On Ben Bernanke's Pathological Inability To Learn From The Lessons Of The Past

Tyler Durden's picture

With Geoffrey Batt

The latest example of the Federal Reserve not learning from its past errors comes, amusingly enough, from the Federal Reserve. In a June 1938 bulletin (page 456) from the St. Louis Fed, the Fed provided some of the wisest words of caution on how to approach boom-bust cycles, when it was evaluating the lessons learned (and promptly forgotten) from the Great Depression.

The events of 1929 taught us that the absence of any rise in prices did not prove that no crisis was pending. 1937 has taught us that an abundant supply of gold and a cheap money policy do not prevent prices from falling - at least, temporarily and sharply.

This is, in its shortest and most concise form, the lesson that Ben Bernanke is apt to never learn, in his current pursuit of happiness and monetary bliss, based purely on free money and flawed economic assumptions.

Yet the biggest threat to the current cycle comes from observing the parallels with 1937 as disclosed by Charles Kindleberger in "The World In Depression" where he observes precisely the same false sense of calm coming from inventory accumulation, that we are seeing today:

For a considerable time there was no understanding of what had happened. Then it became clear. The spurt in activity from October 1936 had been dominated by inventory accumulation. This was especially the case in automobiles, where because of fear of strikes, supplies of new cars had been built up. It was the same in steel and textiles - two other industries with strong CIO unions. When it became evident after the spring of 1937 that commodity prices were not going to continue upward, the basis for the inventory accumulation was undermined, and first in textiles, then in steel, the reverse process took place. Long-term investment had not been built to great heights and did not fall far. The steepest economic descent in the history of the United States, which lost half the ground gained for many indexes since 1932, proved that the economic recovery in the United States had been built on illusion.

The parallels are endless. The current administration's response has been a more forced one, which has relied on subsidies to spur demand for excess inventory, in essence masking the massive drop in prices. One need only to observe the unprecedented failure that Cash for Clunker has been, as demonstrated by the News N Economics website, which observes:

The net impact on auto and parts sales was, according to the Census
retail sales figures, negative. To date, retail sales by motor vehicles
and parts dealers (part of the Census advanced retail sales report) is -0.6% spanning the period July 2009 to February 2010.

So, according to this measure, there has been NO additional auto sales created since CFF; no new jobs, no new spending, no aggregate benefit. There was some confusion about the CFF start date, so including July 2009 retail auto sales were up 1.1%. This is positive growth, but still nothing to call home about.

With incremental bulk stimulus measures unlikely to pass, the economy is largely on its own (and relying on an increasingly belligerent China courtesy of stupid political overtures by a variety of domestic politicians).

Yet the biggest variable is the topic we have written endless posts on: the end of Quantitative Easing. The issue here is not so much what will happen to mortgage rates - a short covering squeeze in MBS may be pushing rates lower, although that is unlikely to persist for more than a few months. The biggest question mark is where will banks get their dry powder to purchase incremental risky securities in the future. And this is precisely the one issue that nobody is talking about. Keep in mind that the $1.2 trillion in excess reserves, and the explosion in the monetary base, additionally leveraged with the diagonal yield curve, directly allows bank to exchange risk-free FRNs into risky assets. Once the monetary pump is closed in one week, there will be no additional liquidity feeding bank balance sheets. It's over (at least until a new iteration of QE is announced). As such the consequences of QE's end are not so much what happens to MBS rates, but what will provide additional purchasing power for the financial centers of America: i.e., the only ones that can take advantage of borrowing for free at the short end and doing whatever they wish with this free money. It is therefore not surprising to see a last minute dash to push the market ever higher into fundamentally unjustified territory, which will allow for a higher baseline from which the decline, when it finally commences, can occur.

As for the St. Louis Fed bulletin froom 1938, we are certain that just the same lessons will be applicable to our current situation, once everything unwinds. Instead of learning from the lessons of the past, the great historian Chairman, will not only repeat them, but will lead the country straight off a cliff, as this time around, there is no incremental economic phase transition, there is no endless money printer to absorb the deflation, and there is no China to import US inflation, which just like America, is now neck deep in excess liquidity. The biggest benefit from the 2008-2011 period will be to future historians, who will have ample primary data to deconstruct and prepare their own lessons for the future, which, as 70 years ago, will be largely ignored.

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ED's picture

Make you wonder how a nugget like this 'lying around' got missed for so long

TuffsNotEnuff's picture


FDR interrupts the New Deal temporarily, producing the 1937 dip, and The Fed goes all goppy on banker-spew. If Bernanke believes any part of this trash talk, he needs to reread Richard Koo's "The Holy Grail of Macroeconomics."

Cistercian's picture

 Repeating our own history says nothing good about our so called leaders.

