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?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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