Fed up with Bernanke
By Nicholas Wapshott The views expressed are his own.
There is one thing every Republican candidate agrees on. Once in the White House, the first thing they’d do is fire Ben Bernanke. His crime is to follow the legal brief of the Federal Reserve to maximize jobs and keep prices stable. To this end he has been printing money to keep interest rates low to boost business confidence to invest and thereby create more American jobs. For many conservatives and libertarians, who dominate the early GOP caucuses and primaries, Bernanke’s cheap money policy has dangerously devalued the dollar’s worth.
Guaranteeing cheap money is a Keynesian way of restoring health to an economy in recession, though Keynes himself was aware that low interest rates do not automatically lead to jobs. However cheap money is, you can’t force people to invest. Or, as he put it, “You can’t push on a string.” He compared it to buying a bigger belt to gain weight. The fact that Keynes backed easy credit is enough to make the policy treacherous in the eyes of many con-libs. (They are far more tolerant of another Keynesian remedy–slashing taxes.)
Bernanke, however, owes his allegiance not to Keynes but to Milton Friedman. To encourage growth without hyper-inflation, Friedman prescribed gradually increasing the money supply. That way, prices would rise slowly and predictably. Bernanke is also an expert on the 1929 Crash and the Great Depression, catastrophes he, like Friedman, attribute to the 1920′s Fed keeping money too tight for too long. As Bernanke told Friedman on the father of monetarism’s 90th birthday, “You’re right. We did it. We’re very sorry. But, thanks to you, we won’t do it again.”
The legislation setting up the Fed in 1913 went out of its way to ensure that the Fed would be free of political interference so that monetary policy could be independent of politicians with short-term aims. It stipulated that the Fed should fund itself, depriving Congress of its traditional means of starving programs and institutions it doesn’t like. It gave Fed board members long terms, 14 years, with the chairman serving for four.
The sole means of influencing the Fed are through appointments and Fed board salaries. Bernanke’s current term ends in 2014* (see editor’s note), when he or his potential successor, nominated by the president, must be approved by the Senate. (The GOP candidates’ demand that Bernanke leave before his term ends would trigger an ugly constitutional crisis much like Franklin Roosevelt’s failed attempt in 1937 to pack the Supreme Court.) By demanding Bernanke’s head on a plate, however, the con-libs have served notice that the Fed’s days of independence are numbered and that every new appointment, like those to the Supreme Court in recent times, will trigger a pitched battle.
The politicization of the Fed and the arguments about its role and its future is perhaps the most significant change in a generation to the way politics is pursued. And it runs counter to best practice in other countries, where politically directed central banks have bowed to short term political demands rather than achieve long term national goals.
Bernanke’s high stakes poker game at the G-20
By Peter Navarro The opinions expressed are his own.
Ben Bernanke is about to play the biggest poker hand in global monetary policy history: The Federal Reserve chairman is trying to force China to fold on its fixed dollar-yuan currency peg. This is high-stakes poker.
Although Bernanke will not be sitting at the table to play his quantitative easing card when all the members of the G-20, including China, meet this week in South Korea. Every G-20 country is suffering from an already grossly under-valued yuan pegged to a dollar now falling rapidly under the weight of Bernanke’s QE2. In fact, breaking the highly corrosive dollar-yuan peg is the most important step the G-20 can take for both robust global economic recovery and financial market stability.
Regrettably, China continues to believe — mistakenly — that the costs of a stronger yuan in terms of reduced export-led growth outweigh three major benefits: increased purchasing power to spur domestic-driven growth, significantly lower costs for raw materials and energy, and a dramatic reduction in speculative hot flows rapidly pushing up inflation.
Of course, the biggest victim of the peg is the U.S which can never eliminate its huge trade deficit with China through currency adjustments. The resultant chronic trade imbalance shaves almost 1% from America’s annual GDP growth rate and costs almost 1 million jobs a year.
Europe, with the notable exception of Germany, suffers a similar problem because of a euro overvalued relative to the yuan. Moreover, as the dollar-yuan pair declines under the weight of QE2, the risk of recession in Europe rises. For its part, Germany largely avoids the peg’s damage through robust exports to China. In addition, Germany’s higher savings rate coupled with vaunted cost efficiencies have allowed it to gain at the expense of other more free-spending countries of the euro zone. Politically, this spells trouble because Germany’s separation from the euro zone pack makes it the one country most likely to align with China.
In sharp contrast, Japan has been brought to its knees by China’s fixed peg. Every time the U.S. dollar declines in value and pulls the yuan down with it, Japan (as well as fellow G-20 members South Korea and India) lose more jobs and growth to China. As a further injury, China has aggressively pushed up the yen up through massive interventions in the Japanese market.
