Who hasn't weighed in by now on Bernanke's press conference yesterday afternoon?
Contrary to CNBC blowhard Jim Cramer's predictions that Bernanke would silence all inflation critics, the reality was more like a Hail Mary pass. Yes, Bernanke did attempt to claim that commodity prices have surged due to developing nation demand, as Cramer predicted. Not that it was such a hard call to make.
The trouble is, it's not just oil. I don't think US food demand is down as much as its oil consumption is from a few years ago. But we have broad grocery store inflation approximating 10%.
Bernanke's hopes for moderated inflation while Americans pay more for food and gasoline just aren't believable. Further, technically, inflation is a monetary phenomenon, and Helicopter Ben has been monetizing Treasury debt and presiding over a weakening dollar.
I thought all the hoopla over how Ben would handle the press conference was overdone. He's a smart guy and has taught at Princeton. He's suredly used to intelligent questions. Trouble is, his answers weren't comforting for the US economic outlook on inflation, prices and dollar valuation.
But, on hearing that rates won't be rising anytime soon, the equities indices, of course, went wild.
Well, I guess it's one silver lining amidst some pretty unsettling comments from the guy who is supposed to defend the dollar and provide for stable, healthy monetary conditions in the US economy. Neither of which he's doing at present.
Showing posts with label Bernanke. Show all posts
Showing posts with label Bernanke. Show all posts
Thursday, April 28, 2011
Wednesday, March 02, 2011
The Ben Bernanke On Capitol Hill Yesterday
I caught some of The Ben Bernanke's testimony on the Hill yesterday, and let me tell you, it was nauseating.
But for me, the two low points were Ben insisting:
- the Fed needs to retain its dual mandate of managing the money supply and targeting full employment.
- there's no risk of US economic inflation.
The first must have Milton Friedman spinning in his grave. And perhaps Paul Volcker spit out his cigar when/if he heard it. Ever since dim-witted Hubert Humphrey championed the added full employment mandate, the Fed has been hampered in its ability to do focus on the one thing that nobody else can do- manage the US money supply. To finally face a friendly House and possibly ambivalent Senate and refuse the chance to formally escape this monstrosity is unforgivable.
The second certainly had Milton spinning. Not to mention tons of pundits laughing at Ben's sophistry.
It got so bad that later, on CNBC, senior economic idiot Steve Liesman made up a whole spiel to explain why Ben was right.
Between excessive money creation over the past two and a half years, and easy dollar-induced rises in commodity prices, we certainly have inflation. The fact that it's not conventional labor-sector cost-push doesn't mean it isn't happening.
Friedman was right. Get rid of the Fed and use a Taylor-style rule to manage the money supply.
But for me, the two low points were Ben insisting:
- the Fed needs to retain its dual mandate of managing the money supply and targeting full employment.
- there's no risk of US economic inflation.
The first must have Milton Friedman spinning in his grave. And perhaps Paul Volcker spit out his cigar when/if he heard it. Ever since dim-witted Hubert Humphrey championed the added full employment mandate, the Fed has been hampered in its ability to do focus on the one thing that nobody else can do- manage the US money supply. To finally face a friendly House and possibly ambivalent Senate and refuse the chance to formally escape this monstrosity is unforgivable.
The second certainly had Milton spinning. Not to mention tons of pundits laughing at Ben's sophistry.
It got so bad that later, on CNBC, senior economic idiot Steve Liesman made up a whole spiel to explain why Ben was right.
Between excessive money creation over the past two and a half years, and easy dollar-induced rises in commodity prices, we certainly have inflation. The fact that it's not conventional labor-sector cost-push doesn't mean it isn't happening.
Friedman was right. Get rid of the Fed and use a Taylor-style rule to manage the money supply.
Wednesday, November 17, 2010
Regarding Alan Blinder's Defense of Bernanke
I do not possess a PhD in economics. Not even a BA in the subject. However, I do hold two business degrees, the completion of which provided me with a substantial amount of both micro and macro economic education, plus a healthy dose of anti-trust law and economics.
Thus, when I read Alan Blinder's In Defense of Ben Bernanke in Monday's Wall Street Journal, my initial reaction was one of potential academic inadequacy to question or critique Blinder's contentions. But, upon rereading his editorial, I realized that many of what I see as his errors are not those of abstruse higher-level economics, so much as those of reasoning and logic. On those bases, I feel quite comfortable discussing his piece.
Blinder begins by claiming "one current catchphrase is "job-killing spending.""
Really? Alan gives no cite on this. So much for PhD-level work, eh? His opening salvo is an unsourced complaint. Even so, it's not government spending that is killing jobs. It's over-regulation, erratic government takeovers of portions of the economy, and vague taxation policies. The spending, by the way, didn't go for infrastructure, as promised, but mostly for transfer payments. Which didn't create jobs, but allegedly saved some. Hardly the same thing.
He then uses an ad hominum argument by calling his friend's detractors "the economic equivalent of the Flat Earth Society." Again, hardly academic-quality reasoning. Or, maybe it is.
Only at the end, by the way, does Blinder tell you what his current position already should. As a Princeton economics professor, he would be well-acquainted with Bernanke. This isn't an objective defense of the Fed chairman. It's somehow personal.
But, back to Blinder's editorial.
Blinder then writes,
"Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment."
He counters that QE2 is really just a big ol' open market operation like the Fed constantly performs. Nothing to be scared of.
But in this recent post, I discussed the Wall Street Journal's lead staff editorial which expressed concerned for QE2's heretofore unheard of effects on the Fed's balance sheet. It is, actually, a dangerous experiment. Blinder's attempt to gloss over type and maturity of assets is misleading.
He continues in his editorial,
"The next charge is that QE2 will be inflationary. Partly true. The Fed actually wants a bit more inflation because, now and for the foreseeable future, inflation is running below its informal 1.5% to 2% target. In fact, there's some concern that inflation will dip below zero—into deflation. The Fed, thank goodness, is determined to stop that. We don't want to be the next Japan now, do we?"
For a counter argument to this, read posts here, here, here and here regarding recent, true inflation rates among commodities and other economic inputs. Virtually every knowledgeable observer realizes that the Fed has switched inflationary measures in order to avoid admitting how commodities in everyday use, e.g., food, energy, metals, are skyrocketing thanks to two phenomena. One is dollar weakness, the other is increased demand by newly-enriched nations. Blinder is just wrong on this argument, following the Fed's lead and choosing convenient measures of inflation which aren't practical, but allow him to claim we're closer to deflation than inflation.
Blinder finishes his item-by-item defense with this passage,
"The final major charge, levied especially by a number of foreign officials, is that the Fed's new policy amounts to currency manipulation: deliberately lowering the international value of the dollar to gain competitive advantage for U.S. exporters. Is there any truth to this? Not if words have any meaning."
Blinder follows with a conventional description of interest-rate effects on capital inflows versus trade-related inflows thanks to a cheaper dollar, claiming nobody knows which will dominate, so Ben is innocent. I don't think that's an adequate or even relevant defense. Just because Ben isn't sure if the trade flows will win out doesn't mean he's not hoping they will.
Then there was Blinder's attempt to clean up various other troubling comments about QE2,
"More important, the U.S. is a sovereign nation with a right to its own monetary policy. So I was stunned when a top aide to the Russian president suggested that the Fed should consult with other countries before making major policy decisions. Come again? An independent central bank doesn't even consult with its own government.
Finally, there's that old hobgoblin: consistency. Critics tell us that QE2 won't give the U.S. economy much of a boost but will lead to rampant inflation. Both? How does that work?
If buying Treasurys is a weak policy tool, a view with which I have some sympathy, then it shouldn't be very inflationary. There is no magic link between growth of the central bank's balance sheet and inflation. People, businesses and banks have to take actions—like spending more, investing more, and lending more—to connect the two. If they don't, we will get neither faster growth nor higher inflation, just more idle bank reserves.
But I don't run the Fed. Maybe Chairman Bernanke's ideas are better than mine and, in any case, the planned QE2 is far better than doing nothing. It is not a shot in the dark, not a radical departure from conventional monetary policy, and certainly not a form of currency manipulation."
Blinder contends QE2 is weak medicine, so, no problem. He then lambastes those who believe that QE2's effectiveness and damage must be proportional. But that's not at all true. QE2 can easily trigger inflation without doing much in the way of boosting US economic activity. I think the more relevant approach is to ask Blinder to explain why the effects should be equal?
Then Blinder switches gears, and claims that if QE2 doesn't work, all we'll have is idle bank reserves. Here, he ignores the effects of all that money creation on the perceptions of the world's investors on dollar valuation.
Finally, is QE2 really "far better than doing nothing?" This is a peculiarly Keynesian view with which Austrian school economists, including Milton Friedman, would never agree. And it is certainly not the first two of Blinder's last three descriptors. And if it's not the third, it's a pretty good facsimile of it.
Thus, when I read Alan Blinder's In Defense of Ben Bernanke in Monday's Wall Street Journal, my initial reaction was one of potential academic inadequacy to question or critique Blinder's contentions. But, upon rereading his editorial, I realized that many of what I see as his errors are not those of abstruse higher-level economics, so much as those of reasoning and logic. On those bases, I feel quite comfortable discussing his piece.
Blinder begins by claiming "one current catchphrase is "job-killing spending.""
Really? Alan gives no cite on this. So much for PhD-level work, eh? His opening salvo is an unsourced complaint. Even so, it's not government spending that is killing jobs. It's over-regulation, erratic government takeovers of portions of the economy, and vague taxation policies. The spending, by the way, didn't go for infrastructure, as promised, but mostly for transfer payments. Which didn't create jobs, but allegedly saved some. Hardly the same thing.
He then uses an ad hominum argument by calling his friend's detractors "the economic equivalent of the Flat Earth Society." Again, hardly academic-quality reasoning. Or, maybe it is.
Only at the end, by the way, does Blinder tell you what his current position already should. As a Princeton economics professor, he would be well-acquainted with Bernanke. This isn't an objective defense of the Fed chairman. It's somehow personal.
But, back to Blinder's editorial.
Blinder then writes,
"Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment."
He counters that QE2 is really just a big ol' open market operation like the Fed constantly performs. Nothing to be scared of.
But in this recent post, I discussed the Wall Street Journal's lead staff editorial which expressed concerned for QE2's heretofore unheard of effects on the Fed's balance sheet. It is, actually, a dangerous experiment. Blinder's attempt to gloss over type and maturity of assets is misleading.
He continues in his editorial,
"The next charge is that QE2 will be inflationary. Partly true. The Fed actually wants a bit more inflation because, now and for the foreseeable future, inflation is running below its informal 1.5% to 2% target. In fact, there's some concern that inflation will dip below zero—into deflation. The Fed, thank goodness, is determined to stop that. We don't want to be the next Japan now, do we?"
