This is a reprint of an earlier article. Since none of these questions were asked at the recent Congressional hearing I hope several journalists will arm themselves with the aid of this cheat sheet before tomorrow’s Q&A with Dr. Bernanke:

1)  Dr. Bernanke, it is clear that your large scale asset purchases have resulted in substantial moves in many markets.  You are often quick to note that equity prices have surged as a result of your LSAP.  Can you please explain to the committee why you also ignore the continuing decline in home prices (the US consumers largest asset) while also claiming no involvement in the surge in commodity prices?  There is a clear contradiction in this commentary which needs to be addressed.

2)  Your commentary matters a great deal to market participants.  As you know, you can move markets substantially.  Therefore, it is possible that your commentary can create quite a bit of price instability and contribute meaningfully to market volatility.  To what degree do you believe speculation has played a role in commodity prices?  While I believe you are right to say that monetary policy and foreign exchange has not substantially contributed to turmoil abroad do you agree that there is a substantial speculative element involved in the recent surge in food prices that could be directly attributed to this belief that you are “printing money”, encouraging a “wealth effect” and sustaining asset prices that are “higher than they otherwise would be”?

3)  Dr. Bernanke, it is clear that total loan growth has not expanded since the LSAP was initiated (see total loans at all commercial banks).  It is also clear that credit conditions for homeowners and households have not been alleviated as mortgage rates and interest rates in general continue to rise.  In fact, it was less expensive to obtain a mortgage before you initiated your purchase program.  Since mortgage debt represents 75% of consumer debt it would make sense that you attempt to alleviate pressures on households.  Why has this program failed to achieve this goal of helping households more broadly and reducing the strains in the housing market?

4)  Dr. Bernanke, it is clear that the Fed’s policy tool kit works almost entirely through the banking system by encouraging the private sector to take on more debt.  At a time when household debt to disposable income remains at 115% don’t you believe you are promoting further indebtedness at the household sector – the exact same thing that caused this crisis to begin with?  If so, why should we expect such policy to result in anything other than a future debt crisis?

5)  Dr. Bernanke, I think we can all agree that you have failed to control the long end of the yield curve via your LSAP.  Had you targeted a specific rate as opposed to a size you might have had better control of the curve, correct?  This is what you do with the short end of the curve and the Fed Funds Rate.  If you had truly desired to control the long end of the curve wouldn’t this have been a superior approach?  Instead, you have allowed the market to control long rates and it has exposed your total lack of control over the long end of the curve.  Do you not see this as a fatal flaw in the LSAP since its inception?

6)  Dr. Bernanke, as you likely know, a rise in equity prices represent a nominal increase in wealth.  Do you believe it is wise to encourage speculation in equity prices when there is the potential that the fundamentals of the underlying assets might not be directly correlated to such price increases?  If this is the case, then aren’t we merely creating an environment that is ripe for another equity bubble as investors purchase equities under what is now known as the “Bernanke Put”.  Don’t you think this is putting the cart before the horse – that is, fundamentals should drive equity prices as opposed to hopeful and speculative purchases based on false promises directly promoted by the Central Bank?

7)  Can you please comment on this development known as the “Bernanke Put”?  Is this a positive development for the United States economy? The “Greenspan Put” is often seen as a significant contributing factor to the turmoil of the last 20 years.  Do you agree that your resurrection of this “put” is a negative development?

8)  Can you please comment on the ever increasing financialization of the United States?  We have become, in many ways, slaves to the too big to fail (now too BIGGER to fail thanks to your actions during the crisis) banks and their needs.  Your institution is clearly centered around maintaining a healthy banking system.  Tim Geithner recently commented that we need to be at the forefront of what is a growing global financialization.  Do you agree with his commentary?  Are you at all concerned by the increasing dependence that our economy has on the banking system?

9)  Thank you for your attempts to stabilize the US economy during these trying times.  I worry  at times that we might be asking too much of the Central Bank.  You have a dual mandate of price stability and full employment.  It is clear from recent economic performance that you have failed to meaningfully contribute to the targeted goal of full employment.  It is my contention that Fed policy is a particularly blunt instrument at the zero bound so it is not surprising that these policies have failed to make a substantive difference with regards to employment.  Do you believe this committee asks too much of the Central Bank?  In other words, do you believe you are ill-equipped to deal with such a broad mandate?

10)  Have we done enough to help Main Street during this crisis?  Your policies have been particularly focused on the banking system.  I think we can all agree that you have succeeded to a large degree.  Wall Street bonuses are at record highs and the banks are raking in record profits again.  Main Street, however, remains mired in a recession.  Do you agree that you misdiagnosed this household crisis as a banking crisis and that we might be in a better position today if the US government had been more focused on helping Main Street and less focused on bailing out Wall Street?

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. “it is clear that total loan growth has not expanded since the LSAP was initiated (see total loans at all commercial banks”

    Bank Credit of All Commercial Banks (TOTBKCR) Economic Research – St. Louis FRB

    This data comes from the BOG’s H.8 release: Selected Assets and Liabilities of Commercial Banks in the United States. In juxtaposition, the Board comingles ATS, NOW, & Share Draft accounts, etc. (in all DFIs), when reporting the money stock, but not when reporting CB credit.

