THE MARKETS STILL LOVE BERNANKE
One of the glaring trends over the course of the last 18 months has been the market’s unrelenting love affair with Ben Bernanke. Just about every time Ben opens his mouth stocks roar higher as they praise his mantras of “low rates for an extended period” and “accommodactive Fed policy”. The funny thing, however, is that Ben doesn’t get it. Bernanke entirely misdiagnosed our current problems and he continues to apply the wrong solution.
Bernanke couldn’t have missed the credit crisis by a wider mark if he had tried. He continued to deny a housing bubble until it blew up in his face. In 2005 he called house price declines a “pretty unlikely scenario”. He was also “confident that the bank regulators will pay close attention to the types of loans that are being made and ensure that underwriting will be done right”. In late 2007 Bernanke said the housing crisis was “contained”, that economic growth was returning and that the sub-prime problems were also “contained”. In July 2007 he said employment “is likely to accelerate” in the coming years. Of course, it’s absurd to expect him to be able to predict these massive long-term macroeconomic trends, but the lack of risk management on display here borders on gross negligence.
His response to the credit crisis was just as bad. He thought he could inject excess reserves into the banking system and juice the lending markets. He couldn’t have been more wrong. Banks are never reserve constrained, but this lifelong academic clearly didn’t understand this because he has never experienced reserve accounting first hand. His approach was to make too big to fail too BIGGER to fail and strengthen the Enron banking system based on the misconception that he is the wizard behind the curtain controlling the entire economy via monetary policy (clearly a falsehood in a balance sheet recession). But as we see Ben continue to push on a string we see that he is entirely wrong and has in fact done very little to contribute to this so-called “recovery”.
His testimony this morning is a confounding one. If you just looked at the market’s response to his speech you might think that this man was right about everything over the last few years and that he really truly knows what is going on. He is reassuring in the same way that an ER doctor is after he diagnoses you with life threatening cancer and then extracts it with great ease (mind you, our great Doctor Bernanke has had no such success in diagnosing anything or extracting anything).
In his testimony he uses the word “recovery” 6 times. What recovery? The one on Wall Street? Sure, there has been a v-shaped recovery in banking profits, but there has been no recovery on Main Street. There is no demand for loans. Small businesses are still struggling and unemployment remains just shy of its highs. I know employment is a lagging indicator, but just how long is this lagging indicator going to lag? We’re now almost two years past Lehman and yet there are almost no signs of recovery on Main Street.
Even worse are his comments regarding the monetary system. I thought there were signs that Bernanke was beginning to get it. He recently admitted to Barney Frank that there is no worry of solvency in the USA. In a Q&A session in late 2009 he even acknowledged that he can’t monetize the debt as long as he targets the Fed Funds Rate. Both statements display a clear understanding of the monetary system. But then today he goes off the deep end again talking about how he is “worried about the impacts of our long-term debt”. Long-term debt? What debt? The Chairman of the Federal Reserve is convinced that bond auctions actually fund the future spending of the United States. Again, he couldn’t be more wrong.
Ben Bernanke has been wrong throughout the entirety of the credit crisis. His policy response has been entirely wrong and it’s clear that he still doesn’t understand the issues that confront us. Why does anyone even listen to this man? The market’s think he is in control, but more and more it looks like Bernanke is helping to walk us off the edge of the cliff.
It’s simple TPC. Bernanke makes it clear that he will save the banks and that means the market moves higher. He’s the head of the banking cabal.
Right. Every Central Bank’s job is to ensure sufficient liquidity of the banks. All the macroeconomic pep talk is just an attempt to dispell worries which might jeopardize the success of such efforts. And its rather the legislator’s, but not the Central Bank’s fault that many banks have turned into gouvernment-backed hedge funds, and that this fundamental error is still not corrected. Therefore, the only thing left is zero interest, QE and more pep talk. What else can Mr. Bernanke do?
well, do you expect him to go in the front of public and scream “run, run, this is going to end badly” ? his primary job is make markets confident. if he would exposed whole banking system as Enron type, then market would loose all confidence and then he would be out of office week after.
anyway, i read from you, TPC, some nice prediction of future GLD prices, which made a lot of sense, however i cant find it anymore…do you know in which post did you wrote it, please?
Oh no. I don’t expect him to feed the fear mongerers more fuel. But he should at least understand the system. He should acknowledge and state in clear terms that the threat remains deflation as the private sector pays down debt and therefore we can afford to run larger than normal deficits.
