A Disturbing Look Inside the Mind of Ben Bernanke

I’ve long expressed my displeasure with the specific approach implemented by the Bernanke Fed.  I am admittedly hard on Dr. Bernanke at times, but I think much of their framework is based on a flawed ideology and misunderstanding of the way the economic machine works.  In today’s press conference Q&A Dr. Bernanke said something that I believe confirms this view.  Pedro da Costa asked how the transmission mechanism works and why QE is different than trickle down economics since it seems to boost Wall Street, but doesn’t do much else.  The Fed Chief answered:

    “The tools we have involve affecting financial asset prices.  Those are the tools of monetary policy.  There are a number of different channels.  Mortgage rates, other rates, I mentioned corporate bond rates.  Also the prices of various assets.  For example, the prices of homes.  To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend.  If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase.  So house prices is one vehicle.  Stock prices – many people own stocks directly or indirectly.    The issue here is whether improving asset prices will make people more willing to spend.  One of the main concerns that firms have is that there is not enough demand…if people feel their financial position is better they’ll be more likely to spend….”

This is a terribly flawed approach to public policy and it underlines a serious flaw in the way the Central Bank is implementing policy today.  What Ben Bernanke just described in the paragraph above is the exact type of thinking that causes enormous distortions in markets and the economy.  This sort of thinking is a remnant of efficient market style thinking that assumes asset prices properly reflect the underlying economy at any particular time and totally ignores the reality that Hyman Minsky often discussed, which states that financial markets can become severely distorted by the effects of ponzi finance and financial instability.  The reality of the market is that asset prices do not always properly reflect their underlying values.  Asset prices reflect the summation of the decisions of the inefficient participants who are engaged in the buying and selling of those assets.  This has been borne out time and time again as irrational human decision making leads people to chase asset prices and underestimate the degree to which stability results in instability.  The recent housing bubble and chasing of assets should have made this more than abundantly clear, but myths persist….

Furthermore, the idea that an economic recovery should be driven by consumers who  spend out of today’s income based on the temporary increase in nominal wealth (which may or may not be higher in the future) is completely backwards.  As I explained previously, this idea is similar to a CEO who thinks she/he can improve her/his business by buying back her/his stock ad infinitum.  No, the CEO is there to generate growth in the underlying assets.  Not to jam up the price of stock traded on a secondary market.  The CEO who buys back stock and foregoes real investment in the firm is generating a temporary boost in nominal wealth that may or may not be backed by real growth in the firm.  What the US central bank is implementing is very similar.  It is an intentional attempt to distort the price of financial assets in order to generate a short-term gain that may or may not be justified by improvement in the underlying assets.  It is the very definition of ponzi finance.

In my opinion, the explicit defense of the ponzi financial policies that got us into this mess is totally indefensible.


Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Your analysis couldn’t be more clear or more correct. And surely Mr. Bernanke has trouble believing his own statement. Isn’t this a naked attempt to save the election for Obama?

    • Why would it be. He was hired by Bush. Obama kept him and Romney and the Rand Paul wing-nuts would audit the bank, take his clothes and throw him—and the rest of the world—off the bus to implement a gold standard that would starve your children and your children’s children.

      Cullen, I don’t really get your constant criticism of Bernanke. His policy is not public policy. His policy is all that he can do from his perch in order to fulfill the dual Fed mandate. It doesn’t seem that complicated.

      And, to echo something you noted in another post–yes, the Fed clearly understands the MMT/R vision of the banking system and the money system better than it lets on.

      • I am only critical because it’s frustrating to see our govt implementing sub-optimal policy ideas. The current environment is like having a patient on the table for surgery and a Da Vinci machine at our disposal and we keep hitting the patient with a sledge hammer. I am surprised that an MMTer like yourself is so eager to defend his policies when you guys propose essentially chopping the Fed’s head off….As an MRist, I am at least open-minded about the efficacy of monetary policy in certain environments.

  2. First of all, Cullen…excellent. I wanted to bring up the subject of Shadow Banking, and some may remember my rebuttal on “Are Shadow Banks, really Banks?”

