The many interpretations of Ben Bernanke

May 23, 2013

Federal Reserve Board Chairman Ben Bernanke testifies before Congress in Washington, May 22, 2013. REUTERS/Gary Camero

On Wednesday in Washington, Federal Reserve Chairman Ben Bernanke presented congressional testimony that repeated, virtually word for word, statements about U.S. monetary policy he has been making since last September.

The Federal Reserve, Bernanke said, would continue buying $85 billion of bonds monthly until it was confident of reducing unemployment to 6.5 percent. The scale of these purchases might be increased or diminished – but only if and when such shifts were warranted by economic statistics. Now, he said, there is no case for a change in either direction.

The reaction to this tediously familiar statement, which was followed by publication of the equally repetitive minutes of the last Fed policy meeting, was some of the wildest gyrations seen in the world’s financial markets for months.

As Bernanke spoke, Wall Street soared to its highest level ever, since the Fed chairman had clearly contradicted speculation about an early tightening of monetary policy. An hour later, however, prices slumped far below their opening levels, as the speculation of tightening revived among investors who claimed to read new meaning into Bernanke’s familiar phrases.

The speculation spread to Tokyo Thursday. Markets there had their biggest one-day swoon since the 2011 tsunami. By the end of the day, tens of billions of dollars in Tokyo and New York had probably been redistributed among speculators who had put different interpretations on Bernanke’s words.

Why did the financial world react in this manic-depressive way to a statement that was bland and predictable? Why do investors keep gambling vast sums of money in speculations on changes in monetary policy when Bernanke has tried to make crystal clear that significant changes are unlikely, at least until the end of the year? Given this unusually clear guidance, why don’t investors just forget about monetary policy, at least until autumn, and focus instead on economic fundamentals or corporate financial results?

Some investors may genuinely not believe Bernanke’s message. They may be paying attention to the small number of Fed officials, including Philadelphia Fed President Charles Plosser, who disagree with the chairman’s unlimited monetary stimulus. But we know these dissidents play no serious role in monetary decisions. So their followers in the market must surely be few and far between.

The other possibility is that many investors may rationally understand that the Fed will stick to its current course, but still hope emotionally that its policies will change. Is it possible that investors who stake billions of dollars on monetary assessments would allow themselves to succumb to wishful thinking? The answer seems to be yes, for several distinct reasons.

Some of Bernanke’s intellectual opponents are so appalled by what they see as the evils of printing money that they just cannot believe this policy will continue much longer – though none of the dire prophecies of hyper-inflation, dollar debasement and general financial mayhem have materialized. Others have political or business reasons for hoping that Bernanke will abandon his monetary experiments and that the Obama administration’s entire economic policy will be seen as a failure. But probably the biggest group of Wall Street doubters are people who want to see the Fed reverse its policies because those policies have been too successful – at least in one respect.

By boosting stock prices far more powerfully than expected, the Fed has left many investment managers far behind. The average hedge fund this year, for example, has delivered only one-third the gains of a simple indexed stock market investment, trailing the performance of the Standard & Poor’s 500 by 10 percentage points.  Feeling flat-footed and embarrassed, these investors are not just disappointed; they are indignant about a bull market they failed to anticipate. Rather than blaming themselves for this failure, they cite the Fed’s “market manipulation.”

How could professional investors, frustrated and angry though they may be, allow themselves to be guided by wishful thinking instead of objective analysis, thereby risking financial ruin? A possible answer is what psychologists call transference – the unconscious projection of one’s own feelings and ideas onto others and vice versa.

Many people on Wall Street who find soaring stock market prices upsetting imagine that Bernanke must be upset, too. They simply ignore Bernanke’s repeated statements, most recently before Congress Wednesday, that the Fed considers current stock prices to be “not inconsistent with the fundamentals.” Instead they assume that Bernanke must know, deep down, that Wall Street is experiencing a monstrous bubble. Because that is what they themselves feel.

Another form of transference works the other way. When Bernanke says something investors do not like to hear – for example, that the Fed is pleased with the outcome of its current policy and inclined to leave well alone – they overlay what they hear with a more appealing message they hear from people who can supposedly discern the Fed’s hidden agendas.

These people are the “Fed watchers” and Washington analysts employed by banks, investment institutions and media outlets to anticipate and explain the twists and turns of monetary policy. These experts make up a respected lobby whose overwhelming interest is to convince the world that economic policy remains unpredictable and unstable. After all, it is hard for a Fed watcher to justify a big salary if all he does is tell his clients: “Nothing much is going to change for the rest of the year.”