He claims to be an expert on the Great Depression, but his response has been to save the banks and ignore main street. It’s not working.
In the land of the blind, the one-eyed man is king.
People want this to be a run-of-the-mill recession, and Wall Street wants to make easy money — Bernanke’s just feeding those desires. Like Greenspan, he’s a genius till it all goes pear-shaped!
could you explain – he can’t monetize the debt as long as he targets the Fed Funds Rate.
Monetizing the debt is a gold standard term which is no longer applicable. It implies that the government borrows directly from the central bank and then spends it. But to do so would create excess reserves in the banking system which would drive the FF rate to 0. But once the Fed sets a positive FF target rate this operation becomes functionally impossible as it would drive rates below the FF target rate. The Fed would be forced to issue bonds to offset this “monetization”.
Bernanke has said as much. He indeed understands that the can’t monetize AND target a positive FF rate. The inflationists have been wrong all this time because they keep throwing around all these inapplicable gold standard terms such as QE and monetizing the debt. QE is just an asset swap while debt monetization is basically impossible. As Richard Koo says, these are the great non events. There is no inflation despite the constant shrieking about all this “printing”. Such terms are just fear mongering.
TPC,
Can you explain more about “QE is just an asset swap”. What get swap with what assets? What scenarios actually happens?
Thanks.
QE is when the Fed converts overnight reserves into treasuries. It’s literally a swap. This effectively forces the private sector out of savings and into cash. You could actually argue that QE is deflationary by nature because it forces investors out of an interest bearing instrument into cash. In the case of the banks it certainly strengthens or alters their balance sheet, but it clearly has had no impact on borrowing as borrowing remains very weak despite all this record setting “money printing”.
C’mon, get real. Is Bernanke supposed to go before Congress and say, “No, I’m NOT worried about the consequences of the long-term debt.” Can you imagine the howls from Congress and the public? Can you imagine the immediate backtracking that would have to occur?
I have no idea what’s in Ben Bernanke’s head. But I am certain that whatever he tells Congress bears little relation to what he actually thinks. Congress acts, for the most part, like a bunch of children. And thus they must be dealt with like children. “Yes, dear, Santa Claus IS real!”
Should he stand up before Congress and tell these people not freak out about the deficit bankrupting us and to consider some form of stimulative fiscal response such as a tax cut? Yes, he absolutely should. But such a thought never even dawns on him.
Cut taxes for who? The rich?
Every time we try that, it just goes into their pockets, and never “trickles down.”
We had better employment prospects when the tax rates were high. It forced people to get more revenue to reap more profits, which is better for economic activity.
I think employment (FICA) tax cuts would go far toward a stimulus. state income tax can not be cut however as state as local government are revenue constrained.
No, I would actually increase taxes on the rich. Cut the poor and middle class and business.
Trickle down doesn’t work. Ben has proved that time and time again.
Couple of points
1. I don’t think he is stupid, he truly believes that dropping $ from a copter is sufficient to prevent a deleveraging cycle.
2. Even though he knows that things are very weak, he can’t really say that. At the end of it all, he answers to his political masters…recall how much he groveled before Obama to win renomination.
Look at what he does, not says. His solution is to throw massive money at the system. Markets will likely rally here a little, then get into correction to 800′s on the S&P. Growth will slow, as fiscal austerity around the world takes hold (unless I guess China pulls out another massive stimulus). Bernanke will panic and order QE 2 – I think $5 trillion or something as crazy as that. Of course, it will be then usurped by in between’s (banks etc.) and not reach the masses and only result will be more of the same and a bigger problem to deal with.
As I said above, more QE will be the great non-event.
TPC, Is Correct here. the bottom line here is that his past prediction performace SHOULD be a fairly good barometer for his FUTURE predictive performance.
Could someone make a simple chart graphing out his piss poor rose colored predictions?
Then we could use this same chart to forcast when we will breach the wall on the other side of this eye..
Fairly short love affair. The Bernanke nitro only lasted four hours…
Gives new meaning to the term hit and run. Bernanke’s walk of shame will be particularly painful this evening.
Ummmmm… it’s not the walking I was thinking of.
It was sitting down (lol)!
Bernanke controls a few primary things – the money supply, bank reserve requirements and short-term interest rates. (Not even long-term interest rates.) That’s just about it.