By linking the currency the Chinese have linked the US and Chinese economy. What better than to have no currency risks with your major customer. If the US devalues then its currency will also devalue vs the rest of the world giving it competitive advantage.
When the Fed pumps money into the economy, it is in effect pumping money into the combined Chinese US economy. Guess where all the money will end up. In low cost/ high return China ofcourse.
So you have inflation in China and deflation in USA. If the Chinese dont give in on exchange rate and they just tighten then there could be a hard landing in China. Thats after a hard landing happens in other developing economies and US enters another recession. Hopefully sense will prevail before then.
Savers shoulder the inevitable burden of bad loans
Britain’s new coalition government likes to remind voters we are all in this together. The phrase is rather glib. But in an important sense savers and borrowers around the world are finding the costs of reckless lending are falling on the innocent and guilty alike.
Few people this century will have experienced what it is like to turn up at their bank and be told they cannot withdraw deposited funds because the bank has “suspended” payments.
Suspension sounds harmless. But before the spread of deposit insurance, the word was enough to strike fear into the hearts of depositors, who risked losing much if not all their life savings, and being made to wait months or years for access to what remained.
Between 1930 and 1933, more than 9,000 banks across the United States were “suspended”, accounting for $6.9 billion or 15 percent of all deposits in the country, according to official figures. Behind those numbers are tales of misery for families, farmers and small businesses suddenly left without funds when their bank was suspended or collapsed forever.
So terrible was it, that even the threat of suspension could produce long lines of anxious depositors outside institutions trying to withdraw cash before the tellers closed their windows. In 1907, long lines marshaled by police formed outside the doors of the Knickerbocker Trust Company on New York’s Fifth Avenue as the depositors (“mostly small shopkeepers, mechanics and clerks”) tried to pre-empt suspension.
“Stacks of green currency, bound into thousand dollar lots, were piled on the counters beside the tellers. One by one these stacks were broached and they dwindled rapidly. Clerks went to the vaults from time to time with arms full of notes, piled up like bundles of kindling wood,” according to an account published by the Washington Post and reproduced in Robert Bruner and Sean Carr’s monograph “The Panic of 1907″.
“As the morning wore on many more depositors arrived carrying satchels, showing they were ready to carry off large amounts. One young man, with his hands trembling, stacked his trousers pockets full of one-hundred and twenty-dollar bills.”
“If true, real GDP will be around 15 percent lower in 2018 than it would have been in the absence of the crisis. Together with the extra millions of unemployed, that is the measure of the real cost of the financial crisis.”
The crisis was just the death by natural cause of the financial bubble that helped create the false prosperity reflected in past great GDP figures.
You can call it ‘false growth’.
The scary part is that the same mentality, interests and politics, which inflated that bubble are still dominant – both in WS and in DC.
Fed launches QE-lite
In a compromise, the Federal Open Market Committee (FOMC) has approved a cautious and conservative second round of quantitative easing (QE2) which may satisfy nobody but should prevent internal splits from widening.
It is designed to provide some marginal stimulus to asset markets and economic recovery without further undermining the confidence of foreign investors.
The best way to characterize the $600 billion bond-buying program implemented over eight months is “QE-lite”. The total is slightly higher than expected, but spread over a slightly longer period. The Fed has done almost exactly what it signaled over the last few weeks — no more (there was no “shock and awe”) and no less.
There is an implicit commitment to continue buying securities until the end of June 2011 and to buy $600 billion in total but the figures are described as an intention, so they could be varied in response to changing conditions.
The committee preserved its flexibility by promising to “regularly review the pace of its securities purchases and the overall size of the asset-purchase program in the light of incoming information and will adjust the program as needed”.
Supporters of large-scale, open-ended asset purchases will note there is no finite end to the program. The committee pledged to continue employing all the policy tools at its disposal “as necessary to support the economic recovery and ensure that inflation, over time, is at levels consistent with its mandate”. It was the Fed’s equivalent of “all necessary means”.
Opponents will be relieved the committee has only sanctioned $600 billion so far, a relatively moderate amount. The regular review means even this could be halted early or scaled back if conditions improve or inflation and commodity prices start to accelerate too much.
Fed is split but QE2 looks a done deal
- The opinions expressed are the author’s own-
FOMC meetings are usually a strange combination of formality and easy-going familiarity but levity may be in short supply this week. The Fed’s institutional credibility is on the line, and the normal decorum that characterizes relations among committee members has become increasingly strained over the summer.
Divisions between proponents and opponents of a second round of quantitative easing (QE2) have been on display as never before. It is not clear what members will say to one another to fill two days since all the arguments have already been rehearsed in detail and in public over the last six weeks.
