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Bernanke's remarks today did little to soothe this ruffled observer. His remarks struck me as practically dishonest in their inability to speak directly to our actual problems.
Bernanke says Fed still has arrows in quiver
WASHINGTON (MarketWatch) - The Federal Reserve has lowered interest rates just about as far as they can go, but the U.S. central bank still has plenty of available firepower it could deploy to restore financial markets to normal, Fed Chairman Ben Bernanke said Monday.
I wish that we could just get some straight talk about our actual condition, instead of this weird insistence on "restoring our financial markets to normal." This ignores the fact that they were completely abnormal. Why would we want to return there? I guess it's this strange insistence on continually repeating the mantra that things can be "restored to normal" that's got me unsettled.
The way I see it, there's no "normal" to return to. Things were hopelessly out of whack before, and now they will settle into some new, different level of activity.
George Soros refers to this same process in his Theory of Reflexivity, arguing that the mainstream economic insistence that there is some sort of magic equilibrium is utterly without merit. Instead, markets reflect the interplay between human perceptions and reality. So there's no such thing as "equilibrium." Everything is constantly in flux.
Hence, any efforts to "restore normality" are destined to fail, because there's really nothing to return to. "Normal" doesn't exist. If you subscribe to this theory, as I do, then Bernanke's efforts are destined to be not only fruitless but also horribly expensive errors that are compounding the prior mistakes.
The Fed could buy Treasury notes and bonds or agency bonds in a bid to drive yields lower and "spur aggregate demand," Bernanke said. Many analysts refer to such a policy as "quantitative easing," because the Fed would target a specific amount of money to flood into the economy.
"Could?" The Fed balance sheet is already loaded with both agency and Treasury debt, and they just announced a $600 billion program for more agency debt last week. So I guess what they meant to say here was that the Fed could buy more government debt than usual.
The U.S. economy is under "considerable stress," Bernanke said, and is likely to remain weak for some time. The economy "downshifted further" after the financial crisis of September, he said.
The economy won't be able to fully recover unless and until financial markets resume normal functioning, he said. The economic outlook is unusually uncertain, he said, because it's difficult to know when financial markets will be healthy again. He noted some tentative signs of improvement, but other signs were worsening.
Again, this economic talk is so far off the mark that it makes me feel like I am being talked down to, as though I were a small child. This is not "considerable stress." 9/11 was "considerable stress." This is the worst economic crisis ever in our history, if the record-breaking and record-setting across-the-board declines are any indication.
I advocate a bit of honesty and truth. We can handle it. In fact, it might even be refreshing, and in an odd sort of way allow some people to conclude that we've turned a critical corner. As long as we continue to sugar-coat every bit of language in an attempt to "soothe the markets," I think we will find a real bottom to be perpetually elusive.
Bernanke spoke at the Greater Austin Chamber of Commerce in the Texas capital, just hours after the private National Bureau of Economic Affairs announced that the economy had entered a recession nearly a year ago.
Thanks NBER! Right on top of things, as usual. That's a very helpful service you've got there, telling us we started a recession a year ago. Perhaps GM can use that information in their planning process.
Further rate cuts are "certainly feasible," but the ability of traditional monetary policy to further stimulate the economy is limited, the Fed chairman said.
Additional rate cuts? To what? Three month T-bills are currently yielding 0.00%. Hard to imagine going much lower than that. The Fed has a long history of following the market on rates, and the market is already at 0.00%.
The Fed could also expand its efforts to supply liquidity directly to markets and investors, bypassing banks and other reluctant institutions, he said.
Uh, oh. This is a very ominous statement. Let's imagine what mechanisms he might be envisioning to "supply liquidity directly to markets and investors." All I can think of is a wire transfer or check directly from the Fed to these "markets and investors." In the case of "markets," I suspect Bernanke is talking about buying stocks. The Fed granted itself the right to perform this function about 3 months ago, and I guess Bernanke is reminding us that they may yet directly buy equities in an effort to support stock prices.
But directly to investors? All I can say there is that if you receive a check from the Fed, spend it as fast as you possibly can, as that will mark a turning point for our currency. If you don't believe me, then we should take a road trip to Zimbabwe together, because that is exactly what their Central Bank did early on in their current inflationary crisis.
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Bernanke is following exactly what he said in his speech in Geneva in Jan 2004.
http://www.federalreserve.gov/boarddocs/speeches/2004/200401033/default.htm
For example:
"As an important participant in the Treasury market, the Federal Reserve might be able to influence term premiums, and thus overall yields, by shifting the composition of its holdings, say from shorter- to longer-dated securities."
"Besides changing the composition of its balance sheet, the central bank can also alter policy by changing the size of its balance sheet; that is, by buying or selling securities to affect the overall supply of reserves and the money stock."
and of course,
"When stated in terms of quantities, it becomes apparent that even if the price of reserves (the federal funds rate) becomes pinned at zero, the central bank can still expand the quantity of reserves. That is, reserves can be increased beyond the level required to hold the overnight rate at zero--a policy sometimes referred to as "quantitative easing." Some evidence exists that quantitative easing can stimulate the economy even when interest rates are near zero; see, for example, Christina Romer's (1992) discussion of the effects of increases in the money supply during the Great Depression in the United States. "
Does everyone remember the name Christina Romer, the soon-to-be head of Council of Economic Advisors. Looks like we're in for change alright - Change American Style.
