James Pethokoukis

Politics and policy from inside Washington

Will Bernanke save the dollar like Volcker did?

Oct 9, 2009 13:49 UTC

David Goldman over at the Inner Workings blog, notes a key anniversary:

Inflation had crossed into double digits after four years of mismanagement by the Carter administration. The gold price was rising (and about to hit an all-time record when the Soviet Union invaded Afghanistan the following Christmas). America’s international position had collapsed; the European elites believed that America would lose the Cold War; America was in deep recession even while inflation soar. Volcker had no choice but to raise the federal funds rate to 15%. The dollar stabilized but the US economy went into free fall.

The San Francisco Fed reported, “Volcker returned from the annual IMF meetings in Belgrade in early October “with his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness on exchange markets. Volcker decided to call a special meeting of the FOMC, a meeting that was not publicly announced, to be held on Saturday, October 6.”

Are we due for a repeat of the Oct. 6 tightening? Not a chance for the time being. No-one wants it, least of all the Chinese — which is why they continue to buy US Treasury debt, albeit at a much reduced rate. But unless the Obama administration finds some way to stop monetizing debt, something like this has to happen.

Kudlow on Bernanke and the dollar

Aug 26, 2009 14:04 UTC

The great Lawrence Kudlow is skittish about Ben Bernanke’s seeming disinterest in a robust greenback:

I have never heard Mr. Bernanke proselytize for a stable-dollar currency value of money. Never. Of course, like any central banker, he says he’s for price stability. But the question remains how to get there and what model to use. Supply-siders like myself strongly support a price-rule model, where markets tell government what to do. But all too often it seems like Mr. Bernanke — who has been out there buying Treasury and mortgage bonds in a futile attempt to control their yields — prefers the model where the government tells markets what to do. This is a loser, as we have painfully learned in the past.

Paul Volcker watched gold in the ’80s. So did Alan Greenspan for most of the ’90s. But I don’t think Mr. Bernanke watches gold at all. And I don’t think he worries much about the fate of the dollar.

Around the horn

Aug 25, 2009 19:17 UTC

Stuff I read today that you should, too!

Bernanke’s out of control! Russell Roberts thinks Bernanke has gone overboard in reacting to the Great Recession. He might be right, though as the man who jumped out of the burning airplane with no parachute said, “First things first!”

Kicking healthcare, Massachusetts style. Kurt Brouwer  finds fault aplenty with RomneyCare.

Words Bernanke wishes he hadn’t said. My pal John Carney of Clusterstock has a must-read (and must-view) photo gallery of some Bernanke misses. But what about his chitchat with Maria Bartiromo!

How to pay for real economic stimulus. Ed Harrison had the same idea I did. Cut entitlements tomorrow create fiscal space today.

Another vote for Bernanke. Right-of-center economist Greg Mankiw likes the Bernanke reappointment.

Trillion dollar stimulus. Donald Marron notices that the Obama’s fiscal stimulus plan may cost $900 billion.

COMMENT

I joked about Obama appointing a Fed Czar, effectively keeping a popular choice – Bernanke, but undercutting him. Basically, no one seems to be talking about the two appointments for the Governors board that have been vacant due to hold ups for confirmantion during the Bush years. This plus other retirements would provide the current administration with a majority on Fed voting decisions. Nifty.

I’m a litttle disappointed that nobody has brought up this permutation.

http://www.bloomberg.com/apps/news?pid=2 0601087&sid=aO3Cyu_.OHD4

“…….Federal Reserve Chairman Ben S. Bernanke, nominated today for a second four-year term at the helm of the central bank, will be working with a reshaped team.

President Barack Obama, who nominated Bernanke for a second term beginning in February, still must fill two other vacancies on the Fed’s Board of Governors, which has operated without its full seven-member complement since April 2006. On top of that, Vice Chairman Donald Kohn’s term expires in June, and Gary Stern, the longest-serving policy maker, will retire when a replacement is named.

The turnover means Obama will be able to appoint a majority of governors in his first year. Bernanke will have to convince the Fed’s new members to concentrate on maintaining the economic recovery and put aside concerns about a revival of inflation, said former Fed Governor Lyle Gramley…….”

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Obama to renominate Bernanke as Federal Reserve chairman: a few thoughts

Aug 25, 2009 11:36 UTC

And once more, another person in Washington involved with helping create the financial crisis gets to keep his job. In a bit of a  summertime surprise,  President Obama has renominated Ben Bernanke as Fed chairman.

1) So not only does the White House release its new budget forecast on the same day as the Congressional Budget Office releases its forecast so there aren’t two separate days of terrible stories, it also drops this bomb to further dilute the impact. The news might even generate a nice stock market reaction Smart politics.