The last thing these experts want is for Bernanke to be believed when he promises to carry on with an unchanged policy. And people wrong-footed by the Fed’s actions are eager to believe these expert speculations about policy changes.

At some point, of course, monetary policies really will start to change. But the timing of this crucial event will be determined by economic statistics – not by speeches and committee minutes.

The Fed will probably want to see six months of strong employment and at least two quarters of 3 percent gross domestic product growth before it seriously considers tightening. In the meantime, big market reactions to comments from the Fed chairman, like those Wednesday, will mostly be reversed – expensively for those investors who replace analysis with wishful thinking.



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Mr. Kaletsky seems to assume that not only has Fed policy directly boosted stock prices but that it can do so indefinitely. I don’t blame him on the first assumption, but I wouldn’t bet on the second. Which is exactly what an investment in the stock market is today– given the fundamentals of the earning cycle and valuations– an investment in the market today is a speculative bet that Fed policy can keep corporate profits elevated without negative consequences that arise from a heavily managed and uber-easy monetary policy.

Posted by VRP | Report as abusive

something has happened in the world today. it seems that there are no printing presses at work in the u.s. just a shift of tradeable asset classes from accounts to accounts. anyone wonder why the dollar doesn’t lose strength? it ain’t because nobody else has crap for assets. this world we live in is full of perceptions. there are no money presses putting out scads of worthless paper. it’s all just a shift of assets. the u.s. is buying 85 billion a month. i know all the conspiricists are salivating, but, if the inflation rate was making the assets worth less or more, which they might be, the stated amount purchased by the fed would fluctuate a heck of a lot more. anybody?

Posted by jbone1226 | Report as abusive

You should Photoshop some bubbles behind him in the picture.

Posted by BidnisMan | Report as abusive

You state, “The Fed will probably want to see six months of strong employment and at least two quarters of 3 percent gross domestic product growth before it seriously considers tightening.”

Unfortunately, the Fed is presently playing out the tragicomedy of Godot, who waits endlessly and in vain for the arrival of that which will never come.

What is guaranteed to arrive, and much sooner than later, is the collapse of this nation due to unrestrained printing of fiat money.

There is not one single incidence of a “successful” recovery driven soley by increasing the supply of money by printing it.

In truth, we are in a “liquidity trap” and cannot recover without demand.

Posted by EconCassandra | Report as abusive

A reality check from the UK Guardian:

What is the economic responsibility of corporate America?

Even Fed chairman Ben Bernanke is calling out the private sector for not doing its part to help the frail economy

Heidi Moore (updated)
Heidi Moore, Thursday 23 May 2013 14.15 EDT
Jump to comments (130)

The best kind of Federal Reserve chairman is the one who doesn’t believe he owes anyone anything. That is when we start to hear the truth about the economy more directly.

Seven years into his term, and unlikely to renew his engagement in Washington, Ben Bernanke has reached this state. He started out as a diplomat and an able politician who avoided offending people and adopted the appropriate Washington plumage to survive. Now he is the truth-teller we need.

He has spent seven years dealing with a do-nothing Congress with little more than perhaps quiet exasperation. Now that his term is nearly over, he is a bolder man. In his testimony before the Joint Economic Committee of Washington, he pulled no punches. He declared:

“Monetary policy is not omnipotent. We are pushing pretty hard at this point.”

Bernanke has chided Congress before, subtly, on its refusal to take action with the budget and revise fiscal policy. He was not so subtle this time. Bernanke noted that long-term health of the economy is “not the Fed’s job” – “that’s the private sector’s job and Congress’s job.”

Congress, we can leave aside. We know that austerity is painful and counterproductive, as the travails of Europe have shown us. If we didn’t know it, Bernanke made it clear. Bernanke’s mention of the private sector, however, is important. While Congress and the Fed discuss what to do about the slow economy, there are a few voices notably absent: those of any important CEOs willing to do their part to increase hiring.

The corporate and financial side of America – the private sector – is not doing its part to help the economy. Congress, as utterly useless as it has been in producing decent legislation, can only do that – legislation. Companies and banks actually hold the purse strings and hiring power, and they are not loosening them to help the economy.

Take a bill introduced by Democratic Representative John K Delaney of Maryland this week. The bipartisan bill – with 13 co-sponsors from the Republican and Democratic ranks – is devoted to improving the country’s weakening infrastructure by luring corporations to contribute to the effort.