    Mortgage backed securities are created at the SPV (special purpose vehicle) of TBTF banks. The SPV acquires our mortgage documents (contracts – which are debt overhead), and creates a security. The security is a child of the former mortgage documents, yet the security carries some of the Federal housing Insurance that underlies home mortgages – the parent. The child carries some of the dna of the parent, but is not the parent.

    In other words, shouldn’t we also be talking about the Shadow Banking system that creates the MBS’s. They were responsible for the fraud with tranching, liar loans, robo signing scandal, and the like. Also, Shadow bankers are big banks with at odds cross duties, such as Primary Dealers, Derivitive Contracts, as well as SPV shadow banking.

    The MBS’s have risk assigned at the SPV, and who knows what level is assigned, it is subjective. For sure, we know they over-assigned risk, in order to extract rents (unearned income), before the crash.

    It seems to me that swapping reserves for MBS, puts ready cash on hand for refinancing loans, or making new housing loans. The loan originating bank, writes up the house – making a new mortgage document. That document is then quickly offloaded to the Shadow Banking system.

    It will create asset inflation which is then capitalized into the new loan. A small amount of personal debt is transformed with lower interest rates, but the housing asset remains overvalued and still requiring debt service, meaning ongoing debt deflation. Subsequent loans ensare the young with overvalued housing, meaning ongoing debt deflation. Those that don’t transform their personal debt, will extract some of the false wealth gains and then spend to maintain a standard of living. Perpetual motion Ponzi finance must come to an end as the underlying economy cannot sustain the rents.

  3. What policies should the FED adopt to try to boost employment given that Congress is not willing to work w/ them to boost demand? They can only use the available tools to realize their mandates whether or not there is a clear transmission mechanism. The government decides the rest through taxes, regulations, and incentives.

  4. REN, Cullen should make you a regular columnist/writer here.. your insight & analysis is superb.

    Out of curiousity, hHow did you get your knowledge in banking/economics/finance, especially that of China’s? I’m ethnically Chinese & have relatives in China still & read Chinese news outlets so that’s how I know them besides my 10+ yrs experience as a business analyst/Oracle devloper for hundreds of businesses.

    My micro/macoeconomics classes at UCBerkeley were nowhere near enough since they were written by ignorant economists like Greg Mankiw who are ignorant of MR/MMT

  5. I agree completely.

    You wrote: “The CEO who buys back stock and foregoes real investment in the firm is generating a temporary boost in nominal wealth that may or may not be backed by real growth in the firm.”

    That, it seems to me, is what being a CEO is all about these days: get in, boost the price by any means necessary to boost your own bonus (including, if you’re the CEO of a bank, by making a bunch of absolutely terrible “high yield” loans that will never be paid back, but for which you can book the profits today, with some sketchy accounting (yes, the CFO will have to be in on it too!)), and then get out while it crashes and burns… or again if you’re a bank, while you get on the horn to Treasury and demand another bailout… oh, and demand that you stay immune from prosecution.


  6. CR is right on the money as always – if you pardon the pun.

    But what is Bernanke to do if the state does not want to issue more bonds? Last I checked, they’re not allowed to drop free USD in people’s bank accounts.. unfortunately.

    Personally, I parse this as an attempt to induce some positive expectations in people holding the money. It might lead to some investments. Maybe. Hopefully.

    If I was in Bernanke’s position, I could certainly see myself lying through my teeth and hoping that enough market lemmings buy it that SOMETHING positive happens with the economy.

    • Oh and if nothing else it might depreciate the USD somewhat, which isn’t as bad as many believe.

      • ya, depreciating your own currency is how countries on a ‘gold-standard’ traditionally increased their money supply.. the depreciated currency would make domestic companies’ goods cheaper on the open market, thus increasing their sales vs. rival foreign companies & foreign imports

        –this thus would increase demand for domestic goods/domestic companies vs. foreign competitors & thus spur increased production & increased hiring .. the influx of sales (more gold in a world of gold-backed currency) & currency thus is helpful for domestic economy
        at the cost of depreciated dollars vs. FOREIGN IMPORTS

      • Wrong! A strong currency is a sign of a country’s economic strength…..always has been and always will be. It’s only been in my adult lifetime (I’m a baby boomer) that this economic FACT has been turned on its head…..and it’s been turned, and a dumbed down electorate taught to accept it, to achieve POLITICAL goals. krb

        • You may want to read up on how foreign exchange works.