In a thinly veiled swipe at his colleagues, Kansas City Fed President Thomas Hoenig has stumped around his patch on the Great Plains denouncing QE as a “dangerous gamble” and “a bargain with the devil”.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser have made no secret of their skepticism or outright opposition to launching QE2 at this point. Minneapolis Fed President Narayana Kocherlakota has questioned whether it will work. Richmond Fed President Jeffrey Lacker has seemed to doubt whether it is necessary.
In contrast, the New York Fed (always the closest to the major money centre banks) and the St Louis Fed (the spiritual home of monetarism in the Federal Reserve System) have openly campaigned for the benefits of a second round of asset purchases.
The final vote to adopt QE2 looks set to be 10-1 (with Hoenig dissenting). But the tally will mask much wider misgivings among the non-voting regional presidents and perhaps among some members of the Board of Governors itself, who will nonetheless fall in line with the chairman to support his authority.
“I think in late 2011 or 2012 we will look back on QE2 and either say “what a good idea” or “boy was that dumb”.
Not a chance, you know what the average American will be saying then?
“Waa waaa waaa!” followed by “how do we deal with this In a forward looking fashion?”
Right now, how many people are truely saying “3 trillion in new spending was really dumb”?
None. & 90% don’t even know that we have FNMA and FRE in conservatorship, and monitized their debt of 14trillion+. They’re always looking to fix a problem using the new “future plan” when all the answers are right there by analizing the past. History will repeat itself again. The federal govt knows clearly that their only escape is to massively devalue the dollar. Big suprise there. Been going on expotentially since 1964 ( & 1913 by some accounts)
$160 for 2 burgers w/drinks by 2015
Central banks face crisis of confidence
Central banks around the world are facing the worst crisis of confidence since the 1930s, as investors, households and firms question their commitment and ability to deliver price stability.
Whether it is inflation or deflation, outsiders question whether the major central banks will be able to regulate prices in the next few years.
TOO HOT …. Bank of England Chief Economist Spencer Dale last week lashed out at what he branded “dangerous talk” the Bank had gone soft on inflation and was choosing to ignore price increases persistently above the target.
Dale admitted “One of the most worrying comments I have heard in recent months came at a lunch of senior businessmen I attended. One of the diners suggested that the UK was returning to its old ways of “depreciating the exchange rate and inflating its way out of trouble.” Soon after, a City circular asked “is the MPC turning a blind eye to inflation.” This is dangerous talk. The evils of inflation are well known.”
He insisted the monetary policy committee (MPC) had only three main priorities — inflation, inflation, inflation — and was committed to meeting the target.
But the rest of the speech was a familiar justification of why inflation has been above target for 41 of the last 50 months (one off shocks to the price level, mothballed spare capacity, exchange rate depreciation and stronger retailers’ margins) and why the Bank had been right to refuse to respond and keep policy very stimulative.
In the end it was an unconvincing narrative that is unlikely to satisfy the Bank’s critics, or a public increasingly angry prices are rising while wages are not.
Uncertainty, distributions and fat-tails
In a thoughtful article published this week in the Financial Times, PIMCO Chief Executive Mohamed El-Erian and Columbia Economics Professor Richard Clarida explore the implications of a shift in the shape of investors’ and policymakers’ expectations about the future.
“It seems that, wherever we look, the snapshot for ‘consensus expectations’ has shifted: from traditional bell-shaped curves — with a high likelihood mean and thin tails (indicating most economists have similar expectations) — to a much flatter distribution of outcomes with fatter tails (where opinion is divided and expectations vary considerably).”
They do not go quite as far as Bank of England policymaker Adam Posen, who suggested in a recent speech that the distribution of outcomes has inverted and become U-shaped. But their focus on a bell-curve with fatter tails agrees with Federal Reserve Chairman Ben Bernanke’s characterisation of the economic outlook as “unusually uncertain” at present.
El-Erian and Clarida draw five conclusions for investors:
(1) Investment strategies based on mean reversion will become less compelling. Fat-tailed distributions still have means but they will be realised less often in practice.
(2) Frequent risk-on/risk-off oscillations in sentiment will remain a persistent feature of the landscape.
(3) Hedging against tail-risks will become increasingly important.
Locking up bank reserves is wrong policy focus
– John Kemp is a Reuters columnist. The views expressed are his own. —
Plotting an exit strategy and shrinking the Federal Reserve’s balance sheet has become a hot topic as policymakers try to underscore their commitment to price stability and markets ponder the risk of inflation.
But micro-managing the reserve base is a curiously inadequate way to respond to medium-term concerns about inflation. Interest rates (the cost of credit) and supervision (leverage) are broader, more appropriate tools.
It is irrelevant whether the Fed sells its assets back to the market. What matters is whether and when the central bank is prepared to raise the price of borrowing.