"Quantitative easing may also work by altering expectations of the future path of policy rates. For example, suppose that the central bank commits itself to keeping reserves at a high level, well above that needed to ensure a zero short-term interest rate, until certain economic conditions obtain."
I read that as no end in sight.
Sorry about the length of the post, but one more:
"quantitative easing that is sufficiently aggressive and that is perceived to be long-lived may have expansionary fiscal effects. So long as market participants expect a positive short-term interest rate at some date in the future, the existence of government debt implies a current or future tax liability for the public. In expanding its balance sheet by open-market purchases, the central bank replaces public holdings of interest-bearing government debt with non-interest-bearing currency or reserves. If the open-market operation is not expected to be reversed too quickly, this exchange reduces the present and future interest costs of the government and the tax burden on the public. "
Long-range planning Fed style.
-Caasi
Bernanke is also admitting to buying US treasuries with printed money.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAyFFofa8zd8&refer=worldwide
I am now more fearful for the US dollar than back in October when I was storing can soup & bullets in the bomb shelter.
I believe that this is the sign to start spending your savings (between now and next year) on whatever non-depreciating assets you can find. Particular gold, silver and equities.
I already stopped buying treasuries as part of my 401k and soon will be time to dump the ones I already have. Great time to dump considering bonds are in a good bubble right now and Bernanke intends to keep it that way.
Chris said: "Thanks NBER! Right on top of things, as usual. That's a very helpful service you've got there telling us we started a recession a year ago. Perhaps GM can use that information in their planning process."
Chris,
This (NBER's year-belated announcement of the recession) will now be used as another strategy to pump the market; that is to say, everyone in our corrupt government, the parrots on CNBC, the analcysts et al will all start claiming that since the recession started "a year ago," and given that the average recession is X months, "we are in great shape now. The bottom's in. The market should start anticipating the recovery."
Where does this B.S. stop! Our entire country--save the few of us that post here--seems to be either completely senseless and incompetent or in unprecedented denial or some combination of the the two.
I just want to scream--every day! This whole charade, the willingness to lie? cheat? steal? deny?...pick a concept, it is just too much.
We're not being treated like children. We're being treated like crops. Feed 'em what they need, then shear them off at at the knees.
P.S. Gak, if you read this: Congrats on the SKF!
Firepower - sure, if he is talking jet fuel that he can pour onto a raging inferno, then yes, I'd agree, the "Fed" has the firepower to burn the house down by hyperinflation or destroying the bond market and taking the currency with it.
In any event I see the cleanup crew for isle one being prepped. Vockler and Romer, Mr. High Interest Rates and Ms. New Currency.
What scares me is what stands in between this time period - and I'm not the least bit concerned with the money aspect of all this.
There are consultants who watch people on video and analyze body language and voice timbre to detect deception. SOme of them are quite good.
I would absolutely LOVE to see a pro analysis on Bernanke's speech today from one of these guys. I watched it live, and although I am not expert enough to back this up with specifics, I didn't believe that he believed one word of the BS he was putting out. His voice kept going high at funny times, and his speech was irregular.
Like a little kid lying to his parents, and knowing he's certain to get caught sooner if not later.
Where does it end?
Erik
Erik said:
"Like a little kid lying to his parents, and knowing he's certain to get caught sooner if not later."
Erik,
I couldn't agree with you more. Having been a teacher for almost 20 years and a union rep for 3 (which involved working with children, colleagues, adminstrators, members, etc, in all imaginable situations of various degrees of intensity), I can say that my instinct tells me--and I've watched every congressional hearing that Paulson and Bernanke have participated in--that they are scared to death; they are putting on an act, hoping to their Gods, whatever they pray to, that nobody is picking up on what they are really thinking.
You have hit the nail on the head with your comment!
NZO
Can't tell if you're being facetious here or if I'm missing some obvious quip. However, I think it would be a good investment. I bought a couple of pairs of back-up glasses and ordered a few years worth of contact lenses. My vision's so bad if I don't have corrective lenses I'm an invalid.
Where does this B.S. stop! Our entire country--save the few of us that post here--seems to be either completely senseless and incompetent or in unprecedented denial or some combination of the the two.
I just want to scream--every day! This whole charade, the willingness to lie? cheat? steal? deny?...pick a concept, it is just too much.
My feelings exactly.
I also love the reference to "the financial crisis of September" as if it's some compartmentalized event separate from the financial crisis of August, October, November and December.
Obfuscation is one of the most effective forms of propaganda.
Erik:
Man, I watched a few clips of Ben and Hank recently. I thought I was being paranoid but Ben has to be the worst "poker player". Thanks for saying that out loud! Nonzeroon, as an ex-union rep and vice chairman I couldn't agree with you more.
I hope, for their sake, that the 20,000 troops being deployed on our soil http://www.washingtonpost.com/wp-dyn/content/article/2008/11/30/AR2008113002217_pf.html can save their collective hineys when the natives figure out that they have been had.
Arnie has declared a fiscal emergency http://www.breitbart.com/article.php?id=D94Q55T80&show_article=1 I guess he might be just a bit worried that he can't pay the cops, teachers and God knows who else...