Ben Bernanke: The ‘Repo Man’ goes global

February 7, 2011

Back in October, after the meeting of the Federal Open Market Committee, the Associated Press reported that “The Federal Reserve is likely to take additional action to rejuvenate the economy and lower unemployment, an influential member of the central bank’s policymaking group said.”

Of course the Fed neither rejuvenates economies nor creates jobs.  For some reason members of the media attribute magical powers to the US central bank and its employees.

Part of the reason for this divine veneration is that there is little in the way of ideas or resources elsewhere in the federal government, thus the holy printing press is now well and truly the only game in town.

Since October the Fed has purchased hundreds of billions of dollars in US Treasury debt in an effort to force liquidity into private assets.  But while the U.S. central bank is able to float the Treasury’s red ink on a sea of new fiat paper dollars, overseas the great deflation has left global central banks largely emasculated.  Unable to create their own money with the ease of the Fed, even the largest central banks in Europe have gone begging for alms in the form of dollar swap lines from Chairman Bernanke.

Other global central banks are chronically short dollars and the Fed is the proverbial tail wagging the global doggie.  Treasury Secretary Timothy Geithner brags about collecting hundreds of billions in nominal greenbacks recovered from the TARP, Ally Financial and AIG bailouts, among others, but it is Fed Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee who are playing the big game with trillions of new fiat paper dollars.

The Daily Bail asks: “Will Bernanke Scoop Up $50 Billion Of Ireland’s Toxic Assets? Fine Gael Seeks MASSIVE Loan From U.S. Fed” This is a very good question since the Irish government likely to be elected in a week or so is going to face an assortment of very unpleasant choices.  If Ireland’s new political coalition goes hat in hand to the American central bank, the new regime is not likely to last very long, especially with the IRA now talking of great conspiracies among private business.

Neither are Chairman Bernanke and the Fed likely to endure if they continue to play the role of de facto global central planning agency without explicit legal authority from Congress.  The trouble here is both one of legal authority and the deleterious effects of current Fed policies.  The more the Fed tries to help the domestic economy with low rates and explicit bailouts, the worse our collective predicament.  Recall the advice of Martin Mayer, who always taught that the Fed (and government generally) should emulate the physician and “first do no harm.”

The Fed keeps interest rates artificially low to “help” the current situation, but in doing so only stokes inflation and bubbles in sectors such as food, energy and strategic commodities — and also market sectors such as equities.  In the past, the central bank has attempted to fine tune the national economy, most recently in the period a decade ago when then-Chairman Alan Greenspan stepped on the monetary gas.  Not only did the resulting surge in cheap credit stoke a domestic housing boom in the US, but it created booms in global financial assets and also internationally traded goods that impacted investment and asset allocation decisions around the world.

With the 30-plus percentage decline in US housing prices so far and another 10-20% in prospect this year and in 2012 before we hit the bottom, the Fed faces continued asset price deflation at home even as the impact of its accommodative policies are already boosting global inflation.  The combination of volatile weather and poor logistical planning in terms of stockpiles could make the global food supply situation acute in 2011-2012.  The Fed, not hedge funds, is making the situation worse in markets for energy, commodities and food.

The Fed’s extreme monetary policies used to bail out the largest banks are creating bubbles with cheap credit.  Look at the bull market in commercial real estate assets, for example, an entirely speculative financial phenomenon.   Prices for well-located assets are driven up by speculative interest among investors who prefer CRE risk to zero yields on Treasury paper.  But is there sufficient cash flow under these assets to support these valuations?

With yields on longer maturities climbing, it seems that the greatest risk facing the Fed is the transition from life support to something that resembles a sustainable run rate.  Trouble is, Bernanke and a majority on the FOMC still seem to be making policy decisions based upon domestic criteria, this even as the extreme easy money policies of the Greenspan/Bernanke era have already achieved the implicit policy goal of asset price reflation.  It’s all relative, you understand.  When an election-focused White House calls for economic recovery, Bernanke, like Greenspan before him, dutifully steps on the gas, seemingly heedless of the risks.

Of course, classical reflationists argue that the Fed is doing precisely the right thing by using low interest rates to force liquidity into private assets.  One reader of my work rebukes those who argue for monetary restraint and invokes Irving Fisher in his famous 1931 “Econometrica” article.  By lowering rates on Treasury bonds below where they might otherwise be, he argues, Bernanke “is likely to push investors into corporate bonds and lower spreads–which, in the end, are the ONLY real engines of growth in the financial markets.”

The trouble with this argument, like the neo-Keynesian corollary about the use of debt to fund fiscal stimulus, is that expedients such as low interest rates and deficit spending are meant to stimulate economic growth on the margins, not to replace private sector demand and economic activity that does not exist.  Bernanke and his fellow travelers on the FOMC, it seems, have entirely embraced the world view of Paul Krugman and Robert Reich, and echoed among the inflationati in the EU led by Martin Wolf, that new monetary emissions are an apt replacement for fiscal spending.