Lord Welligton's picture

Enlightening and frightening.

And Europe too can look forward to similar with serial Sovereign crises thrown in for good measure.

The troubled countries in Europe desperately need a global “upturn” to pull their economies out of the quicksand. The strong (exporting) countries need the same.

The second leg could be quite terrifying.

geopol's picture

flag as junk...

Not sure why this site has this feature invoked,,,Maybe something to do with the  FC theme, seems to present no value to me as I consider it... Creates a hiding place for the uninformed...

Lord Welligton's picture

It certainly doesn’t add to understanding and has no value as humour.

Perhaps its use is meant to be intimidating.

waterdog's picture

No, it is not meant to be intimidating. The person who is intimidated is the person who uses the flag as junk. Just like the person who signs on as anonymous. They do not realize that we are all anonymous, even with our tags.

The person who uses the flag as junk is inarticulate. They do not know how to say- waterdog, you are the most pompous asshole in the world and your last comment proves it. If you knew anything about what you are talking about ....- signed Junkyard dog. Flag as junkers cannot do it, even when what they are thinking is most likely correct.

In some cases, it is obvious that people hit the flag as junk symbol because they do like the person who made the comment. It is the coward's way of getting even. Leo has that problem. You can really see it when you read back on other comments and find that the previous 10 comments were truly junk and the only comment that had any thought was the one flagged as junk.

Most of my stuff is junk: a failed attempt to be humorous.


Perhaps one day a software writer for this program used by ZH will remove the flag as junk symbol. Just like ZH has removed the anonymous sign on idiots. Removing the flag will not reduce the number of bloggers who think I am a flaming idiot.



fahmahbob's picture

There are, on occasion, some comments which simply require no explanation as to why they were flagged as junk. Once in a great while there are comments that simply add nothing to the conversation, and the thread would be no worse off without them.


faustian bargain's picture

Creates a hiding place for the uninformed...

yes, I was just going to ask whether anyone thinks Bernanke reads this blog.

Or rather, whether some low-level staffer does, and timidly, anonymously, prints out a page or two and slips it under Ben's door.

What do you think, potential whistleblower? Want to do something great for your country and the world?

Lord Welligton's picture

The timeline for Zero Reserve banking would be useful.

BlackBeard's picture

I guess he quadrupled down a bit early eh?

MarketTruth's picture

Yes i realize you are just making a point, yet Heli ben did far more than quadruple. How about going from pretty much zero to $1.25T and goodness knows how many more trillions no one is fully aware of (yet... if ever).

The PPT must be working overtime giving themselves vast sums of money to pump into the stock market.

B9K9's picture

As long as debt is incurred with an interest rate greater than economic growth and/or inflation, one can never produce enough output or create enough new wealth to service the exponential nature of compounding principal+interest.

Them's just the facts. I know 'em, Mako knows 'em, many ZH space monkeys know 'em, and Bernanke knows them. At a 1.5% spread between interest rate and output, it only takes approximately 50 years in which the underlying principle+interest doubles.

At that point, the debtor usually defaults, leaving the lender in possession of the underlying collateral. It's why the entire country of England was disenfranchised to the money-lenders when Edward 1 (Longshanks) returned from the Crusades.

It always turns out this way; you cannot beat the math. So why is the credit-banking system even allowed to exist in the first place? If you know the answer to that, then you'll also know why BSB continues to execute policies which help no one other than a select group of insiders.

After this sucker crashes, we're gonna finally get a chance to implement the sort of money system the folks over at SwarmUSA are advocating.

tenaciousj's picture

And then over the course of the next 100-200 years it will slowy and surely be converted to a system similar to that which we have today.

Nathan Muir's picture

Fear not, a new Tyler Durden will emerge.

B9K9's picture

Monetary theory postulates, as Ben expounded in his infamous helicopter speech, that a determined sovereign could re-inflate a deflationary cycle. This **may** have been true in an environment where reserve ratios were on the order of 5-10X, placing currency anywhere from 10-20% of the total money supply.

But when currency is a mere fraction of total credit-money (somewhere in the neighborhood of 1-4%), then it is an impossible task. Which is why, in spite of Ben's seeming self-assurance, his very actions signal that he long ago surrendered to reality.

And what actions are these? The decision to focus on psychology via gunning the stock markets to get the private sector to re-leverage. If he really had a strong hand (where the fiat currency was 10-20% of the total money supply), he might have been able to muscle inflation higher via the printing press in accordance with traditional monetary theory.

But given the reality in which he/we face? Forget about it. It's all just theater until the real show opens. You know, the one involving restoration of liberty, equality & fraternity.