For a counter argument to this, read posts here, here, here and here regarding recent, true inflation rates among commodities and other economic inputs. Virtually every knowledgeable observer realizes that the Fed has switched inflationary measures in order to avoid admitting how commodities in everyday use, e.g., food, energy, metals, are skyrocketing thanks to two phenomena. One is dollar weakness, the other is increased demand by newly-enriched nations. Blinder is just wrong on this argument, following the Fed's lead and choosing convenient measures of inflation which aren't practical, but allow him to claim we're closer to deflation than inflation.
Blinder finishes his item-by-item defense with this passage,
"The final major charge, levied especially by a number of foreign officials, is that the Fed's new policy amounts to currency manipulation: deliberately lowering the international value of the dollar to gain competitive advantage for U.S. exporters. Is there any truth to this? Not if words have any meaning."
Blinder follows with a conventional description of interest-rate effects on capital inflows versus trade-related inflows thanks to a cheaper dollar, claiming nobody knows which will dominate, so Ben is innocent. I don't think that's an adequate or even relevant defense. Just because Ben isn't sure if the trade flows will win out doesn't mean he's not hoping they will.
Then there was Blinder's attempt to clean up various other troubling comments about QE2,
"More important, the U.S. is a sovereign nation with a right to its own monetary policy. So I was stunned when a top aide to the Russian president suggested that the Fed should consult with other countries before making major policy decisions. Come again? An independent central bank doesn't even consult with its own government.
Finally, there's that old hobgoblin: consistency. Critics tell us that QE2 won't give the U.S. economy much of a boost but will lead to rampant inflation. Both? How does that work?
If buying Treasurys is a weak policy tool, a view with which I have some sympathy, then it shouldn't be very inflationary. There is no magic link between growth of the central bank's balance sheet and inflation. People, businesses and banks have to take actions—like spending more, investing more, and lending more—to connect the two. If they don't, we will get neither faster growth nor higher inflation, just more idle bank reserves.
But I don't run the Fed. Maybe Chairman Bernanke's ideas are better than mine and, in any case, the planned QE2 is far better than doing nothing. It is not a shot in the dark, not a radical departure from conventional monetary policy, and certainly not a form of currency manipulation."
Blinder contends QE2 is weak medicine, so, no problem. He then lambastes those who believe that QE2's effectiveness and damage must be proportional. But that's not at all true. QE2 can easily trigger inflation without doing much in the way of boosting US economic activity. I think the more relevant approach is to ask Blinder to explain why the effects should be equal?
Then Blinder switches gears, and claims that if QE2 doesn't work, all we'll have is idle bank reserves. Here, he ignores the effects of all that money creation on the perceptions of the world's investors on dollar valuation.
Finally, is QE2 really "far better than doing nothing?" This is a peculiarly Keynesian view with which Austrian school economists, including Milton Friedman, would never agree. And it is certainly not the first two of Blinder's last three descriptors. And if it's not the third, it's a pretty good facsimile of it.
Thursday, November 11, 2010
How Did We Return To The Brink of 1970s Stagflation?
You sit up and take notice when people as diverse as economist Alan Reynolds, former Reagan Treasury official Bob Zoellick, and former Alaskan Governor Sarah Palin decry, the latter two in the same edition of the Wall Street Journal, the Fed's QE2 policies for stoking inflation.
Palin's remarks demonstrated a surprisingly firm and clear understanding that Helicopter Ben's recent QE2 monetization of Treasury debt is weakening the dollar, thus driving dollar-denominated prices of commodities skyward.
Add to this Alan Meltzer's Journal editorial a week ago, entitled Milton Friedman vs. the Fed, and you should really be worried. Meltzer began his piece,
"Some people, including this newspaper's David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.
Friedman's main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, "Inflation and Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is . . . a side effect of the cure for inflation," so that if a central bank "cured" unemployment by inflating, it "will have unemployment later." In other words, don't try it."
That's what I recall from my undergraduate economics courses, as well. Friedman was famous for eschewing any active currency creation, instead, legislating some constant rate of growth of the currency, perhaps related to population or GDP growth rates.
On the subject of inflation measurement and expectations, Meltzer helpfully wrote,
"In the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch the core deflator for personal consumption expenditure—the PCE deflator. Since then, the Fed has used that measure as its inflation target. Recently, without much publicity, the Fed switched to the consumer price index (CPI). The reason? From 2003 to 2009, the two measures moved together. In 2010, they diverged—and the CPI shows substantially less inflation than the PCE.
Even so, the most recent PCE deflator shows inflation running at around 1.2% annually, about where the Fed says it wants to hold the inflation rate. And it has been between 1.5% and 1.8% for a year. There is no sign of deflation.
The two measures diverged because they give different weights to their components, especially housing prices. The CPI gives almost double the weight to housing prices, especially the rental value of owner-occupied houses. This is not a number that government statisticians sample in the market. They make an estimate. The new long-term bond purchase program puts a lot of weight on a weak foundation.
Paul Volcker and Alan Greenspan restored much of the credibility that the Fed lost in the great inflation of the 1970s. The Fed's plan to increase inflation puts this credibility at risk and is a large step away from the policy that Milton Friedman favored."
So we see that the Fed has been playing fast and loose with measured inflation, while somewhat unbelievably declaring that the current risk to the economy is deflation. I distinctly read of Bernanke's recent comments about how slack labor markets virtually guarantee no imminent inflation. This while commodity prices such as copper, corn and oil spike to new highs, thanks to global perceptions of the administration's and Fed's weak dollar policy.
Can anybody say "stagflation?" Art Laffer wrote a Journal editorial just over a year ago, on which I wrote this post. He rather eerily foresaw what is now occurring. A few years ago, I dismissed some pundits' fears of stagflation, because, then, monetary policy-induced inflation wasn't yet evident. It is now.
I well recall, though young at the time, the decade of monetary policy incompetence delivered by Fed Chairmen Arthur Burns and G. William Miller. They presided over the monetary half of US stagflation, while LBJ's Great Society spending, combined with the Vietnam war, provided the fiscal half.
Is it really that possible that we've learned nothing from that era, as well as, per Laffer's editorial, the 1930s? What more evidence is needed for the Fed and Congress to understand where their joint policies are headed?
Only, this time, global interests and ubiquitous information make reactions near-immediate and much more damaging. As significant as our deficits and foreign-held debt were in the 1970s, they are far larger now. And today's global economy is much more multi-lateral than it was forty years ago.
Reynolds notes this in his recent Journal editorial, Ben Bernanke's Impossible Dream, in which he uses an EFT which ultra-shorts Treasuries, TBT, as a barometer of market reaction to Fed moves,
"Producer prices rose at an annual rate of 5.5% in September and 4.8% in August. The broad price index for GDP rose at an annual rate of 2.3% in the third quarter, up from 1.9% in the second quarter and 1% in the first.
Mr. Bernanke is unconcerned, however, because he believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing.
This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn't intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?
On Oct. 15, Mr. Bernanke gave another speech, at the Boston Fed, saying, "Inflation is running at rates that are too low . . . and the risk of deflation is higher than desirable." TBT rose again to 34.17, up from 33.34. On Nov. 3, when the scope of the Fed's long-term Treasury purchase plan was revealed, TBT jumped from 32.69 at 2:12 p.m. (EST), just before the news was released, to 34.99 by 3:34 p.m. (TBT closed Monday at 34.99.) If the Fed's plan really portends a sustainable reduction in long-term rates ahead, TBT should have moved in the opposite direction. When technocrats and markets disagree, it is rarely wise to bet against the markets.
There is ample evidence from commodity and foreign-exchange markets that world investors are indeed confident the Fed will raise inflation. However, the growing interest in shorting long-term Treasury bonds shows that the market does not believe higher inflation is consistent with lower long-term interest rates.
In other words, Mr. Bernanke and his FOMC allies are risking higher interest rates and inflated commodity costs in the pursuit of the contradictory objectives of higher inflation and lower bond yields, seemingly oblivious to all the evidence that they are pursuing an impossible dream."
Why is it a collection of notable economists are observing, across a variety of media, that the Fed is pursuing a foolish goal which will lead to sharply increased inflation, and, yet, the Fed and Bernanke seem largely unmoved?
Now, more than any other time in history, large numbers of investors, economists and various pundits have access to historical evidence and current data to make the case that US policy makers, both monetary and fiscal, are retracing steps down a painfully familiar road to stagflation.
Yet the Fed continues on this dangerous and foolish path.
Palin's remarks demonstrated a surprisingly firm and clear understanding that Helicopter Ben's recent QE2 monetization of Treasury debt is weakening the dollar, thus driving dollar-denominated prices of commodities skyward.
Add to this Alan Meltzer's Journal editorial a week ago, entitled Milton Friedman vs. the Fed, and you should really be worried. Meltzer began his piece,
"Some people, including this newspaper's David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.
Friedman's main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, "Inflation and Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is . . . a side effect of the cure for inflation," so that if a central bank "cured" unemployment by inflating, it "will have unemployment later." In other words, don't try it."
That's what I recall from my undergraduate economics courses, as well. Friedman was famous for eschewing any active currency creation, instead, legislating some constant rate of growth of the currency, perhaps related to population or GDP growth rates.
On the subject of inflation measurement and expectations, Meltzer helpfully wrote,
"In the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch the core deflator for personal consumption expenditure—the PCE deflator. Since then, the Fed has used that measure as its inflation target. Recently, without much publicity, the Fed switched to the consumer price index (CPI). The reason? From 2003 to 2009, the two measures moved together. In 2010, they diverged—and the CPI shows substantially less inflation than the PCE.
Even so, the most recent PCE deflator shows inflation running at around 1.2% annually, about where the Fed says it wants to hold the inflation rate. And it has been between 1.5% and 1.8% for a year. There is no sign of deflation.
The two measures diverged because they give different weights to their components, especially housing prices. The CPI gives almost double the weight to housing prices, especially the rental value of owner-occupied houses. This is not a number that government statisticians sample in the market. They make an estimate. The new long-term bond purchase program puts a lot of weight on a weak foundation.
Paul Volcker and Alan Greenspan restored much of the credibility that the Fed lost in the great inflation of the 1970s. The Fed's plan to increase inflation puts this credibility at risk and is a large step away from the policy that Milton Friedman favored."
So we see that the Fed has been playing fast and loose with measured inflation, while somewhat unbelievably declaring that the current risk to the economy is deflation. I distinctly read of Bernanke's recent comments about how slack labor markets virtually guarantee no imminent inflation. This while commodity prices such as copper, corn and oil spike to new highs, thanks to global perceptions of the administration's and Fed's weak dollar policy.
Can anybody say "stagflation?" Art Laffer wrote a Journal editorial just over a year ago, on which I wrote this post. He rather eerily foresaw what is now occurring. A few years ago, I dismissed some pundits' fears of stagflation, because, then, monetary policy-induced inflation wasn't yet evident. It is now.
I well recall, though young at the time, the decade of monetary policy incompetence delivered by Fed Chairmen Arthur Burns and G. William Miller. They presided over the monetary half of US stagflation, while LBJ's Great Society spending, combined with the Vietnam war, provided the fiscal half.