2) I am mildly surprised. Although, Bernanke seemed to have the backing of Wall Street, the politics were not as clear. What president would not rather have his own pick in the post? And while most economists praise the Fed’s efforts to keep the recession from becoming a depression, politicians in both parties have attacked the Fed’s big bailouts, as well as its handling of the BofA-Merrill merger. Plus, Bernanke terribly underestimated the potential severity of the financial crisis in its early days. If Obama wanted to make a switch, there was enough there to justify it.

3) Bernanke got lucky with the timing. If his term was up in January of 2011 instead, he might get more of the blame for a lackluster economic rebound. As it is, he gets credit for engineering the rebound — and given the mood six months ago, any rebound is a good rebound. But another year of high unemployment might alter those views.

4) I think Obama should get credit for not picking an obvious dove like Janet Yellen, but I am not sure she was really a ever a viable option. I think Larry Summers was viewed as both too independent and too outspoken, a real wildcard. Bernanke is a known quantity in the position who has worked with the White House every step of this crisis.

Too soon for a Bernanke victory lap?

Aug 24, 2009 14:18 UTC

It was a pretty upbeat Ben Bernanke that spoke over the weekend at the Fed conference. But a few cautionary statistics from Ed Yardeni:

(1) Commercial bank loans are down $293.1bn ytd through August 12.

(2) Commercial banks are still failing. Indeed, 77 lenders have been closed ytd, compared with 25 in all of 2008.

(3) The delinquency rate for mortgage loans on 1-to-4-unit residential properties rose to a seasonally adjusted rate of 9.24% of all loans outstanding as of the end of Q2-2009. The percentage of loans in the foreclosure process at the end of Q2 was 4.30%.

(4) The combined percentage of loans in foreclosure and at least one payment past due was 13.16% on a non-seasonally adjusted basis, the highest ever recorded in the delinquency survey conducted by the Mortgage Bankers Association.

(5) There was a major drop in foreclosures on subprime ARM loans during Q2, suggesting that the government’s mortgage mitigation programs are working. However, they are aimed mostly at distressed borrowers with resets rather than prime borrowers losing their jobs. Indeed, there were increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts.

COMMENT

Commercial foreclosures are coming. There’s true now!

Political woes could push Obama to nix Bernanke

Aug 21, 2009 13:35 UTC

The great Andy Busch of BMO Capital Markets draws up a scenario that could see Ben Bernanke get pushed toward the exits:

David Wessel in his book, “In Fed We Trust: Ben Bernanke’s War on the Great Panic” said this, “But in what would prove a colossal mistake, they (Bernanke, Paulson, Geithner) hadn’t come prepared with a plan to prevent a bankruptcy if they couldn’t sell Lehman as they had managed to sell Bear Stearns.” This ability to see the danger and yet not being prepared to stop it is truly troubling.

However, this is not why Ben Bernanke may lose his job. It will be due to someone taking the fall for the crisis and for why the unemployment rate remains above 9.5%. This is Bernanke’s Mendoza Line. This is what Moody’s John Lonski and I agreed upon last night on the Kudlow Report: Bernanke can be the fall guy for a weak US economy.

Envision a political world for President Obama in which he’s not getting his major pieces of legislation through Congress. Imagine then, he’s also got an economy that is not rebounding enough to generate job gains and an economy that may be experiencing a strange form of commodity inflation leading to higher gasoline prices. Something has to change and that change could cost Bernanke his job.

If we’ve learned anything from last fall, we know that what was once deemed rock solid can crumble away amidst the pressure of an outside force.

The case against Bernanke being reappointed as Fed chairman

Aug 20, 2009 17:52 UTC

David Rosenberg of Gluskin Sheff outlines the bear case on Ben Bernanke getting reappointed by Obama:

Bernanke was a giant cheerleader for the leverage-induced economy during his time as the chief economist at the White House and while he was aggressive (and likely broke every rule in the book of central banking) in getting the credit market and economy back on track, he failed at the outset to realize the severity of the credit collapse and treated it as a liquidity event only for months

The Fed’s economic forecast that was published just over a year ago for late 2008 and 2009 is an embarrassment, to say the least. Valuable time was lost under his watch and the question is (i) does the Administration look at his entire record as opposed to his period as a White Knight, and (ii) will Mr. B end up being a scapegoat once the economy relapses in the fourth quarter and the unemployment rate makes new post-WWII highs along the way. See the front page of the NYT for more — Bernanke, a Hero to his Own, Still Faces Fire in Washington. The search committee is already out, by the way, and the likes of Blinder, Yellen, Ferguson and Summers are on it.