The Fed could not have prevented the housing bubble, regardless of who was running it. Mortgages were an attractive, seemingly low risk alternative to capital markets looking for places to park large amounts of money, and raising short-term interest rates would not have halted the flood of that equity into the debt securitization markets. So his commentary about housing is fairly irrelevant.
What is relevant is that he responded to crisis by doing the right things, namely by cutting short-term rates and by aggressively using QE. He cut rates to the point that we hit the zero bound, so more rate cutting is not even possible. At this stage, you’d be arguing about the degree of QE and similar liquidity measures, not the concepts of the policy.
The rest of the stuff that hasn’t been done needs to be done by Congress and, by extension, Treasury and the president. You are blaming Bernanke for things that are not under his jurisdiction.
Central banks are largely reactionary in nature. They react to crises, they don’t create prosperity. The Fed is already run about as well as one could expect.
You expect too much from central banks — there just isn’t that much that the Fed, or monetary policy, can do when dealing with deflation. The deficiency is on the regulatory and fiscal sides, and those come from the legislature.
I largely agree. My main point is that I expect nothing from Bernanke so I am always shocked to see the market roar higher on his comments.
As you said, the central bank has very little power in this sort of recession. However, his commentary is extraordinarily persuasive and influential. It would be nice to at least see him acknowledging some of the risks and perhaps trying to influence or persuade Congressional action….Thus far he’s been dead wrong and only appears to be contributing to the problems. What is he bringing to the table at this point?
My main point is that I expect nothing from Bernanke so I am always shocked to see the market roar higher on his comments.
His comments are helpful in that they help us to divine what the Fed’s next step may be. If Bernanke believes that GDP growth in the next couple of quarters is going to clock in at about 3-4% (which, in this case, I personally think is about right) and that unemployment is going to remain high, then that suggests that the Fed will not be inclined to raise rates this year.
That in turn is potentially bullish news for stocks, given the typical inverse relationship between bond yields and stock performance. That is probably why the market is rallying — it isn’t that Bernanke is boosting optimism per se, but that Bernanke has signaled to us what he is going to do, and what he is going to do could be good for equities.
I think you’re missing my point. Bernanke is powerless. Lower rates are not helping the economy. He’s adding more apples to the shelves, but there is no demand. It’s the same faulty logic that leads people to believe the real estate market will bounce back because of record low mortgage rates.
Lower rates are not helping the economy
At this point, I’d argue that they are helping about as much as can be expected, but that those policies when used by themselves in circumstances as dire as these are doomed to have limited value.
We would be worse off had Bernanke not been as aggressive, but monetary policy in a vacuum is inadequate. We have had virtually no fiscal policies or debt resolution policies (writeoffs and cramdowns) to compliment the monetary policy, and that legislative failing is where the shortfall lies. There has been minimal coordinated effort to date, and that is a political failing.
Yes and I fault Bernanke for that. He implemented his classic Monetarist response and it has failed. Would we be worse off if he had done nothing? Who knows. I would argue that we would be better off if Bernanke had not rescued all the banks and had instead tried to promote a Main Street recovery.
There are 2 main human deficiencies you forgot to mention…fear and greed.
excellent analysis
TPC — Can you recommend a book which gives a good overview of our monetary system and would help me understand the concepts your are describing in your comments about monetizing the debt and QE?
Hmmm, not off the top of my head. Let me look into it.
Shoot me an email on this otherwise I will forget…
Ditto that.
Thank you! I was so exasperated when I read the article on Yahoo! Finance titled “Bernanke says recovery on track despite headwinds.”
Does anyone really expect him to say anything different? Does anyone listen anymore after the number of “blue sky” remarks we’ve received from the Fed in the last 5 years. Perhaps his job is to instill confidence in the markets but if they had added a small part of caution and warning to their statements over the years perhaps the last two years would have been better for most everyone.
Yeah, the point is that no one cares what Ben says anymore He has failed. The markets spoke today.
Anonymous, take a look at Understanding Modern Money by L. Randall Wray.
http://books.google.com/books?id=6PMuExCtMe8C&printsec=frontcover&dq=wray&ei=Z2QQTJuROonONb_Q7JkI&cd=6#v=onepage&q&f=false
Forgive me if already explained, but please explain:
If bond auctions don’t fund US spending, why conduct them? If taxes don’t fund US spending, why tax anyone?
Bond auctions are a monetary operation to help the Fed hit the FF target rate. It’s a way of controlling excess reserves.
Taxes serve to control aggregate demand. If the govt never drained the system via taxes and only spent money the system would flood with cash and cause inflation.