Is it really that possible that we've learned nothing from that era, as well as, per Laffer's editorial, the 1930s? What more evidence is needed for the Fed and Congress to understand where their joint policies are headed?
Only, this time, global interests and ubiquitous information make reactions near-immediate and much more damaging. As significant as our deficits and foreign-held debt were in the 1970s, they are far larger now. And today's global economy is much more multi-lateral than it was forty years ago.
Reynolds notes this in his recent Journal editorial, Ben Bernanke's Impossible Dream, in which he uses an EFT which ultra-shorts Treasuries, TBT, as a barometer of market reaction to Fed moves,
"Producer prices rose at an annual rate of 5.5% in September and 4.8% in August. The broad price index for GDP rose at an annual rate of 2.3% in the third quarter, up from 1.9% in the second quarter and 1% in the first.
Mr. Bernanke is unconcerned, however, because he believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing.
This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn't intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?
On Oct. 15, Mr. Bernanke gave another speech, at the Boston Fed, saying, "Inflation is running at rates that are too low . . . and the risk of deflation is higher than desirable." TBT rose again to 34.17, up from 33.34. On Nov. 3, when the scope of the Fed's long-term Treasury purchase plan was revealed, TBT jumped from 32.69 at 2:12 p.m. (EST), just before the news was released, to 34.99 by 3:34 p.m. (TBT closed Monday at 34.99.) If the Fed's plan really portends a sustainable reduction in long-term rates ahead, TBT should have moved in the opposite direction. When technocrats and markets disagree, it is rarely wise to bet against the markets.
There is ample evidence from commodity and foreign-exchange markets that world investors are indeed confident the Fed will raise inflation. However, the growing interest in shorting long-term Treasury bonds shows that the market does not believe higher inflation is consistent with lower long-term interest rates.
In other words, Mr. Bernanke and his FOMC allies are risking higher interest rates and inflated commodity costs in the pursuit of the contradictory objectives of higher inflation and lower bond yields, seemingly oblivious to all the evidence that they are pursuing an impossible dream."
Why is it a collection of notable economists are observing, across a variety of media, that the Fed is pursuing a foolish goal which will lead to sharply increased inflation, and, yet, the Fed and Bernanke seem largely unmoved?
Now, more than any other time in history, large numbers of investors, economists and various pundits have access to historical evidence and current data to make the case that US policy makers, both monetary and fiscal, are retracing steps down a painfully familiar road to stagflation.
Yet the Fed continues on this dangerous and foolish path.
Wednesday, June 09, 2010
Helicopter Ben: Economic Cheerleader-in-Chief
Yesterday's US equity markets sprint to a higher close has been attributed to Fed Chairman "Helicopter Ben" Bernanke's recent remarks that the US economy is still on an expansionary path. That everything is okay.
Well, what would you expect Ben to be saying?
"Head for the exits?"
"Buy gold and bury some food in the backyard while you're at it?"
One charming thing about now-discredited, prior Fed Chairman Alan Greenspan was that he tended to speak in riddles, leaving analysts and observers to form their own conclusions about the economy. Except, perhaps, for that "irrational exuberance" remark. Which turned out to be wrong.
I'm not surprised by Ben's remarks of the other day. I fully expect him to be waving those pom poms on the Hill this morning as he testifies before some House or joint committee.
What dismays me is how many investors, analysts and pundits still assign any credibility to Ben's remarks. Is it not clear that Ben has become a constant mouthpiece for good news? A virtual Pollyanna?
For me, Bernanke has become a valueless indicator, permanently stuck in the 'optimistic' position.
What good is that for providing honest and accurate economic information to investors?
Well, what would you expect Ben to be saying?
"Head for the exits?"
"Buy gold and bury some food in the backyard while you're at it?"
One charming thing about now-discredited, prior Fed Chairman Alan Greenspan was that he tended to speak in riddles, leaving analysts and observers to form their own conclusions about the economy. Except, perhaps, for that "irrational exuberance" remark. Which turned out to be wrong.
I'm not surprised by Ben's remarks of the other day. I fully expect him to be waving those pom poms on the Hill this morning as he testifies before some House or joint committee.
What dismays me is how many investors, analysts and pundits still assign any credibility to Ben's remarks. Is it not clear that Ben has become a constant mouthpiece for good news? A virtual Pollyanna?
For me, Bernanke has become a valueless indicator, permanently stuck in the 'optimistic' position.
What good is that for providing honest and accurate economic information to investors?
Thursday, February 25, 2010
"So Dumb, Her Head Must Hurt...."
Years ago, a college friend had a saying about really stupid people. It was,
"He's so dumb, his head must hurt."
This phrase came to mind yesterday morning as I heard and watched California Democratic Representative Maxine Waters question Fed Chairman Ben Bernanke.
Waters distinguished herself with a new low in ineptitude when she began by confusing the discount rate with the Fed Funds Rate. After Bernanke patiently explained the difference, Waters then spent long minutes insisting that mortgage interest rates must remain low, so she wanted Bernanke to guarantee and assure the House Financial Services Committee that market interest rates would not increase due to the increase in the discount rate.
Now, if you visit that link, you'll see a list of the House members on the committee. Because they are not listed in alphabetical order, it's a reasonable guess that they are in order of seniority. Thus, Waters is at least the third-longest serving Democrat on the panel. I know I've heard Waters' idiotic questions and comments on this committee for years.
Don't you think it's fair to expect such a long-serving committee member to know, by now, the difference between the discount window rate and the Fed Funds rate? How about expecting them to know a fair amount about the structure of the US financial system, basic economics, and some international trade economics, as well?
But, no, instead, we get Maxine Waters.
"So dumb, her head must hurt."
Just once, I'd like to, and would pay money to hear a Fed Chairman respond to a question like Waters' as follows,
'Ms. Waters, your question is idiotic. It conveys a total lack of understanding of the workings of the Fed.
How long have you been on this committee, Rep. Waters? Don't you think you owe it to your constituents and all American voters, to actually understand the matters before this committee?
Have you not taken the time, over the years you've been on this panel, to learn about our financial and economic system? Or are you simply overwhelmed by the subject matter?
Mr. Frank, this is ridiculous. I'm casting pearls before swine, here.
Please make sure, in the future, that the members on this committee have passed a basic test of knowledge on the subject matter that the committee oversees.
Until such time as you can assure me that all of your committee members have passed such a test, a test which I will sit with you to create, I will not bother to waste my valuable time sitting for questions from uninformed, stupid Members.
That is all for today. I have work to do.'
This is why so many of us cringe at the prospect of Congress having more and more power over all facets of American life. Congressional members sit on committees, the subjects of which they have absolutely no knowledge.
It's frightening that these people think they can regulate or oversee anything. Few seem to have even held a private sector job recently.
Just imagine you were Ben Bernanke and had to continually explain complex, inexact economic matters to more than 30 Maxine Waters clones.
It's not a political matter, nor a partisan issue. It's about the ability of Americans to conduct business in the face of inept, inexperienced and unqualified federal legislators trying to accrete more power to themselves, while remaining ignorant of how business and economics actually work.
It's enough to make you go insane, isn't it?
"He's so dumb, his head must hurt."
This phrase came to mind yesterday morning as I heard and watched California Democratic Representative Maxine Waters question Fed Chairman Ben Bernanke.
Waters distinguished herself with a new low in ineptitude when she began by confusing the discount rate with the Fed Funds Rate. After Bernanke patiently explained the difference, Waters then spent long minutes insisting that mortgage interest rates must remain low, so she wanted Bernanke to guarantee and assure the House Financial Services Committee that market interest rates would not increase due to the increase in the discount rate.
Now, if you visit that link, you'll see a list of the House members on the committee. Because they are not listed in alphabetical order, it's a reasonable guess that they are in order of seniority. Thus, Waters is at least the third-longest serving Democrat on the panel. I know I've heard Waters' idiotic questions and comments on this committee for years.
Don't you think it's fair to expect such a long-serving committee member to know, by now, the difference between the discount window rate and the Fed Funds rate? How about expecting them to know a fair amount about the structure of the US financial system, basic economics, and some international trade economics, as well?
But, no, instead, we get Maxine Waters.
"So dumb, her head must hurt."
Just once, I'd like to, and would pay money to hear a Fed Chairman respond to a question like Waters' as follows,
'Ms. Waters, your question is idiotic. It conveys a total lack of understanding of the workings of the Fed.
How long have you been on this committee, Rep. Waters? Don't you think you owe it to your constituents and all American voters, to actually understand the matters before this committee?
Have you not taken the time, over the years you've been on this panel, to learn about our financial and economic system? Or are you simply overwhelmed by the subject matter?
Mr. Frank, this is ridiculous. I'm casting pearls before swine, here.
Please make sure, in the future, that the members on this committee have passed a basic test of knowledge on the subject matter that the committee oversees.
Until such time as you can assure me that all of your committee members have passed such a test, a test which I will sit with you to create, I will not bother to waste my valuable time sitting for questions from uninformed, stupid Members.
That is all for today. I have work to do.'
This is why so many of us cringe at the prospect of Congress having more and more power over all facets of American life. Congressional members sit on committees, the subjects of which they have absolutely no knowledge.
It's frightening that these people think they can regulate or oversee anything. Few seem to have even held a private sector job recently.
Just imagine you were Ben Bernanke and had to continually explain complex, inexact economic matters to more than 30 Maxine Waters clones.
It's not a political matter, nor a partisan issue. It's about the ability of Americans to conduct business in the face of inept, inexperienced and unqualified federal legislators trying to accrete more power to themselves, while remaining ignorant of how business and economics actually work.
It's enough to make you go insane, isn't it?
Monday, February 08, 2010
Cuomo, Lewis, Paulson & Bernanke...and the Martin Act
New York gubernatorial candidate and, oh, yes, current AG Andrew Cuomo has finally brought suit against former BofA CEO Ken Lewis, and his CFO, under the Martin Act, for Lewis' alleged wrongs in the BofA-Merrill Lynch affair. My initial thoughts about this go back to last March, when I wrote this post, as Cuomo began bellowing his threats to file this case.
I had a very spirited debate about this case with my business partner yesterday morning.
My partner's opinion is that what is done, is done. Let's not waste time and money picking through the wreckage of a done deal that has, by the way, actually turned out profitably for BofA. Government if full of thugs who wield too much power, usually coercively, and this case won't change that.
In fact, he noted, even Ken Lewis doesn't want his day of reckoning in court.
I have a different perspective. I welcome the opportunity for a trial in which Lewis, probably John Thain, Ben Bernanke and Hank Paulson can all be made to tell the truth, under oath, about their actions in this mess.
The motives of everyone are quite transparent:
Andrew Cuomo- currently thuggish AG of NY, badly wanting to follow Eliot Spitzer to the governorship on the back of this sensational case.
Ken Lewis- hapless, gutless former CEO of BofA who folded like a house of cards under pressure from Bernanke and Paulson, probably violating a slew of SEC regulations involving his fiduciary duty to his shareholders.