Me: I notice that Intrade has Bernanke at 80 percent, but contract is pretty lightly traded. I just keep thinking about the House Government Oversight Committee meeting concerning BofA and Merill where members from both parties basically said Bernanke was lying about his role in the merger. That can’t be good.

COMMENT

They could eat their cake and have it too by keeping Bernanke and appointing a “Fed Czar” that Bernanke reports to. It’s a two-fer — the pesky Senate approval process could be skipped since “Czars” aren’t subject to that and Bernanke’s overlord would have the real power ;-)

Seriously though, how is anyone on that list a genuine improvement or change for the better?

Why not Paul Volcker? Agree or disagree with his philosophy, his appointment would represent a sea change.

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The case against Ben Bernanke

Jul 30, 2009 15:01 UTC

Over at ClusterStock, former Merrill Lynch strategist Richard Bernstein tells us why it should be “one and done” for Ben Bernanke. (He compares BB to Burns and Miller from the 1970s. Ouch!)

1) He is a status quo chairman when big change is needed.

His policies both before and after the banking and credit crises have attempted to maintain financial market status quo. … Mr. Bernanke’s comments regarding his inability to proactively control financial bubbles, and the ease with which the Fed could manage a bubble’s deflation, were astonishing for their naïveté. The fact that the credit bubble’s deflation caused the worst recession of the post-war period seems to demonstrate that Mr. Bernanke has failed even according to his previously expressed expectations.
2) He is too close to Wall Street.
Wall Street thrives on financial asset inflation’s cheaper and more abundant credit. Mr. Greenspan and Mr. Bernanke made sure that the Street was not disappointed regardless of the longer-term detrimental effect on the US economy. The next Fed Chairman should be more concerned with the stability of the financial sector, rather than with the growth of the financial sector.
3) He doesn’t understand the dangers of financial asset inflation.

The future of monetary policy, in my opinion, will focus on the delicate balance between real and financial asset inflation. The US economy does not function well when there is excessive real asset inflation. The 1970s have proven that. However, the US economy also does not function well when there is excessive financial asset inflation. … Yet most central bankers, like Mr. Bernanke, do not yet appreciate this delicate balance. They continue to operate under the assumption that real asset inflation is bad and financial asset inflation is good.  In this respect, Mr. Bernanke’s term as Fed Chairman seems to mimic those of Arthur Burns and William Miller during the 1970s.

Bernstein’s bottom line:
The next Fed Chairman should probably come from one of the Federal Reserve’s district banks. The person should not primarily focus on Wall Street, but rather should fully understand how the optimal cost of capital in the financial markets drives efficient real investment and maintains a stable banking system. The next Fed Chairman should have a thorough understanding of small businesses lending (imagine if TARP money had gone to the Small Business Administration instead of to bank trading desks?) and how the future of the US economy depends on efficient real investment and not on financial engineering. That person undoubtedly exists somewhere within the Federal Reserve Board but, unfortunately, it is not Mr. Bernanke.
COMMENT

I was curious to see how Bernstein concluded his opinion on Bernanke. The beginning parts of his case were the general & dated talking points from the Obama campaign.

1) I don’t know how anyone could call Bernanke “status quo” especially in light of the extreme & heroic measures the Fed has undertaken over the last 10 months (which has had the not so small benefit of saving Obama’s bacon these few months later & more importantly the Country & the world economy– but never miss a chance to bite the hand that feeds you). I thought it was universally accepted that the heavy lifting by the Fed was a key component of averting complete disaster(?) and creating current stability. Today the President inexplicably stated it was his Stimulus bill that is goosing the “recovery.” What was in that Bud Lite?

2) Next the nonsense about being “too close to Wall St.” — another deeply held article of faith for Obamacrats. This has proven to be one big obstacle to first class government appointments. Accordingly, it’s best to apponit someone who is removed from the source, academics are best or even someone who has an arcane or tangential connection to the subject at hand(!!!?) They lost out on appointing Rodgin Cohen. This extends to foreign policy where even Sec. of State Clinton has groused about the appointment procedures. Is the Treasury Dept. even close to half staffed yet?

To his 3rd point, who the heck puts any kind of “asset inflation” on the top of the list right now –really -? The bigger risk is hyper-inflation, which would be a result of the Fed not having an exit strategy for quantative easing. It’s going to be tough to turn off the spigot & we’d all prefer someone who won’t be leveraged by the politicos.

Last, Bernstein’s concluding argument was rife with nonsense. TARP, Small Biz, etc. Does he forget how TARP came to be, what it’s purpose was? It was meant to avert collapse.

Is his concluding argument an opening salvo for gov. involvement & investment in small biz? Does he forget that all this commenced with “real investment” – homes? He wants to expand the recklessness further when the first mess isn’t cleaned up?

