it has never addressed the roots of “too big to fail” which is largely a product of crony capitalism emergent from bubble policies.

As per Constantino Bresciano-Turroni as quoted by Gerard Jackson ``The increase in banking business was not the consequence of a more intense economic activity. The work was increased because the banks were overloaded with orders for buying and selling shares and foreign exchange, proceeding from the public which, in increasing numbers, took part in speculations on the Bourse. The banks did not help in the production of new wealth; but the same claims to wealth continually passed from hand to hand.”

In other words, the so-called banker’s greed is a result of policy based support to the banking sector, and it’s kindda obvious where this leads to-another Potemkin village or poker bluff.

Unfortunately these desperate attempts by the US President risks unforeseen consequences, considering that major banks engage in these activities have been supported by the US government.

This translates to policy contradictions which increase the overall risk environment thereby heightening uncertainty, and thus, perhaps the market’s sharp reactions.

Figure 6: stockcharts.com: S&P ETFs By Sector

Well based on the sectoral performance by the S&P ETFs, the materials, financials and energy took the brunt of the recent selloffs, these implies that since China has emerged as a major force in the demand for commodities then the fall in materials and energy could have been construed as China related and the fall of the Financials as imputed on the Volcker Fund issue.

Figure 7: Danske: US treasuries

Moreover, this week’s meltdown didn’t come with higher interest rates. Therefore the issue wasn’t about funding, interest rate and or rollover risks. Instead the lower yields signaled a supposed flight to safety as Danske Team indicates above (right window) which has been corroborated by a rising US dollar.

Considering that the net supply of bonds have shriveled due to Fed QE purchases, the selloff wasn’t also indicative of concerns over exit plans.

One analyst offered a conspiracy theory and wrote that for the US to be able fund its intractable deficits she would need to engineer a stock market crash, as the frightened public (domestic and foreign) will likely buy into US treasuries. Although I would tend to dismiss this as normally outrageous, as any short term benefits will offset by medium to long term losses, desperate politicians may embrace almost anything silly for as long as it could preserve their privileges or power.

Lastly there is also the issue of the Ben Bernanke’s reconfirmation as the Federal Reserve chairman. Considering Mr. Bernanke needs 60 votes in the Senate to extend his term, the current anti-bank sentiment has prompted several Senators to cross partylines and move against extending Bernanke’s tenure which expires on January 31^st.

``According to a Dow Jones Newswires tally, 26 senators have said they will back him; 15 have said they will oppose him. The remaining 59 haven't said what they will do. Under Senate rules, the earliest a vote could come is Wednesday,” notes the Wall Street Journal.

So why could the market crash with Bernanke’s confirmation in the line?

Perhaps Connecticut Democrat Senator Christopher Dodd, a Bernanke backer, gives us an inkling of what Ben Bernanke may or may not do, "I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination."

In other words, there seems no easy or better way to get reconfirmed than by holding the market hostage!

Yet all these political muddling makes us wonder, why would US debt get supported when regime uncertainty appears to be snowballing? Why should the US dollar become the safe haven when the pillars of central banking appear to be in jeopardy?

Other than all three variables-China’s efforts to quash a homegrown bubble, the US Volcker Fund brouhaha or the Bernanke confirmation controversy and fears of default Greece default-the markets could be looking for an excuse to correct.

So who says the markets are solely about the economy?