Hank Paulson & Ben Bernanke- probably engaged in illegal, improper and coercive behavior to force Lewis, against his wishes, to complete the Merrill Lynch purchase and deceive his shareholders regarding the total cost of the deal and Merrill's losses.
John Thain- recently-hired CEO of failed CIT, wants desperately to publicly clear his name in the Merrill Lynch affair.
Ideally, this trial will illuminate just who did what. From the various media accounts, someone is lying.
Bernanke and Paulson deny strong-arming Lewis. Lewis claims he didn't want to consummate the deal, but was forced to do so by Bernanke and Paulson. Thain claims he told Lewis about the losses and bonuses at Merrill. They can't all be telling the truth.
Ironically, as today's lead Journal staff editorial notes, Cuomo is personally responsible for having touched off the financial meltdown by setting higher percentages of low-income mortgages to securitize at Fannie and Freddie, while lowering downpayments.
In the recent Journal editorial, however, they made a rare mistake, claiming that because Merrill made some money for BofA last year, the deal was thus a good one. Really?
Doesn't it matter what the final purchase price was, and how much money was made? It's not clear yet whether Lewis' final string of acquisitions, including Countrywide and Merrill, will actually prove to be accretive. Maybe, with the fungibility of federal loans, we'll never know.
I had a very spirited debate about this case with my business partner yesterday morning.
My partner's opinion is that what is done, is done. Let's not waste time and money picking through the wreckage of a done deal that has, by the way, actually turned out profitably for BofA. Government if full of thugs who wield too much power, usually coercively, and this case won't change that.
In fact, he noted, even Ken Lewis doesn't want his day of reckoning in court.
I have a different perspective. I welcome the opportunity for a trial in which Lewis, probably John Thain, Ben Bernanke and Hank Paulson can all be made to tell the truth, under oath, about their actions in this mess.
The motives of everyone are quite transparent:
Andrew Cuomo- currently thuggish AG of NY, badly wanting to follow Eliot Spitzer to the governorship on the back of this sensational case.
Ken Lewis- hapless, gutless former CEO of BofA who folded like a house of cards under pressure from Bernanke and Paulson, probably violating a slew of SEC regulations involving his fiduciary duty to his shareholders.
Hank Paulson & Ben Bernanke- probably engaged in illegal, improper and coercive behavior to force Lewis, against his wishes, to complete the Merrill Lynch purchase and deceive his shareholders regarding the total cost of the deal and Merrill's losses.
John Thain- recently-hired CEO of failed CIT, wants desperately to publicly clear his name in the Merrill Lynch affair.
Ideally, this trial will illuminate just who did what. From the various media accounts, someone is lying.
Bernanke and Paulson deny strong-arming Lewis. Lewis claims he didn't want to consummate the deal, but was forced to do so by Bernanke and Paulson. Thain claims he told Lewis about the losses and bonuses at Merrill. They can't all be telling the truth.
Ironically, as today's lead Journal staff editorial notes, Cuomo is personally responsible for having touched off the financial meltdown by setting higher percentages of low-income mortgages to securitize at Fannie and Freddie, while lowering downpayments.
In the recent Journal editorial, however, they made a rare mistake, claiming that because Merrill made some money for BofA last year, the deal was thus a good one. Really?
Doesn't it matter what the final purchase price was, and how much money was made? It's not clear yet whether Lewis' final string of acquisitions, including Countrywide and Merrill, will actually prove to be accretive. Maybe, with the fungibility of federal loans, we'll never know.
What better day of reckoning for the lot of them than a public courtroom and sworn testimony?
If everything goes well, there should be some perjury charges coming against someone or ones.
As I said to my business partner, I believe it's important for the public to see, if true, how federal officials Paulson and Bernanke improperly used their positions to coerce private company executives. If they abused their power, it should be made public, and they should be charged and convicted of said offenses.
We'll never curb abuses of power by high-level federal officials without making examples of those who misbehave. No matter if the events are now in the past.
Were someone with omniscience to inform us all, here's what I believe we'd learn:
-Ken Lewis abdicated his fiduciary duties to his shareholders, in order to keep his job.
-Bernanke and Paulson illegally coerced Lewis to behave improperly, keeping his shareholders ignorant of important new risks in the Merrill Lynch transaction
-John Thain informed Lewis and his BofA team of the losses Merrill was incurring, and the bonuses planned to be paid to Merrill personnel.
I may be wrong. But those are my contentions.
If I'm right, Lewis, Bernanke, Paulson and maybe Lewis' CFO should all, ideally, be wearing orange suits and raking sand traps at Allenwood.
Friday, January 29, 2010
Bernanke's Renomination As Fed Chair
It doesn't seem very comforting to see Bernanke confirmed by the smallest margin the Senate has ever voted for this position, does it?
Especially when you consider that he's had the job for one term. I guess some Senators felt that changing Fed chairmen was risking someone even worse than Bernanke.
For a guy who seemed so experienced and well-qualified for the job, he sure made a hash of it when the going got tough.
To me, the salient criticism of Bernanke & Co. was conveyed in Anna Kagan Schwartz' interview in the Wall Street Journal in October, 2008. In that interview, she said this, which is in that linked post,
"But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."
By that, which she specified elsewhere in the interview, she meant that liquidity wasn't the problem in 2008, but counterparty risk and solvency.
For this alone, I think Bernanke should have been denied another shot at mismanaging our money supply.
I suppose many feel better that even more uncertainty hasn't been injected into the financial system. But the price is to labor under a Fed chief who clearly does not have the confidence of most of Congress, has taken steps that are pretty clearly unconstitutional, including his role in the AIG and Merrill Lynch situations, and confused the nature of the single greatest challenge any Fed chairman has faced, with the probable exceptions of Volcker and Eccles.
Especially when you consider that he's had the job for one term. I guess some Senators felt that changing Fed chairmen was risking someone even worse than Bernanke.
For a guy who seemed so experienced and well-qualified for the job, he sure made a hash of it when the going got tough.
To me, the salient criticism of Bernanke & Co. was conveyed in Anna Kagan Schwartz' interview in the Wall Street Journal in October, 2008. In that interview, she said this, which is in that linked post,
"But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."
By that, which she specified elsewhere in the interview, she meant that liquidity wasn't the problem in 2008, but counterparty risk and solvency.
For this alone, I think Bernanke should have been denied another shot at mismanaging our money supply.
I suppose many feel better that even more uncertainty hasn't been injected into the financial system. But the price is to labor under a Fed chief who clearly does not have the confidence of most of Congress, has taken steps that are pretty clearly unconstitutional, including his role in the AIG and Merrill Lynch situations, and confused the nature of the single greatest challenge any Fed chairman has faced, with the probable exceptions of Volcker and Eccles.
Tuesday, January 26, 2010
Bernanke's Troubling Congressional Roadshow
There was considerable buzz yesterday as Fed chairman Ben Bernanke made the rounds of Capitol Hill.
According to Senate Majority Leader Harry Reid, Helicopter Ben promised he'd continue his easy money policy as a quid pro quo for being reappointed to his current job.
As retiring Kentucky Republican Senator Jim Bunning contended this morning on CNBC, Bernanke is engaging in unusual and dangerous behavior.
What are we to make of a Fed chairman publicly prostrating himself for Senate confirmation votes? Where's the outrage from the rest of the Fed now? They certainly rallied to protest the House bill to audit the Fed. They were all up in arms about the sacred independence of the Fed.
How can it possibly remain 'independent' when its chairman grovels before Congress, promising easier monetary policy than the already-zero interest rates?
Worse, what signal does this send to the rest of the investing world? The chairman of the central bank for the world's reserve currency pleading with those who would reappoint him that he'll make monetary policy sufficiently lax to please them?
This way would seem to lie serious danger for the US dollar and very dire long term economic consequences for our country.
According to Senate Majority Leader Harry Reid, Helicopter Ben promised he'd continue his easy money policy as a quid pro quo for being reappointed to his current job.
As retiring Kentucky Republican Senator Jim Bunning contended this morning on CNBC, Bernanke is engaging in unusual and dangerous behavior.
What are we to make of a Fed chairman publicly prostrating himself for Senate confirmation votes? Where's the outrage from the rest of the Fed now? They certainly rallied to protest the House bill to audit the Fed. They were all up in arms about the sacred independence of the Fed.
How can it possibly remain 'independent' when its chairman grovels before Congress, promising easier monetary policy than the already-zero interest rates?
Worse, what signal does this send to the rest of the investing world? The chairman of the central bank for the world's reserve currency pleading with those who would reappoint him that he'll make monetary policy sufficiently lax to please them?
This way would seem to lie serious danger for the US dollar and very dire long term economic consequences for our country.
Sunday, January 24, 2010
Regarding Bernanke's Reappointment
How the winds have changed in just a few short weeks!
I have, on my desk, a Wall Street Journal editorial from the weekend edition of 9-10 January by Judy Shelton. In it, she lampoons the Fed chairman for admitting in a recent speech only,
"the timing of the housing bubble does not rule out some contribution from monetary policy."
Apparently Bernanke still won't face up to the fact that government forces were responsible for the first steps leading to the recent financial sector turmoil. First Greenspan kept interest rates too low for too long. Coupled with that, Congress, through the CRA and misguided direction to Fannie Mae and Freddie Mac, encouraged, as well as demanded, that mortgage loans be made to unqualified home buyers.
Yes, with that stage set, commercial, investment and mortgage banks were too aggressive in their pursuit of profits through residential home financing. But they simply joined the party that the Fed and Congress had started.
Now that the voting public is angry at the federal government for having rescued banks which should have been allowed to fail, Bernanke's reappointment carries more risk than it did only a few months ago.
Personally, I believe that Bernanke responded incorrectly to the developing financial sector debacle as far back as the late summer of 2007. With post-1929 securities markets and banking reforms in place, including deposit insurance, bank insolvency is no longer something to be papered over. Furthermore, there was little sign that monetary liquidity had ever truly dried up in 2007 or 2008.
What worried federal officials was the solvency of Bear Stearns, Lehman, AIG, Morgan Stanley, Goldman Sachs and Citigroup, not the overall liquidity in the US.
Additionally, at a time of administration and Congressional overreach in several legislative areas, the Fed is now seen as having behaved in an unconstitutional manner in the AIG case. And its rush, with Treasury, to force-feed federal funding to large banks which could have safely been put into receivership to thin out the sector's overcapacity, is now seen as favoring large business and financial interests at the literal expense of taxpayers.
This has suddenly become very unpopular. Especially in the wake of the election to the US Senate of Republican Scott Brown last Tuesday.
For once, I'm with Larry Kudlow, of CNBC, in thinking that John Taylor would be a good replacement for helicopter Ben. Rather than avoid a depression, our recent challenges have been how to productively and effectively shed excess financial sector capacity without having monetary policy become either overly restrictive, or overly stimulative.