          Here’s how it normally works:

          If an American company exports and a Canadian one buys, the Canadian company needs to go out on the foreign exchange market (via intermediaries of course) and go “I have CAD and want USD” and find someone that wants to sell USD and get paid in CAD.

          So, export from USA results in increased demand for USD and – in this case – surplus for CAD.

          As always increased demand leads to higher prices.

          The reverse is of course also true, if there is a surplus of USD because the USA is running a trade deficit, you get increased demand for e.g. Yuan.

          Now, if this would have been allowed to play out like FX normally works, USD would have hit rock bottom a long time ago, and Yuan would have been ridiculously strong. Noone would want to buy from China anymore.

          The PboC of course does not desire this, so it’s merrily buying foreign currency – lots and lots of USD, and paying in other currencies, like, oh, Yuan.

          This has nothing to do with “Strength of economy”. If that’s all it took, the swiss franc would be a monster currency.

          This is all about China propping up the USD artificially and keeping the Yuan as depressed as they can. Because that’s good for China.

          Take away Chinese currency warring and the USD (and Euro) would drop like rocks. Which is not a bad thing for much other than gas prices.

          • You are COMPLETELY wrong about this. Strength of economy, strength of financial regulation, strength of financial markets…..if we still had these things…..would lead to demand for dollars, to allow participation in our economy and markets and to buy our goods, and lead to strength in the dollar.

            You can’t cite interventions by govt’s around the world, and the resultant artificial valuations and distortions of currencies around the world, to defend your claim that plummeting dollar values is a GOOD thing. It may be a good thing for segments of the population, for example a company with a majority of its sales overseas, or the portion of a person’s investment portfolio denominated in foreign currency that benefits in the conversion back to dollars, but devaluing dollars is NOT, and NEVER HAS or NEVER WILL be a good thing when viewing the economy and the impact on a country’s population in total.

            Despite their public lies to the contrary, our govt has adopted a weak and weakening dollar policy in order to make our now unaffordable debt load a little more affordable……which almost by definition undermines the “strength of economy” argument. They have decided that they, in their greater wisdom, will now pick the winners and losers within our economy. “Right” and “wrong, “success” and “failure”, has been completely turned on its head as a result.

            And by the way, the swiss franc WAS viewed as a “monster currency” until the SNB decided to join the global race to the bottom and intervene. krb

            • And by the way…..with regard to your “You may want to read up on how foreign exchange works.”……I trade fx every day, have been employed by a foreign company that sold in the US, and owned my own company which sold overseas……I’m a little familiar with our it works. I hope you have as much experience in order to make such a claim. krb

            • The more I re-read your post the more I disagree with it….I don’t mean to put words in your mouth, but it appears to me you accept huge trade deficits as an assumed fact or inevitability, and therefore defend weak dollar policies in order to address the trade deficit. BUT, what you take as an assumed just reinforces my point……when we were strongest, and our economy strongest, we were an EXPORT country. The fact that we now import more than we export and the dollar in a downward spiral as a result, reinforces the point I’m making…….strong economies, markets, regulation to insure fairness, will drive strong currency. krb

              • If you by strength you mean regulation, then yes by all means I agree with you.

                But you also have to admit that the previous strength is exactly what makes imports from (or outsourcing to) countries with depreciated currencies so lucrative.

                Unfortunately when you are running a long term trade deficit, you also end up importing unemployment when demand can no longer increase. Which leads to lower demand. Which leads to higher unemployment.

                No, I do not see a trade deficit as something that must forever be. But allowing free markets in the face of a currency war does pretty much guarantee it, no?

                I would love to see higher import tariffs. But will international politics AND the wealthy and powerful that benefit from the status quo allow them? I doubt.