    (TOTBKCR) Bank credit originally represented the system’s (commercial bank), credit creation. However, the DIDMCA of 1980, gave the nation’s savings and loan associations, mutual savings banks, and credit unions the same capacity to create new money & credit. In other words, the DIDMCA created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions.

    Therefore to only use (TOTBKCR), is to understate the growth of bank credit in all DFIs.

    In the commercial banking system, loans & investments, equal bank deposits. You can look at that relationship 3 ways:

    One is that when a CB makes a loan to, or buys securities from, the non-bank public, it creates new money & credit, i.e., loans create deposits.

    Or two, from another, more sophisticated angle, there are many different factors, which can, and do, alter the volume of bank deposits, including: (1) changes in currency held by the non-bank public, (2) in bank capital accounts, (3) in reverse repurchase agreements, (4) in the volume of Treasury currency issued and outstanding, & (5) in Reserve Bank credit, etc. Taken altogether, the principle items which alter the total volume of bank deposits are peripheral (net to zero). I.e., the credit creating ability of the CBs (as a system) is responsible for all new bank deposits (loans & deposits come into being simultaneously).

    Or three, in 1966 “a new measure, the BANK CREDIT PROXY, was developed by the FOMC during the year in order to get current information about the operating guide more frequently. This measure infers changes in member bank loans and investments (assets) from changes in member hank deposits (liabilities).”

    “Deposit data are available weekly on a daily average basis, whereas bank credit data are available less frequently. The Federal Open Market Committee’s strategy remained essentially unchanged for more than three years, from Sept 66, when the committee first began including a bank credit proviso clause ion its directive until Dec 1969″

    So, the loans & investments associated with the growth in ATS, NOW & share draft, accounts (originating from the nation’s savings and loan associations, mutual savings banks, and credit unions), are thus erroneously omitted from St. Louis & BOGs figures.

  2. “At a time when household debt to disposable income remains at 115% don’t you believe you are promoting further indebtedness at the household sector – the exact same thing that caused this crisis to begin with?”

    Damn good point. Household debt went from 45% to 68% between 1965 and 2000 (as a percentage of gDp), and then to 98% in 2009. The Case–Shiller index (which rose from 77.74 in 1995 & peaked @ 189.93 in 2nd qtr 2006). The latest 20-city figure stands at 140.86. That’s still almost double. We literally haven’t created a job since between 1996-1998. We have approximately 132 million jobs same as back then. Another shocking figure is the number of people on food stamps. It is STILL INCREASING EVERY MONTH and is at a record. It is something like 45 million people or 15% of the US population is on food stamps.

    Further indebtedness is incomprehensible to me. Consumer’s balance sheets continue to hemorrhage. Gas & groceries have drained disposable income. And much higher taxes are unavoidable. A declining exchange rate will make manufacturing inputs & consumer products even more expensive.

    Congress needs to change some laws to help the unemployment rates. As an example, the credit card industry isn’t any different than yesteryear’s loan-sharks. That’s just one reason why I don’t like Paul Volcker. His administration opened up “unlawful debt” collection. “In 1980, BECAUSE OF INFLATION, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws.”

    I guess this rule was in the same spirit, at that time, as interest rate deregulation (REG Q CEILINGS). But, if deleveraging & bloated consumer balance sheets are overriding considerations, establishing much lower credit card ceilings would seem to be helpful. To me, if the Federal Government can take my property to build a highway (for the greater good), the Federal Government can use the eminent domain concept to nationalize portions of the finance industry. I.e., we live in a predatory society (with mostly financial predators), and the dominant predators have enslaved their captors.

  3. question 5). i read on some blogs that the fed is writing put on ust. that looks like a attempt to control the long end of the curve. is that true? i would like to know the strike….

    • The same blogs that have been calling for the end of the USA for the last 5 years? The hyperinflationists have been so wrong it’s amazing that their audience is still growing.

  4. I’d like to ask Bernanke – If you want house prices to rise, why don’t you just go out and buy ALL the foreclosed houses from the banks? Why beat around the bush by buying Treasury Securities when you can just buy real estate and rent it out over a long enough time horizon for the Fed to turn a profit? Why doesn’t the Federal Reserve simply become the nation’s biggest landlord for the next 50 to 100 years?

  5. Clearly, BB is smart. He scored 1600 on his SAT.

    My belief is that this is precisely why he is screwing things up so much. His intellect has engendered unadulterated HUBRIS. This is more dangerous than simple ignorance, it’s ignorance of ignorance.

    No human being on the planet, past or present, can fix a broken economic system. Not only is the system too complex and inherently chaotic (path dependent), it tends to respond to artificial manipulation by producing greater imbalances.

    Anyways, if you have never seen this compilation of BB clips leading up to the melt down, it’s well worth the 5 minutes.

  6. Dear Sir,

    I believe the term “Bernanke Put” was derived from a tongue-in-cheek play on the term’s implied football expression; namely – the “Bernanke PUNT”. :-)

    …and as you have pointed out, he has missed the goal posts and may very well be heading the US towards (at worst) a new Fed induced bubble, and at the very least, Stagflation.