I personally think Bernanke is damaged goods now. He pulled the wrong levers during the recent financial crisis, helped things spin out of control, only to have to apply too much force to rein them back in, while apparently engaging in some illegal behavior by coercing BankofAmerica to close its purchase of Merrill Lynch.
Regardless of its effect on the equity markets, I am actually pleased to see that Bernanke's reconfirmation for Fed chairman is now a long shot.
I have, on my desk, a Wall Street Journal editorial from the weekend edition of 9-10 January by Judy Shelton. In it, she lampoons the Fed chairman for admitting in a recent speech only,
"the timing of the housing bubble does not rule out some contribution from monetary policy."
Apparently Bernanke still won't face up to the fact that government forces were responsible for the first steps leading to the recent financial sector turmoil. First Greenspan kept interest rates too low for too long. Coupled with that, Congress, through the CRA and misguided direction to Fannie Mae and Freddie Mac, encouraged, as well as demanded, that mortgage loans be made to unqualified home buyers.
Yes, with that stage set, commercial, investment and mortgage banks were too aggressive in their pursuit of profits through residential home financing. But they simply joined the party that the Fed and Congress had started.
Now that the voting public is angry at the federal government for having rescued banks which should have been allowed to fail, Bernanke's reappointment carries more risk than it did only a few months ago.
Personally, I believe that Bernanke responded incorrectly to the developing financial sector debacle as far back as the late summer of 2007. With post-1929 securities markets and banking reforms in place, including deposit insurance, bank insolvency is no longer something to be papered over. Furthermore, there was little sign that monetary liquidity had ever truly dried up in 2007 or 2008.
What worried federal officials was the solvency of Bear Stearns, Lehman, AIG, Morgan Stanley, Goldman Sachs and Citigroup, not the overall liquidity in the US.
Additionally, at a time of administration and Congressional overreach in several legislative areas, the Fed is now seen as having behaved in an unconstitutional manner in the AIG case. And its rush, with Treasury, to force-feed federal funding to large banks which could have safely been put into receivership to thin out the sector's overcapacity, is now seen as favoring large business and financial interests at the literal expense of taxpayers.
This has suddenly become very unpopular. Especially in the wake of the election to the US Senate of Republican Scott Brown last Tuesday.
For once, I'm with Larry Kudlow, of CNBC, in thinking that John Taylor would be a good replacement for helicopter Ben. Rather than avoid a depression, our recent challenges have been how to productively and effectively shed excess financial sector capacity without having monetary policy become either overly restrictive, or overly stimulative.
I personally think Bernanke is damaged goods now. He pulled the wrong levers during the recent financial crisis, helped things spin out of control, only to have to apply too much force to rein them back in, while apparently engaging in some illegal behavior by coercing BankofAmerica to close its purchase of Merrill Lynch.
Regardless of its effect on the equity markets, I am actually pleased to see that Bernanke's reconfirmation for Fed chairman is now a long shot.
Wednesday, September 16, 2009
Two Contrasting Views of The Impact of Lehman's Failure
Today's Wall Street Journal presented two starkly differing anniversary reviews of the failure of Lehman Brothers.
Two finance professors from the University of Chicago, John Cochrane and Luigi Zingales, argued, with hard, credible quantitative evidence, that it wasn't Lehman's demise, but Hank Paulson's and Ben Bernanke's panicked testimony to Congress a few days later, that caused financial markets to begin to fail, too.
On the other side of the argument, with little but hearsay and a few top-line numbers sizing the mutual fund market, is the Journal's own financial columnist, James B. Stewart. Augmenting Stewart's piece in the paper was an afternoon appearance on CNBC, wherein he went beyond his Journal article, contending that Lehman's failure was a financial system near-death event, and that no firm like Lehman should, or could, now, ever be safely allowed to fail.
Whom to believe?
Well, first, let's review the academics' piece. Cochrane and Zingales present a graph showing clearly that shortly after Lehman's bankruptcy, spreads of instruments like Libor-OIS rose only 18 points, whereas it rose more than three times that within two days after the Treasury Secretary and Fed Chairman sounded the general financial alarm and demanded that the TARP legislation be passed.
Since the TARP was never actually used as described, it wasn't even the source of any significant calming of the financial markets.
As to the importance of the Lehman failure, or its rescue, they wrote,
"Would a Lehman bailout have averted a panic? The news would still be that Lehman failed, and markets knew bailouts would not last forever. After all, the Bear Stearns rescue in February had just postponed worse trouble."
Cochrane and Zingales go on to contend that the real lesson in Lehman's bankruptcy "cannot be that the government must always bail out every large financial institution."
They cite the 1984 Continental Bank rescue, and others that followed, including LTCM, to demonstrate that none of these rescues have positively or constructively affected financial firms' appetite for risk. They write, near the end of their piece,
"The blame-it-on Lehman story leads to a dangerous complacency. If we can persuade ourselves that the fault was just one policy mistake, forced on the feds by silly legal restrictions and not enough bailout power, everything can go back the cozy way it was before.
This is a convenient story for large banks that dominate the lobbying and communication effort. And it absolves the Fed and Treasury of facing up to their long string of policy mistakes."
The two Chicago professors conclude that, while they don't claim to have the perfect answer, they would trust markets before trusting an overly-powerful government which has serially increased the stakes of each financial crisis which it has spawned through 25 years of bailouts.
In contrast to Cochrane's and Zingales' use of actual data to demonstrate that Lehman's failure did not panic markets, Journal writer James Stewart continues his usual misunderstanding of financial markets by claiming that Lehman's debt obligations, stuffed into so many mutual funds, required the government to guarantee those assets. Thus, by Stewart's reasoning, allowing Lehman to fail was a huge mistake which necessitated the assumption by the government of $4 trillion of mutual fund value.
On CNBC this afternoon, however, Stewart babbled on incessantly about how necessary it was that Lehman had been saved. That no similarly-sized financial firm can ever be allowed to fail again, because, although markets would have eventually corrected, Stewart solemnly judged that such correction would have taken us 'back to the iron age.'
Really?
That's precisely what the two professors convincingly demonstrate would not have happened. And did not happen.
The fact is that mutual fund investors take risks for extra return. Holding those assets meant investors chose to bet on the managements of those funds.
Have those funds now been cleansed of inept managers? No. The federal safety net saw to that. Just as Ken Lewis and Vik Pandit still run BofA and Citigroup, their incompetence notwithstanding.
I don't know if anyone else happened to notice this bizarre coincidence in today's Journal. It makes for an interesting comparison between savvy, analytical observers of last year's financial crisis, and a fear-mongering, large-government and -bank supporting financial beat flack with little in the way of evidence to sustain his contentions.
Two finance professors from the University of Chicago, John Cochrane and Luigi Zingales, argued, with hard, credible quantitative evidence, that it wasn't Lehman's demise, but Hank Paulson's and Ben Bernanke's panicked testimony to Congress a few days later, that caused financial markets to begin to fail, too.
On the other side of the argument, with little but hearsay and a few top-line numbers sizing the mutual fund market, is the Journal's own financial columnist, James B. Stewart. Augmenting Stewart's piece in the paper was an afternoon appearance on CNBC, wherein he went beyond his Journal article, contending that Lehman's failure was a financial system near-death event, and that no firm like Lehman should, or could, now, ever be safely allowed to fail.
Whom to believe?
Well, first, let's review the academics' piece. Cochrane and Zingales present a graph showing clearly that shortly after Lehman's bankruptcy, spreads of instruments like Libor-OIS rose only 18 points, whereas it rose more than three times that within two days after the Treasury Secretary and Fed Chairman sounded the general financial alarm and demanded that the TARP legislation be passed.
Since the TARP was never actually used as described, it wasn't even the source of any significant calming of the financial markets.
As to the importance of the Lehman failure, or its rescue, they wrote,
"Would a Lehman bailout have averted a panic? The news would still be that Lehman failed, and markets knew bailouts would not last forever. After all, the Bear Stearns rescue in February had just postponed worse trouble."
Cochrane and Zingales go on to contend that the real lesson in Lehman's bankruptcy "cannot be that the government must always bail out every large financial institution."
They cite the 1984 Continental Bank rescue, and others that followed, including LTCM, to demonstrate that none of these rescues have positively or constructively affected financial firms' appetite for risk. They write, near the end of their piece,
"The blame-it-on Lehman story leads to a dangerous complacency. If we can persuade ourselves that the fault was just one policy mistake, forced on the feds by silly legal restrictions and not enough bailout power, everything can go back the cozy way it was before.
This is a convenient story for large banks that dominate the lobbying and communication effort. And it absolves the Fed and Treasury of facing up to their long string of policy mistakes."
The two Chicago professors conclude that, while they don't claim to have the perfect answer, they would trust markets before trusting an overly-powerful government which has serially increased the stakes of each financial crisis which it has spawned through 25 years of bailouts.
In contrast to Cochrane's and Zingales' use of actual data to demonstrate that Lehman's failure did not panic markets, Journal writer James Stewart continues his usual misunderstanding of financial markets by claiming that Lehman's debt obligations, stuffed into so many mutual funds, required the government to guarantee those assets. Thus, by Stewart's reasoning, allowing Lehman to fail was a huge mistake which necessitated the assumption by the government of $4 trillion of mutual fund value.
On CNBC this afternoon, however, Stewart babbled on incessantly about how necessary it was that Lehman had been saved. That no similarly-sized financial firm can ever be allowed to fail again, because, although markets would have eventually corrected, Stewart solemnly judged that such correction would have taken us 'back to the iron age.'
Really?
That's precisely what the two professors convincingly demonstrate would not have happened. And did not happen.
The fact is that mutual fund investors take risks for extra return. Holding those assets meant investors chose to bet on the managements of those funds.
Have those funds now been cleansed of inept managers? No. The federal safety net saw to that. Just as Ken Lewis and Vik Pandit still run BofA and Citigroup, their incompetence notwithstanding.
I don't know if anyone else happened to notice this bizarre coincidence in today's Journal. It makes for an interesting comparison between savvy, analytical observers of last year's financial crisis, and a fear-mongering, large-government and -bank supporting financial beat flack with little in the way of evidence to sustain his contentions.
Wednesday, August 26, 2009
Ben Keeps His Job!
The big news yesterday was that Ben Bernanke was nominated to a second term as Fed Chairman.
Of course, the pundits were running wild on air and, today, in print.
But it probably all boils down to what one observer noted in a discussion on CNBC yesterday morning.
Basically, he opined that if Obama had nominated Larry Summers, and the economy didn't straighten out flawlessly, or anything else unexpectedly bad occurred in the financial sector, then the administration would own the result. Period.
This way, the president can try to cling to some last vestige of the prior administration, blaming them and then-, and still-Fed Chairman Bernanke for the mess. The logic is that Ben can stay to clean up the mess that occurred on his watch, with no new problems interjected by the new administration via a new Chairman.
It's a sensible explanation. And, God knows, Bernanke has prostrated himself humbly, and reflated the economy massively, in order to secure that reappointment.