Many of these corporations, in protest of “high corporate taxes” that they rarely actually pay, hire expensive lawyers to avoid the entirety of their tax bills. Yet they use the nation’s roads for trucking, our waterways for shipping, our bridges and city streets and airports. In small towns, one big corporation can make the entire economy, as FedEx is in its Tennessee headquarters. But how about the towns and the states that these companies just pass through on their way to making money? They don’t get the same economic benefit to help with their maintenance.

While major corporations are happy to use infrastructure, they contribute very little to its maintenance as long as they don’t pay their full compliment of taxes. Yet convincing these corporations to pay their full tax burden is a lost cause, as was evident yesterday when Apple CEO Tim Cook smilingly explained openly to Congress how Apple uses Irish subsidiaries to lessen its US tax bill. The lawmakers mostly met Cook’s testimony with adoration. The message of his appearance on behalf of corporations everywhere was: allow us to pay lower taxes, and we will stop avoiding them.

As this ego-fed debate continues, the nation’s infrastructure needs repair – hundreds of billions of dollars in repair, according to many studies – and that money isn’t coming from the government. So Washington has to think carefully: how can it persuade corporations to do their duty and pick up part of the tab for the services they use?

The answer is in Congressman Delaney’s bill, which proposes that companies be allowed to repatriate their foreign earnings at a lower tax rate – as low as 8%, probably – if they use some of the money to buy new infrastructure bonds. The bonds, of which only $50bn will be sold, will raise about $750bn for infrastructure investment.

With its bipartisan support and solid negotiation technique – a simple quid pro quo – the Delaney bill is likely to be successful, or at least should be. It is perhaps the first constructive answer to both a government and a corporate problem.

Still, there remains a question of whether the offshore tax holiday was ever really a plausible corporate problem, or one hyped by CEOs as an excuse to inflate their company’s coffers and their stockholders’ wallets rather than invest in new initiatives. Once the offshore-profits issue is out of the way, what excuse will companies have left for not investing money in the American economy and American workers?

The issue of offshore profits and a tax holiday was a red herring: US companies have not been hurting for cash. The stock market is at record highs overall, and particularly so for big companies. The stock market riches are flooding corporations in inflated stock options and paper wealth. Corporate profits, as a percentage of US GDP, are higher than ever, according to the St. Louis Federal Reserve.

The 2004 tax holiday showed that the companies that took advantage actually fired workers, and that was during a good economy. There is no reason to believe they would be any more eager to hire as long as there is the excuse of a weak economy.

The truth is, the weak economy is not out of the hands of corporations. They don’t have a tax problem. They don’t have an economic problem. They don’t have a problem of an unskilled workforce. Instead, they have an innovation problem. These companies could, for instance, invest in new initiatives or expand their business models. Very few, if any, companies are doing that. In fact, a recent study from Accenture raised the question of whether CEOs even believe in innovation as a solution any more. The survey of 512 companies found 51% said they were investing more in innovation but 46% said their companies were becoming risk-averse anyway.

This is fearful thinking, and it’s the same plague that infects Congress. Just as fear has paralyzed Congress, it has scared CEOs. Yet fear is no excuse. Taxes are no excuse. Caution is no excuse.

The excuses have run out. The corporate side of America is not pulling its weight. It is not paying the fair price in economic boosterism or in taxes for all the advantages it enjoys. Instead of hearing Ben Bernanke testifying, or Congress and the Fed trading blame, maybe it’s time to ask some CEOs why they have taken themselves out of the equation of getting America back on its feet.

Even more importantly, it’s worth asking why we have let them.

Posted by EconCassandra | Report as abusive

It’s silly to blame corporate America for not paying enough. They pay plenty of taxes. Our government is wasteful. Plain and simple. We have a Present who actually roots against our country, so it’s no wonder why we come up short.

Posted by IronHamster | Report as abusive

So the government has failed and now you want corporations to bail them out. Not going to happen. Sooner or later the government will have to govern instead of endlessly campaigning. No one wants this tar baby when the money printing has to slow or stop altogether. Best that can be hoped for is some sort of “managed decline” of expectations as inflation works it’s terrible destruction of what is left of the once productive middle class.

Posted by AZWarrior | Report as abusive

IMO, the reason mkt got disappointed was they expected much dovish comments from Mr. Bernanke. The mere possibilities of tapering QE can be scary to some in the markets.

Posted by KTX | Report as abusive