Kinda dumb.

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The Fed more unpopular than the IRS

Jul 28, 2009 13:54 UTC

Ben Bernanke isn’t just campaigning for his own reappointment — though that certainly is part of what’s going on. He is also bolstering the public image of the Fed, which could use some help:

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COMMENT

I don’t think anyone could credibly argue that Bernanke should not be re-appointed. He’s done a great job,is genuinely motivated to do the right thing, is the foremost authority on the US Depression & all the permutations. He has held his own in Congressiional hearings — maybe even found his sea legs in that forum. Who knows, maybe he’ll throw out a smart ass answer to some of the boob questions next time ;-)

It boils down to a basic intelligence test. The most critical aspect for America ( and actually the world) is the Fed’s independence. Any other appointment from the current administration, at this juncture, would seriously compromise at the least,the appearance of independence. They may as well nominate Rob Blagojevich or some other bagman.

Larry Summers’s track record (Clinton admin. & Harvard) is crapola and it appears the bubble the Obama admin. floated very early (remember the rumblings right after the election?) on that nomination have popped. Triste ;-)

It seems pretty likely that anyone else the current administration would appoint would be their tool, perhaps with the “appearance” of being independent but with no juice.

Next, and really important, we’ve only seen Bernanke’s opening salvo. Yes, it was a big one, but just as criticsa, he has intimated a plan to relax the quantitative easing. This is the tricky, perhaps surgical part and not a job for the ham fisted or politically indebted.

This decision is really easy, if it’s not Bernanke, we should all worry — alot.

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Candidate Bernanke hits the campaign trail

Jul 27, 2009 19:36 UTC

JamesPethokoukiscrop.jpgIf Ben Bernanke were running TV ads, taking polls and holding town hall-style meetings, it wouldn’t be any clearer that he’s conducting an explicit reelection campaign for another four-year term as Federal Reserve chairman come next January. Oh, wait a second, he just did hold an unprecedented town hall meeting. And it was one worthy of a presidential candidate charming primary voters in Iowa.

At the Kansas City Fed last night, Bernanke answered a couple dozen questions from 190 area residents for a three-part public television broadcast. Like a veteran politico, he tossed out the occasional platitude (“The best way to have a strong dollar is to have a strong economy”), railed against Washington (“I don’t think the American people want Congress running monetary policy”), gave a riveting and heroic personal narrative (“I was not going to be the Federal Reserve Chairman who presided over the second Great Depression”), and got downright folksy when talking about too-big-too-fail (“When the elephant falls down, all the grass gets crushed as well”).

Message to America: Ben Bernanke, a pharmacist’s son from Dillon, South Carolina, feels your pain. Now it’s not as if previous Fed chairmen haven’t campaigned for another four-year hitch. But the usual modus operandi is to curry favor with the Electorate of One — the president — who will be doing the renominating. And the precise mechanism has been a growth-friendly monetary policy.

Of course, the Fed has already been, to use Bernanke’s town hall phrase, “putting the pedal to the metal” to bolster the fragile economy and financial system. And that’s sure been to Wall Street’s liking. A Reuters poll last month found that economists rated Bernanke at eight out of 10 for his handling of the financial crisis.

But Bernanke’s smart to try and also get Main Street on his side. Obama, for instance, might prefer a more dovish Fed chair, such as San Francisco Fed President Janet Yellen, who’ll worry more about unemployment than inflation as the 2010 and 2012 elections near. Bernanke’s pushback against Obama’s proposals for a consumer financial protection agency is also another sign of his independence.

Plus, the president could desire to make more diversity history by nominating the first woman Fed chair — while leaving it to aides to rip Bernanke in background briefs to reporters. (“He was part of the Fed team that left rates too low for too long and failed to regulate Wall Street.” “Remember, he called the mortgage crisis a $100 billion problem.” “Bernanke was way too slow to ease in 2007.”) What’s more, Bernanke has to worry about a Congress where populists in both parties have been critical of his role in providing bailouts to Wall Street banks and AIG, as well as Bank of America’s takeover of Merrill Lynch.

So if Bernanke wants to keep his job, the PR campaign should continue. More TV interviews like the one he did on 60 Minutes in March. Maybe a televised town hall meeting in each Fed district. How about a Chairman’s Blog? And if we start heading into November and Obama still hasn’t renominated him? Two words: Oprah Winfrey.

COMMENT

To say that Mr. Bernanke is campaigning for himself personally is a gross mischaracterization.
Mr. Bernanke is campaigning for the Federal Reserve to keep its job.
The Fed is under pressure from HR1207 & S604. Audit the Fed then End it.

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