Personally, I'm of the opinion that, because it's a nomination for the Fed Chairman, whether a "renomination," or not, Obama will still own the results.
If bad, one could argue that he should have changed horses from the guy who let things spin so badly out of control through, at the very least, a failure of the Fed's bank oversight function.
But, the die is cast. It would be unlikely, and a very important signal, if a Democratic Senate doesn't confirm Bernanke to another term.
The wait is over. Now, perhaps we'll see the hard work begin- raising interest rates and draining excessive liquidity from the US and worldwide economies.
Of course, the pundits were running wild on air and, today, in print.
But it probably all boils down to what one observer noted in a discussion on CNBC yesterday morning.
Basically, he opined that if Obama had nominated Larry Summers, and the economy didn't straighten out flawlessly, or anything else unexpectedly bad occurred in the financial sector, then the administration would own the result. Period.
This way, the president can try to cling to some last vestige of the prior administration, blaming them and then-, and still-Fed Chairman Bernanke for the mess. The logic is that Ben can stay to clean up the mess that occurred on his watch, with no new problems interjected by the new administration via a new Chairman.
It's a sensible explanation. And, God knows, Bernanke has prostrated himself humbly, and reflated the economy massively, in order to secure that reappointment.
Personally, I'm of the opinion that, because it's a nomination for the Fed Chairman, whether a "renomination," or not, Obama will still own the results.
If bad, one could argue that he should have changed horses from the guy who let things spin so badly out of control through, at the very least, a failure of the Fed's bank oversight function.
But, the die is cast. It would be unlikely, and a very important signal, if a Democratic Senate doesn't confirm Bernanke to another term.
The wait is over. Now, perhaps we'll see the hard work begin- raising interest rates and draining excessive liquidity from the US and worldwide economies.
Wednesday, August 19, 2009
The Coming Bernanke Inflation
A little less than a month ago, Fed Chairman Ben Bernanke took the unusual step of penning an editorial in the Wall Street Journal, on which I wrote this post, entitled, "The Fed's Exit Strategy."
I observed, in my piece,
"Here's the one thing Ben never mentions in his editorial. All of the methods he described involve raising interest rates.
You know what rising interest rates tend to do? Yes, that's right. Choke off recoveries and slow economic growth."
Back about a week before Bernanke's piece, occasional Journal editorialist Andy Kessler wrote a column in which he observed,
"At the end of the day, only one thing has worked- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear."
I don't usually find Kessler's financial sector insights very good, but this time was an exception. I think he's right on the money, as it were. Pun intended.
Then Journal staffer and editorialist Kim Strassel chimed in last week, noting that Bernanke has a big job on his hands trying to get renominated and reconfirmed for his job. She observed Congress' rough handling of the Fed Chairman at hearings, wherein he was vaguely accused of perjury for 'forgetting' key conversations with Ken Lewis and then-Treasury Secretary Hank Paulson.
Strassel shrewdly concluded,
"The once hard line between the "independent" Fed and the rest of official Washington has been blurred. Mr. Bernanke's problems are now the Obama team's."
Personally, I am betting on Larry Summers' getting Ben's job. But that won't keep Ben from trying.
And that, unfortunately, means the Fed Chairman won't tighten until after he is sure he is either renominated, or not. And if not, then why bother?
Either way, here's the thing. We are in for easy money for the rest of the year. And when the US economy gets addicted to cheap, or, in this case, nearly no-cost money, watch out.
There is no safe exit to this monetary policy mess that will leave the US economy in healthy shape.
The monetary-based equity rally of the past few months isn't about a recovery. It's about hope for a recovery with low interest rates.
Whether it's tightening or inflation, there's no obvious safe, easy path out of this mess which includes a healthy, growing US economy in the next year.
I observed, in my piece,
"Here's the one thing Ben never mentions in his editorial. All of the methods he described involve raising interest rates.
You know what rising interest rates tend to do? Yes, that's right. Choke off recoveries and slow economic growth."
Back about a week before Bernanke's piece, occasional Journal editorialist Andy Kessler wrote a column in which he observed,
"At the end of the day, only one thing has worked- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear."
I don't usually find Kessler's financial sector insights very good, but this time was an exception. I think he's right on the money, as it were. Pun intended.
Then Journal staffer and editorialist Kim Strassel chimed in last week, noting that Bernanke has a big job on his hands trying to get renominated and reconfirmed for his job. She observed Congress' rough handling of the Fed Chairman at hearings, wherein he was vaguely accused of perjury for 'forgetting' key conversations with Ken Lewis and then-Treasury Secretary Hank Paulson.
Strassel shrewdly concluded,
"The once hard line between the "independent" Fed and the rest of official Washington has been blurred. Mr. Bernanke's problems are now the Obama team's."
Personally, I am betting on Larry Summers' getting Ben's job. But that won't keep Ben from trying.
And that, unfortunately, means the Fed Chairman won't tighten until after he is sure he is either renominated, or not. And if not, then why bother?
Either way, here's the thing. We are in for easy money for the rest of the year. And when the US economy gets addicted to cheap, or, in this case, nearly no-cost money, watch out.
There is no safe exit to this monetary policy mess that will leave the US economy in healthy shape.
The monetary-based equity rally of the past few months isn't about a recovery. It's about hope for a recovery with low interest rates.
Whether it's tightening or inflation, there's no obvious safe, easy path out of this mess which includes a healthy, growing US economy in the next year.
Monday, August 17, 2009
More Reflections On The Economy, Growth & The Fed
Today's US equity market sell-off seems to be following my expectations, as expressed in these recent posts here, here and here.
Allegedly following foreign equity markets' reactions to Friday's dismal consumer confidence survey report, the S&P has fallen 2.3% as I write this just before the market close.
Suddenly, the fall swoon of which I had written could be nigh.
Or not. As one pundit on the floor of the NYSE put it today, it depends on volume. And I agree with that. But Lowe's tepid earnings report, coming after various analyses explaining why it should have been good, will probably go a long way to dampen investor expectations now.
Never mind last year's comparable quarter results. I think investors are smart enough to not dwell on that metric.
The real key seems to be the trajectory of the US economy. It's not enough to sustain a recovery rally that Bernanke thinks the economy is 'leveling.'
Printing money, borrowing it and having government spending it will do a lot in the short term, or could do so. But for long term equity gains, the private sector has to resume growth. And there's currently nothing presaging that.
I keep returning to the inventory situation. So many pundits simply assume inventories will be rebuilt, resulting in manufacturing activity, chain reactions among suppliers, higher payrolls, and, voila, growth and recovery!
So if that doesn't happen, what then?
Rely on some 'shovel ready' road projects? Not enough.
It's not clear that today's sell-off is the beginning of the next 'big one.' But it's having some observable, significant effects on our equity options signals already. Certainly altering their prior trends.
I wouldn't be betting on a much higher S&P very soon. The CNBC pundits who predicted such a market gain by later this year seem to be naively optimistic, in my opinion.
Allegedly following foreign equity markets' reactions to Friday's dismal consumer confidence survey report, the S&P has fallen 2.3% as I write this just before the market close.
Suddenly, the fall swoon of which I had written could be nigh.
Or not. As one pundit on the floor of the NYSE put it today, it depends on volume. And I agree with that. But Lowe's tepid earnings report, coming after various analyses explaining why it should have been good, will probably go a long way to dampen investor expectations now.
Never mind last year's comparable quarter results. I think investors are smart enough to not dwell on that metric.
The real key seems to be the trajectory of the US economy. It's not enough to sustain a recovery rally that Bernanke thinks the economy is 'leveling.'
Printing money, borrowing it and having government spending it will do a lot in the short term, or could do so. But for long term equity gains, the private sector has to resume growth. And there's currently nothing presaging that.
I keep returning to the inventory situation. So many pundits simply assume inventories will be rebuilt, resulting in manufacturing activity, chain reactions among suppliers, higher payrolls, and, voila, growth and recovery!
So if that doesn't happen, what then?
Rely on some 'shovel ready' road projects? Not enough.
It's not clear that today's sell-off is the beginning of the next 'big one.' But it's having some observable, significant effects on our equity options signals already. Certainly altering their prior trends.
I wouldn't be betting on a much higher S&P very soon. The CNBC pundits who predicted such a market gain by later this year seem to be naively optimistic, in my opinion.
Thursday, July 23, 2009
What Ben Bernanke Didn't Tell You In His Editorial
Fed Chairman Ben Bernanke wrote a long editorial in Tuesday's Wall Street Journal, appearing the morning of his Capitol Hill testimony, entitled "The Fed's Exit Strategy."
You see, many people, including me, doubt that the Fed can effectively avoid rampant inflation caused by its monumental explosion of the US money supply and guarantees.
Ben patiently attempted to reassure readers by listing the many ways he feels the Fed can rein in much of the liquidity it recently created.
Here's the one thing Ben never mentions in his editorial.
All of the methods he described involve raising interest rates.
Whether it's by paying higher interest rates on bank reserve deposits, selling Treasuries, or any of the other approaches he outlined, they all necessarily involve boosting interest rates.
It's fundamental economics. Money supply down, rates up. Pushing securities into investors' hands via sales pushes those prices down, thus raising effective interest rates.
You know what rising interest rates tend to do?
Yes, that's right. Choke off recoveries and slow economic growth.
Granted, rates are basically at zero for now. But they are at zero with much, much more US obligations outstanding than ever before. To move the needle on these massive obligations, interest rates will have to rise.
Oh, yes. That's right, the rate the US pays on its debt will...have to...rise.....too.
Oh, my. Doesn't that raise our cost of government and the deficit?
You betcha!
Thanks for the tutorial, Ben. Next time, maybe be more honest about the effects trying to shrink the money supply will have on the economy's effective interest rates?
You see, many people, including me, doubt that the Fed can effectively avoid rampant inflation caused by its monumental explosion of the US money supply and guarantees.
Ben patiently attempted to reassure readers by listing the many ways he feels the Fed can rein in much of the liquidity it recently created.
Here's the one thing Ben never mentions in his editorial.
All of the methods he described involve raising interest rates.
Whether it's by paying higher interest rates on bank reserve deposits, selling Treasuries, or any of the other approaches he outlined, they all necessarily involve boosting interest rates.
It's fundamental economics. Money supply down, rates up. Pushing securities into investors' hands via sales pushes those prices down, thus raising effective interest rates.
You know what rising interest rates tend to do?
Yes, that's right. Choke off recoveries and slow economic growth.
Granted, rates are basically at zero for now. But they are at zero with much, much more US obligations outstanding than ever before. To move the needle on these massive obligations, interest rates will have to rise.
Oh, yes. That's right, the rate the US pays on its debt will...have to...rise.....too.
Oh, my. Doesn't that raise our cost of government and the deficit?
You betcha!
Thanks for the tutorial, Ben. Next time, maybe be more honest about the effects trying to shrink the money supply will have on the economy's effective interest rates?