A NEW STORYLINE
Federal Reserve Chairman Ben Bernanke is expected to use his testimony to the House Financial Services Committee on Wednesday to outline plans for taking back some of the liquidity it injected during the crisis.
There is no suggestion the Fed wants to start reducing liquidity straight away. Rather the central bank hopes a credible plan for reducing it later will head off fears about inflation and keep bond rates and borrowing costs down.
The fed had better raise interest rates soon, because a there are a growing number of us with a lot of cash in the banks that are getting sick of letting everyone use our money for next to nothing in interest. What if we all withdraw it until we get better rates?? For every $1mil I have in the bank I control $10Mil in lending.
Sluggish investment will hamper recovery
– John Kemp is a Reuters columnist. The views expressed are his own –
Unable to rely on the wounded consumer, the outlook for U.S. growth in the next three years depends on business investment and exports to take up the slack when stimulus programmes wind down. Ultra-low interest rates will help. But with the economy struggling to work off a huge overhang of unused real estate assets, and not much sign of investment elsewhere, investment spending is set to remain sluggish, condemning the economy to a weak recovery in the medium term.
Federal Reserve Chairman Ben Bernanke and other senior U.S. officials have already warned the rest of the world can no longer rely on over-indebted U.S. consumers as the principal source of global growth. There is no choice but to rely on investment and exports to take up more of the burden.
But investment spending outside real estate has been very depressed over the last cycle; there is no reason to expect it to accelerate much before 2013 at the earliest. So despite signs of a significant cyclical improvement in manufacturing in the past couple of months, the medium-’term outlook looks weaker.
MANUFACTURING BASE STAGNATES Between 2004 and 2008, private sector fixed-investment averaged $2.125 trillion per year (16 percent of GDP), split evenly between spending on equipment and software ($1.025 trillion) and buildings and structures ($1.102 trillion), according to the Bureau of Economic Analysis.
Manufacturers accounted for just $188 billion (8.8 percent of the total), with a higher share of spending on software and equipment (15.8 percent) but only a tiny fraction of spending on structures (2.4 percent).
Their investment simply replaced the loss of asset values due to deprecation ($187 billion) as a result of wear and tear, loss of efficiency with aging, and technological obsolescence. There was no net increase in the manufacturing sector’s capital stock.
There’s no way to hedge politics
Ben Bernanke in peril and the Volcker crackdown on proprietary trading by banks show two truths of the current dispensation: there is no effective hedge against politics and the reflation trade rests on fragile foundations.
Neither of these realities is particularly good for financial markets and neither is going away any time soon.
Both, too, are utterly related not just to each other, but to the Senate election in Massachusetts which installed a Republican into what had been a Kennedy seat, in the process terrifying Democrats who fear they will be sunk by association with a set of policies perceived to be favoring Wall Street.
In the aftermath, President Obama unveiled a policy authored by former Fed chief Paul Volcker, which is intended to make financial firms get out of the business of using government insurance to underwrite speculative bets; well, er, not all speculative bets, but the bad kind.
At the same time the confirmation of Bernanke is under threat, and he and the institution he works for had to endure the humiliation of seeing Senator Harry Reid issue a statement endorsing him but implying that he’d extracted some sort of undertaking from the central banker to “redouble” his efforts to help those struggling in the recovery.
Whether all of this is good or bad, or even if it has much of an impact, the fact is that both are the result of a financially struggling electorate which is going to strive to control things that they’ve previously been convinced to more or less let alone.
That’s quite a change from a few years ago, when most of us sat around stroking our chins and praising Alan Greenspan, banks and market forces as if they were one and the same. Everyone still agrees that you need banks, a market and a Federal Reserve Chairman, but there is a lot less agreement about how much freedom the three should be given.
And now Obama is a movie star? He is in a movie–called “Stock Shock.” … exposing greedy hedge funds and market manipulation. Even though the movie mostly focuses on Sirius XM stock being naked short sold to hell, I liked it because it shows the dark side of Wall Street. DVD is everywhere for sale or rent but cheaper at http://www.stockshockmovie.com
Given Wapshott’s recent book his opinions here seem odd.
Bernanke has clearly failed at least in part due to his reliance on Keynesian assumptions. He did not take action to prevent the credit bubble from forming, did not even see the downturn, and when it did arrive failed to understand just how bad it really was. He continues to use methods and tools that are purely Keynesian that those influenced by Hayek would naturally object to and rightly fear.
I’m skeptical of assertions that but for his interventions all would be lost.
So given Bernanke’s record that he should be removed is hardly politicizing the Fed.
Further, a review of the views of the current Board at the Fed reveals a preponderance of people holding similar views as Bernanke. That this imbalance should be corrected with the adding to the Board of people sympathetic with the Hayekian point of view would also seem not to be so much politicization as restoring sound management.