            • “to allow participation in our economy and markets and to buy our goods”

              But why would the rest of the world want to buy US goods? They are so much more expensive than .. oh.. Chinese!

              • Which is part of my point……and you don’t, and long term can’t, restore a country’s competitiveness by driving a currency war……that’s the short cut way, kick the can down the road way……which is why our politicians and fed make it the “way” of choice.

                Weak economies, trade deficits, weak currencies are symptoms of deeper rot…….that’s my point. Long term solutions involve making difficult, painful choices to address root causes…..not just treating symptoms with short term actions. So I come full circle to my original point……..strong economies, strong regulatory environments, strong capital markets and strong currencies go hand in hand. I also want to be clear about what I mean by “strong regulatory environments”……I do NOT mean oppressive regulatory environments, I mean regulatory regimes that insure fairness, consistency, that reward good behavior and good performance, and punish bad behavior and bad performance……..you’ll note that current govt oversight does just the opposite. All the symptoms we see, including a deteriorating currency, are indicative of decay, and we don’t ever seem to get govt leaders with the long term vision and backbone to make the hard choices needed to turn it around……just more short-termism, can kicking and perception management to get past the next election. krb

                • Many wise words there.

                  The “problem” of course is that even fair regulations are “oppressive” to some – especially to those that actually want things more unfair. And they have the money to drive home that point with the politicians. And the guile to dress it up as free markets and faux liberalism.


                • Picking a bit more on one point: I never suggested that the US should _drive_ a currency war. But it’s been IN one for quite a while now without really shooting back.

          • We give Chinese USD to get their stuff. This is through multinational corps. The Chinese cannot circulate USD in china. They have to take USD to Chinese bank to change to Yuan. Bank of China will have to issue a lot Yuan in the past decade for change of USD cuz we bought a lot junks from them. The newly issued Yuan will circulate in china to pay wages and materials. Once they have USD in their hand, in large quantity, they cannot buy Chevron or Walmart, cuz the congress doesn’t let them. They buy oil, gold, and anything physical. There is not big enough market for the amount of USD they have in their banks except for US treasury. They don’t have much of choice to buy treasury. Those USD come back as cash through brokers and bankers to US. As long as USD is the reserve currency, US will be fine, cuz everyone still wants USD. It will get to a point that the cost to manufacture in China is too high and not profitable for the multinationals, then the flow of USD to china will stop. At present, the flow is not stopped. In a way, we are not producing as a nation to be wealthy, we are using our currency to be wealthy. That cannot last forever.

            • Wait… I’m not following. Are you saying that a currency becomes stronger if you import a lot?

              • Everyone manipulates their currency. If your currency is strong, you import capital cuz others will buy your currency. If your economy is growing, the cost of capital will be up (interest rate), and your currency is more favorable on the market. This is not hypothetical abstract debate. It is happening everyday. Japan, Swiss, Chinese and our Fed, they all manipulate their currencies.

  7. Bernanke is just trying to find excuses to buy toxic assets from the Super Banks. Wealth effect on main street is just an excuse to provide liquidity to these banks. QE is all about improving banks balance sheets. period. Bernanke is hoping once the banks have better balance sheets they will start giving out loans to firms and he is also hoping that banks will be prudent this time to give loans to productive firms.

    • Also note that US corporations are sitting on 4 months worth of GDP in liquid assets at last count.

      Most of the big ones don’t need more money. They’re just hoping for demand to pick up.. without realizing their own role in it.

  8. How is that a remnant of EMH style thinking, Cullen? Targeting asset prices as a CB is to suggest markets went too low and aren’t fully reflecting the current “potential” of the US economy. So, bernanke is an interventionist. EMH folks shouldn’t advocate the Bernanke approach. Whether markets are themselves efficient or not, to what degree – we won’t really know, while we have a central bank that keeps altering the cost of one half of the transaction (money), the price of risk and risk-factors themselves. So I’m really not sure how you’re arguing Ben is an EMH guy here – he IS intervening to reach outcomes that he thinks are more desirable! Closer to being a price fixer than a believer in the EMH.