Thursday, March 19, 2009
Helicopter Ben's Latest Trillion
Yesterday's 2.1% rise in the S&P500 Index was mostly fueled by Fed chairman Ben Bernanke's promise to add a trillion dollars to the Fed's balance sheet via quantitative easing.
Faced with a 0% interest rate, all the Fed can now do is to pump money into the US and global financial markets by purchasing financial instruments.
But, as I wrote in this post earlier this month, where is the money coming from? By what means will investors continue to value US dollar obligations as the Federal Reserve either prints more money or borrows more money with which to buy more questionable assets from US financial institutions.
This approach may have led to a one-day equity market rally, but, longer term, it has to have inflationary implications. And that, of course, is bad for equities.
In a healthy US economy, or one in a normal recession, the Fed can command sufficient confidence to add liquidity to the economy without necessarily causing long term economic damage via inflation.
But the US economy is currently deleveraging in the midst of a recession. What Bernanke is proposing, in conjunction with the federal government's many spending plans in excess of several trillion dollars, is to essentially releverage our economy.
But isn't that what we now believe was a mistake? Private over-leveraging of our economy led to unsustainably low interest rates which fueled bad lending and overconsumption of housing.
Isn't Bernanke's solution of adding a trillion dollars to global capital markets just repeating, with government money, what was viewed as a mistake by private markets only last year?
Faced with a 0% interest rate, all the Fed can now do is to pump money into the US and global financial markets by purchasing financial instruments.
But, as I wrote in this post earlier this month, where is the money coming from? By what means will investors continue to value US dollar obligations as the Federal Reserve either prints more money or borrows more money with which to buy more questionable assets from US financial institutions.
This approach may have led to a one-day equity market rally, but, longer term, it has to have inflationary implications. And that, of course, is bad for equities.
In a healthy US economy, or one in a normal recession, the Fed can command sufficient confidence to add liquidity to the economy without necessarily causing long term economic damage via inflation.
But the US economy is currently deleveraging in the midst of a recession. What Bernanke is proposing, in conjunction with the federal government's many spending plans in excess of several trillion dollars, is to essentially releverage our economy.
But isn't that what we now believe was a mistake? Private over-leveraging of our economy led to unsustainably low interest rates which fueled bad lending and overconsumption of housing.
Isn't Bernanke's solution of adding a trillion dollars to global capital markets just repeating, with government money, what was viewed as a mistake by private markets only last year?
Wednesday, February 25, 2009
Bernanke's Capitol Hill Testimony
I listened yesterday as Fed Chairman Ben Bernanke re-applied for his job.
That's pretty much how I viewed his remarks. Others may, and will differ.
But as I worked on various items throughout the morning and afternoon, I kept hearing Bernanke solidly endorsing whatever new, half-baked financial rescue scheme is coming out of the administration.
My mind went back to Bernanke's testimony only last year, when Democrats were querying him on the need to cut spending. At the time, anxious to clip a Republican administration's wings and raise taxes, Congressional Democrats were nearly tripping over themselves to ask Bernanke to agree with them that deficits should be closed.
Now, in the wake of a $1T spending bill, Ben was silent on the matter. As were his Congressional inquisitors.
Instead, it was all about propping up famously-named US banks, rather than let them go through the natural process of insolvency, closure and seizure by the FDIC, and the next steps that all failed banks experience.
For example, where was Bernanke's defense of his own staff's bank examinations? Why defer to some new 'stress test' by Geithner's people, when the Fed was presumably stress testing and examining federally-chartered banks all along?
How could Geithner's purportedly "new" idea add anything that hasn't already been, or should have been done?
If anything, following in the footsteps of Volcker and Greenspan, Bernanke seems to cut a decidedly smaller, less confident and powerful figure. With a Congress controlled by the same party as the President who would renominate him in 2010, it's no surprise that Bernanke is appearing as eager and compliant as possible with anything the administration wants to do.
Nationalize a bank, but not call it that? Fine by Ben.
Spend a trillion dollars, but say you'll also cut the deficit? Totally believable, says Ben.
Keep interest rates low and demand more lending by already-crippled banks? Done, says Ben.
I suspect we are in for a very, very dangerous next few years, due to the recent, more acutely-politicized nature of Bernanke's position at the Fed.
That's pretty much how I viewed his remarks. Others may, and will differ.
But as I worked on various items throughout the morning and afternoon, I kept hearing Bernanke solidly endorsing whatever new, half-baked financial rescue scheme is coming out of the administration.
My mind went back to Bernanke's testimony only last year, when Democrats were querying him on the need to cut spending. At the time, anxious to clip a Republican administration's wings and raise taxes, Congressional Democrats were nearly tripping over themselves to ask Bernanke to agree with them that deficits should be closed.
Now, in the wake of a $1T spending bill, Ben was silent on the matter. As were his Congressional inquisitors.
Instead, it was all about propping up famously-named US banks, rather than let them go through the natural process of insolvency, closure and seizure by the FDIC, and the next steps that all failed banks experience.
For example, where was Bernanke's defense of his own staff's bank examinations? Why defer to some new 'stress test' by Geithner's people, when the Fed was presumably stress testing and examining federally-chartered banks all along?
How could Geithner's purportedly "new" idea add anything that hasn't already been, or should have been done?
If anything, following in the footsteps of Volcker and Greenspan, Bernanke seems to cut a decidedly smaller, less confident and powerful figure. With a Congress controlled by the same party as the President who would renominate him in 2010, it's no surprise that Bernanke is appearing as eager and compliant as possible with anything the administration wants to do.
Nationalize a bank, but not call it that? Fine by Ben.
Spend a trillion dollars, but say you'll also cut the deficit? Totally believable, says Ben.
Keep interest rates low and demand more lending by already-crippled banks? Done, says Ben.
I suspect we are in for a very, very dangerous next few years, due to the recent, more acutely-politicized nature of Bernanke's position at the Fed.
Tuesday, November 04, 2008
Bernanke's Next Step To US Bank Nationalization: MBS Insurance
This weekend's Wall Street Journal reported on Fed chairman Ben Bernanke's comments, delivered to a mortgage finance conference via video link, on a continuing Federal role in housing finance.
My business partner and I have reasoned, since the Fannie and Freddie takeovers, that the government is unlikely to allow the past levels of profitability in mortgage finance to continue in the future. It's the simplest way to avoid a repeat of the excesses of the past few years and recent real estate lending cycle.
I've written a few posts on the nationalization of US banks, both recent, and, ideally, in the future.
Part of those futuristic musings of mine came a step closer to reality with Bernanke's comments. I actually saw part of his address live on Friday, but didn't know the context of what I was viewing.
In his remarks, Bernanke sketched out a continued role for the Federal government in housing finance in at least one of three ways: heavily regulated covered bonds to back mortgages; a 'public utility' model which featured a cooperative between private mortgage originators and GSEs, or; Federal mortgage bond insurance.
Taken in conjunction with Bernanke's comments concerning the difficulty in making the current GSE model function, it's not clear how the 'public utility' model is really any different than the current one.
But his description of government-issued mortgage bond insurance sounds like the sort of step that will further cement a nationalized banking system into place.
Can you imagine trying to sell mortgage-backed bonds in a market without such Federal insurance, when all the competing, similar bonds carry the Federal insurance? It would seem foolish.
About the only way you could do so would be to market the mortgage equivalent of high yield, or junk bonds. And we just saw what has happened to those in the past year. Much like the original junk bonds, such a mortgage-backed variant, even without the CDO overlay, would only be attractive during periods of risking markets.
But, back to Bernanke's comments. Introducing government-sourced mortgage bond insurance would encroach upon the conventional, private-sector bond insurers, such as MBIA and AMBAC. However, observing their disastrous plunge into insuring CDOs, it's unclear whether they could credibly re-enter the non-municipal bond insurance market again and offer simple mortgage-bond insurance.
With government provision of mortgage bond insurance, there would likely be a permanent foreclosure of the market to private enterprise, much like the effective elimination of private mortgage conduits when Fannie and Freddie were allowed to dominate that market.
We are probably seeing, therefore, the next concrete step along the road to heavy governmental regulation and de facto nationalization of core banking and lending functions in the US.
My business partner and I have reasoned, since the Fannie and Freddie takeovers, that the government is unlikely to allow the past levels of profitability in mortgage finance to continue in the future. It's the simplest way to avoid a repeat of the excesses of the past few years and recent real estate lending cycle.
I've written a few posts on the nationalization of US banks, both recent, and, ideally, in the future.
Part of those futuristic musings of mine came a step closer to reality with Bernanke's comments. I actually saw part of his address live on Friday, but didn't know the context of what I was viewing.
In his remarks, Bernanke sketched out a continued role for the Federal government in housing finance in at least one of three ways: heavily regulated covered bonds to back mortgages; a 'public utility' model which featured a cooperative between private mortgage originators and GSEs, or; Federal mortgage bond insurance.
Taken in conjunction with Bernanke's comments concerning the difficulty in making the current GSE model function, it's not clear how the 'public utility' model is really any different than the current one.
But his description of government-issued mortgage bond insurance sounds like the sort of step that will further cement a nationalized banking system into place.
Can you imagine trying to sell mortgage-backed bonds in a market without such Federal insurance, when all the competing, similar bonds carry the Federal insurance? It would seem foolish.
About the only way you could do so would be to market the mortgage equivalent of high yield, or junk bonds. And we just saw what has happened to those in the past year. Much like the original junk bonds, such a mortgage-backed variant, even without the CDO overlay, would only be attractive during periods of risking markets.
But, back to Bernanke's comments. Introducing government-sourced mortgage bond insurance would encroach upon the conventional, private-sector bond insurers, such as MBIA and AMBAC. However, observing their disastrous plunge into insuring CDOs, it's unclear whether they could credibly re-enter the non-municipal bond insurance market again and offer simple mortgage-bond insurance.
With government provision of mortgage bond insurance, there would likely be a permanent foreclosure of the market to private enterprise, much like the effective elimination of private mortgage conduits when Fannie and Freddie were allowed to dominate that market.
We are probably seeing, therefore, the next concrete step along the road to heavy governmental regulation and de facto nationalization of core banking and lending functions in the US.
Tuesday, October 21, 2008
Bernanke On Yet Another Pointless Congressional "Stimulus" Package
Did you see Fed Chairman Ben Bernanke's testimony on Capitol Hill yesterday?
An editorial in today's Wall Street Journal characterized it as Ben's application for another term as Fed Chair.
I'm referring, of course, to his fawning and eager agreement that Congress should pass another multi-hundred billion dollar 'stimulus' package.
Surely Bernanke doesn't think we saw any lasting effects of the last stimulus, does he? Other than increasing a deficit with which Congressional Democrats have tarred President Bush for years, it didn't make any difference.
Am I the only person left who believes that only permanent tax rate cuts have a quick and lasting effect on economic behavior?
Or, having passed a $700B 'urgent' TARP bill that has been dwarfed by the Treasury buying equity in our nation's banks, has Congress simply decided it no longer matters what deficits we create by paying citizens to spend now?