The problem with living in a world where relativity is the operative standard is that there is no truth in an objective sense.  Political survival, not civil society, is the first priority, so members of the FOMC will say and do anything to get through the day, no matter how internally inconsistent or reckless.  Until Bernanke and the FOMC start to recognize that their well-intentioned efforts to help the domestic US economy are creating the precursor for future global economic collapse, we cannot truly bring the Fed under effective public control and begin the process of national restructuring in America.


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This will end badly, but probably not until the Fed says Uncle. The troubles are showing up in the bond market though, as the foreign central banks have halted their subsidies, causing the Fed’s efforts to prop the Treasury market to fail.

All of the Fed’s money printing is having the obviously expected effects. The dollar is weakening. Commodities are skyrocketing. Even gold may be getting in the act. Equities are inflating, and foreign governments who usually buy our bonds are facing raging inflation, weakening their economies, and increasing the cost of their manufactured goods in the US. It’s all bad.

Yet Bernanke in his speech to the National Press Club refused to take any responsibility for the commodity price speculation that his damned “printing press in the basement” is fueling. He’s willing to take responsibility for the increase in stock prices, but not the increase in commodity prices that is wreaking havoc all over the world, and is about to wreck the US economy too. This kind of double talk is the hallmark of a narcissistic psychopath and pathological liar. Does Bernanke actually believe his own swill, or is he just evil? I prefer to believe the former, but it really doesn’t matter. The end result will be the same.  /bernankes-narcissistic-swill-professio nal-edition/

Posted by LeeAdler | Report as abusive

Sorry. I guess my take on Bernanke was too harshly worded for this venue. My apologies.

Posted by LeeAdler | Report as abusive

SO the un-naturally low fed rates are pushing risk averse investors into high risk asset classes. Where have we seen this before? Oh – that’s right – earlier this decade when fed (chasing deflation monsters) lowered rates and created un-natural demand for mortgage backed securities.

That didn’t work out so well. Maybe it will work better this time.

Is the fed banking on hope?

Posted by gordo365 | Report as abusive

IMO the low rates are just a method of recapitalizing banks while grandma & grandpa get 0.25% on money that they worked a lifetime to save. You see, grandma & grandpa aren’t “investors” so they don’t register in todays world. Sort of like those people who have stopped looking for work after a couple of years of frustration and aren’t counted as unemployed…..this counting method then improves the unemployment rate and the stock market just loves it!

Just took my kid out for a burger last night. I noticed the little Whopper on the dolar menu now costs $1.29. Yum!

Our central bank tries to solve a debt crisis with more debt than ever. This will end badly. Oh, wait, it already is ending badly.


Posted by Missinginaction | Report as abusive

LeeAdler is perfectly right–Bernanke will go down in history as an incompetent, smug, pretentious, and toxic unelected official who had access to the jugular vein of the economy, when he should have been removed far long ago. Yet, our generation will be seen in history as the complacent dupes that let him and his bankster cronies reap havoc on U.S. citizens. Don’t think for one minute that his grandchildren will not be wealthy from Bernanke’s corruption, while 99% of the next generation of citizens will likely have a very rough life.

Posted by fallboy | Report as abusive

Ben has ingenious ideas and deserves the Nobel Peace Price.
This magician has proved, that wealth can be created from nothing simply by printing more money.
This opens for the first time to the mankind a real change to eradicate the poverty, which is the main cause of all evil.
Ben is a true follower of The Zimbabwean School of Economics, who already before him have successfully adapted this money printing methodology.

Posted by HealingKnife | Report as abusive

Wow, you’re totally clueless.

Printing money?

You do realize that the Bureau of Engraving and Printing, which is part of Treasury, physically prints the money (along with the Mint, also part of Treasury, which coins physical money too)?

Now, just when these amateurs claim they know that, let’s talk about the money supply: There has not been any big change in the money supply (M2). I mean, have you even taken the 10 seconds necessary to create a graph from FRED?

Clearly, you screwed up excess reserves with money. Good job hombre. Do you need a lesson in channel-corridor economics too?

So, please tell me how monetary policy neither rejuvenates the economy nor creates jobs using the principle of monetary nonneutrality given price stickiness.

And I dare you to find empirical evidence that monetary policy created the housing bubble. Here’s a hint, it ain’t out there, no matter what phony coefficients John Taylor uses.

You know damn well that Wall Street pumped up the bubble with financial innovation, and so do good economists who have done more rigorous work than you have with your watered down MBA classes.

Finally, commodity prices are very volatile and have generally foreshadowed neither major inflation nor major deflation.

Why weren’t you and your ilk whining about deflation back in late 2007/early 2008 when commodity prices plunged?

And, by the way, those very volatile commodity prices I just mentioned have now pushed the overall commodity index back to where it was before it plunged back in December 2007, when, you know, output also plunged.

So there you have it. An investment manager and blogger who cannot even understand that commodity prices have been driven by growth and not monetary policy.


Posted by Pingry | Report as abusive

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