This just makes no sense whatsoever. It seems that any sense of self-reliance in our country has vanished.
An editorial in today's Wall Street Journal characterized it as Ben's application for another term as Fed Chair.
I'm referring, of course, to his fawning and eager agreement that Congress should pass another multi-hundred billion dollar 'stimulus' package.
Surely Bernanke doesn't think we saw any lasting effects of the last stimulus, does he? Other than increasing a deficit with which Congressional Democrats have tarred President Bush for years, it didn't make any difference.
Am I the only person left who believes that only permanent tax rate cuts have a quick and lasting effect on economic behavior?
Or, having passed a $700B 'urgent' TARP bill that has been dwarfed by the Treasury buying equity in our nation's banks, has Congress simply decided it no longer matters what deficits we create by paying citizens to spend now?
This just makes no sense whatsoever. It seems that any sense of self-reliance in our country has vanished.
Friday, March 07, 2008
Bernanke's Recent Errors
By and large I have found Fed Chairman Ben Bernanke to be qualified, informed and vigilant in his position.
Beginning last summer, however, with the onset of the private sector's self-inflicted financial troubles, I have questioned Bernanke's ability to remain objective amidst media attacks.
Two recent pieces in the Wall Street Journal drew my attention to actions by Bernanke which I find to be troubling, and would even label as 'errors.'
The first was the Journal's lead editorial two Fridays ago, on February 29. In that piece, the authors noted that commodities such as gold, food and energy have been hitting record highs lately. Retrospectively, these are typically signs of coming inflation at the consumer level.
Meanwhile, Bernanke and the Fed have rather recklessly cut rates since this summer, attempting to solve a counterparty risk dilemma with lower rates and easier monetary policy.
To date, it's unclear that any of the extra Fed-supplied liquidity has affected the credit markets in a substantial, lasting manner. Instead, equity markets have reacted to the various rate cuts like heroin addict to his latest fix. After the effect wears off, he looks for the next dose, hoping it will be even larger.
The editorial points out that the Fed is notoriously bad at what used to be called "fine tuning." In this case, knowing when to suddenly switch from recession-fighting rate cuts to inflation-fighting rate hikes seems likely to be problematic.
As the Journal editorial put it so eloquently,
"For readers under age 30 who are wondering why they are suddenly paying $3.15 for gasoline and $2 for milk, the answer is that this is what an inflation looks like. Those of us of a certain age remember it well, if painfully, and judging by the noises coming from the Federal Reserve of late we had all better get used to it again.
First, Fed Vice Chairman Don Kohn declared that, while inflation was worrisome, the Fed now views recession as the more urgent danger to fight. Then on Wednesday, Fed Chairman Ben Bernanke told Congress that the Fed will do whatever it takes to stop the credit squeeze from becoming a recession. That's about as close as a central banker will get to saying that he's thrown price stability to the wind. If inflation rises -- as it now surely will -- then the Fed will worry about that later, after the economy is safely past the credit crunch."
Personally, I could not care less about Humphrey-Hawkins, the poorly-designed Senate law which foolishly commands the Fed to pursue both price stability and full employment.
The Journal concludes by noting,
"Then as now they were also dismissing such forward-looking price signals as gold and oil and instead focusing on such misleading indicators as "core inflation" and the money supply. Mr. Mishkin may be seen as a monetary wizard at the Fed, but to investors around the world he is beginning to look more like a high-class inflationist.
The people who aren't being fooled by all this are the American people. They don't pay their bills with "core" dollar bills, and they know those dollars buy less with each passing month. This explains their rising economic anxiety -- and anger -- better than trade or job losses do, especially since the job market has remained relatively healthy. Inflation is the great thief of the middle class, as even Americans who don't recall the 1970s are learning. With its all-in reflation bet, the Bernanke Fed is gambling with their money."
I have to admit, I am not happy with Bernanke. Rather than insulate himself from external critics and have the courage Paul Volcker did when he wrung inflation out of our economy over 25 years ago, Bernanke seems to actually be afraid of the Congressional Committees before which he must periodically appear.
As if all of this were not bad enough, yesterday's Journal reported that in Bernanke's recent speech to a conference of bankers, he said,
"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure" than reducing the interest rate."
Meaning unilateral loan forgiveness under quasi-duress from the Federal government. In other language, this would known as a "taking-" the unlawful seizure of property without compensation. For the record, Barney Frank was thrilled to welcome Bernanke aboard his ideological investment confiscation train.
Reactions to Bernanke's sudden socialist uttering included,
"Reducing the principal rather than the interest rate is a "very different framework for thinking about the problem," said Andy Laperriere, an analyst at ISI Group, a brokerage firm. He said with so many borrowers under water, "any proposal that helps them will be very expensive for either the financial institution or the taxpayer," and a large program would potentially sweep in millions of borrowers who weren't going to default anyway.
Industry reacted coolly to Mr. Bernanke's proposal. The American Securitization Forum, which represents participants in the market for mortgage-backed securities -- pools of mortgages originated and sold by banks and other lenders -- said it had already developed procedures for modifying loans, including through principal reduction. To reduce principal, firms that service MBS pools on behalf of the end investors need "a clear basis for concluding that the related borrower is unable...rather than simply being unwilling" to repay."
No kidding! Doesn't Bernanke realize to what this sort of reward for an ultimate moral hazard- buying a home you can't afford- this will lead? Potential borrowers will never again take loss of their equity via foreclosure seriously. They'll simply wait to be part of a massive wave of subprime borrowing, the better to be part of those receiving the resulting Federal largess of loan forgiveness.
At a time when Congress complains that the Federal government is living beyond its means, but won't cut its own budget, we see it now demanding lenders allow US consumers to live beyond theirs, too.
I'd pay some extra tax dollars if it were targeted at bringing Tall Paul back out of retirement to lead the Fed for a few years. Not that I don't think Bernanke had been doing a good job until recently. Or that he doesn't understand the various aspects of his job. I just think Volcker was a Godsend whose discipline is now sorely missed, and will be, much more, I'm afraid, before too much longer.
Beginning last summer, however, with the onset of the private sector's self-inflicted financial troubles, I have questioned Bernanke's ability to remain objective amidst media attacks.
Two recent pieces in the Wall Street Journal drew my attention to actions by Bernanke which I find to be troubling, and would even label as 'errors.'
The first was the Journal's lead editorial two Fridays ago, on February 29. In that piece, the authors noted that commodities such as gold, food and energy have been hitting record highs lately. Retrospectively, these are typically signs of coming inflation at the consumer level.
Meanwhile, Bernanke and the Fed have rather recklessly cut rates since this summer, attempting to solve a counterparty risk dilemma with lower rates and easier monetary policy.
To date, it's unclear that any of the extra Fed-supplied liquidity has affected the credit markets in a substantial, lasting manner. Instead, equity markets have reacted to the various rate cuts like heroin addict to his latest fix. After the effect wears off, he looks for the next dose, hoping it will be even larger.
The editorial points out that the Fed is notoriously bad at what used to be called "fine tuning." In this case, knowing when to suddenly switch from recession-fighting rate cuts to inflation-fighting rate hikes seems likely to be problematic.
As the Journal editorial put it so eloquently,
"For readers under age 30 who are wondering why they are suddenly paying $3.15 for gasoline and $2 for milk, the answer is that this is what an inflation looks like. Those of us of a certain age remember it well, if painfully, and judging by the noises coming from the Federal Reserve of late we had all better get used to it again.
First, Fed Vice Chairman Don Kohn declared that, while inflation was worrisome, the Fed now views recession as the more urgent danger to fight. Then on Wednesday, Fed Chairman Ben Bernanke told Congress that the Fed will do whatever it takes to stop the credit squeeze from becoming a recession. That's about as close as a central banker will get to saying that he's thrown price stability to the wind. If inflation rises -- as it now surely will -- then the Fed will worry about that later, after the economy is safely past the credit crunch."
Personally, I could not care less about Humphrey-Hawkins, the poorly-designed Senate law which foolishly commands the Fed to pursue both price stability and full employment.
The Journal concludes by noting,
"Then as now they were also dismissing such forward-looking price signals as gold and oil and instead focusing on such misleading indicators as "core inflation" and the money supply. Mr. Mishkin may be seen as a monetary wizard at the Fed, but to investors around the world he is beginning to look more like a high-class inflationist.
The people who aren't being fooled by all this are the American people. They don't pay their bills with "core" dollar bills, and they know those dollars buy less with each passing month. This explains their rising economic anxiety -- and anger -- better than trade or job losses do, especially since the job market has remained relatively healthy. Inflation is the great thief of the middle class, as even Americans who don't recall the 1970s are learning. With its all-in reflation bet, the Bernanke Fed is gambling with their money."
I have to admit, I am not happy with Bernanke. Rather than insulate himself from external critics and have the courage Paul Volcker did when he wrung inflation out of our economy over 25 years ago, Bernanke seems to actually be afraid of the Congressional Committees before which he must periodically appear.
As if all of this were not bad enough, yesterday's Journal reported that in Bernanke's recent speech to a conference of bankers, he said,
"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure" than reducing the interest rate."
Meaning unilateral loan forgiveness under quasi-duress from the Federal government. In other language, this would known as a "taking-" the unlawful seizure of property without compensation. For the record, Barney Frank was thrilled to welcome Bernanke aboard his ideological investment confiscation train.
Reactions to Bernanke's sudden socialist uttering included,
"Reducing the principal rather than the interest rate is a "very different framework for thinking about the problem," said Andy Laperriere, an analyst at ISI Group, a brokerage firm. He said with so many borrowers under water, "any proposal that helps them will be very expensive for either the financial institution or the taxpayer," and a large program would potentially sweep in millions of borrowers who weren't going to default anyway.
Industry reacted coolly to Mr. Bernanke's proposal. The American Securitization Forum, which represents participants in the market for mortgage-backed securities -- pools of mortgages originated and sold by banks and other lenders -- said it had already developed procedures for modifying loans, including through principal reduction. To reduce principal, firms that service MBS pools on behalf of the end investors need "a clear basis for concluding that the related borrower is unable...rather than simply being unwilling" to repay."
No kidding! Doesn't Bernanke realize to what this sort of reward for an ultimate moral hazard- buying a home you can't afford- this will lead? Potential borrowers will never again take loss of their equity via foreclosure seriously. They'll simply wait to be part of a massive wave of subprime borrowing, the better to be part of those receiving the resulting Federal largess of loan forgiveness.
At a time when Congress complains that the Federal government is living beyond its means, but won't cut its own budget, we see it now demanding lenders allow US consumers to live beyond theirs, too.
I'd pay some extra tax dollars if it were targeted at bringing Tall Paul back out of retirement to lead the Fed for a few years. Not that I don't think Bernanke had been doing a good job until recently. Or that he doesn't understand the various aspects of his job. I just think Volcker was a Godsend whose discipline is now sorely missed, and will be, much more, I'm afraid, before too much longer.
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