Lord Welligton's picture

Interesting analysis. Going out on a limb here, I think that if “they” can maintain relative order for the next five to ten years we will have moved to a cashless society. Everything done by chip and pin. That’s when Bernanke no longer requires banks to have reserves. Everything can be controlled by one big clearing house. No freedom mind you. But that might be the price of stability.


Of course “they” could fail miserably and that won’t be pleasant either.

Bear's picture

Exactly ... One cannot push a black hole uphill and indeed one who tries will be sucked in.

Mako's picture

I disagree with the comment that the Federal Reserved prolonged the issue, yes they MIGHT have if Hilter didn't do all the dirty work for everyone.  

You can eliminate the Fed all you want you are looking at many decades of chaos this time. 

buzzsaw99's picture

The author(s) assume too much about Ben Bernanke's (& the PTB's) goals. All that stimulus, demand, and inventory stuff is just window dressing. Ben cares about one thing and one thing only: the perpetuation of the bankster regime.

non-anon's picture

Come now, stop dissing Ben, he is the perennial expert on the Great Depression,

past and present!

RunningMan's picture

We may be having inventory accumulation now, but haven't sales results been (oddly) reasonable in the US, despite the abyssmal consumer confidence numbers?  Granted, that may be due to all the UE benefit extensions, early refunds, free money, etc., coupled with an ever rising stock market (defies imagination it does), but it all seems to be holding the system from plunging over the precipice. What I wonder is how any rational person could ever trust the financial system again in any form - investments, credit, deposits - when there is clear manipulation at work on a daily basis? Why would one play a game where the rules were always changing, and the winners predetermined?

B9K9's picture

UI is only $40b per year. What is the cumulative effect of 6m homeowners no longer paying their mortgages? At an avg of $2,000/mo, that is $12b per month, or almost $150b per year.

Now do you know why F/F have unlimited backstops? TARP allows Treasury to fund F/F bondholder payments, so that non-paying mortgagees can go back to consumer spending.

As I said above, Ben has already conceded the game by focusing on psychology (stock market, consumer spending, etc) to get the private sector to re-lever.

If he had any actual power, he might have been able to brute force print in accordance with monetary theory. But he doesn't, which is why he is dependent on the private sector to reanimate its animal spirits.

But that sentiment is over. Even if people wanted to rally and party again in the midst of a hangover (say, college age kids), the people he really needs help from are all grown-up boomers who have -0- interest in getting down again anytime soon.

Mako's picture

Great post. 

The only way to get the party started like it's 2007 is to start digging up dead people at the cemetry and having them sign for a mortgage.


AccreditedEYE's picture

"The only way to get the party started like it's 2007 is to start digging up dead people at the cemetery and having them sign for a mortgage."


PLEASE don't give them any ideas... they have done this in the voting booth. A little encouragement and they may actually try it  for economic data manipulation.

knukles's picture

Chicago already does this!  Da machene woiks!

Rick64's picture

Exactly! Nice post.

RunningMan's picture

Good comments B9K9 - the issue of millions of delinquent borrowers living rent free is part of the 'free money' floating around that I referenced. I get the part about wanting to get the private sector to re-lever, but leverage works to amplify returns, which presumes that there are real returns to be had. This can NOT be just artificial returns generated by propping equity markets. So where are these real returns going to come from? Distressed assets (and distressed companies) are overvalued because of the illusion of recovery. Is the private sector really buying into this? Insider trading numbers posted at ZH earlier this year would have suggested not. So again, I'm left scratching my head about how this all magically comes together. Judging from other posters here over the last 16 months I've been (silently) reading, I'm not alone.

crosey's picture

BINGO!!!  +100

Our youngest is a college junior, and he hates debt almost as much as he hates Fox News.  No releverage in his camp.  I think his generation is rife with Libertarians.  Bad news for the Dem and GOP establishment.

I hope they succeed.  They certainly will be pissed off enough to act.

Miyagi_san's picture

He's part of a sleeper cell of Visitors...join or be crushed

M31Capital's picture

All the commodities and most commodity stocks have technically bearish chart patterns and have topped out.  They are just being held up by the equity markets at this point, with the exception of oil which is just an algo driven derivative of the equity markets.  

Johnny Dangereaux's picture

the lesson that Ben Bernanke is apt to never learn

He learned a whole bunch.... he's from Princeton!

BTW....head and shoulders in May Corn targets 3.29 bu.

jm's picture

I think Ben's problem is that he thinks this is a crisis of liquidity... good balance sheets get a shock, but time will show them good balance sheets.

This is a crisis of solvency.  The balance sheets are not good and the only shock was a good dose of reality.

That said, there is no policy to fix an insolvency crisis.  He can only act with what he has liquidity to slow the collapse.

If unemployment hit 25% like in 1932, would you be complaining about too much crazy-ass monetary policy or too little?  What if YOU were unemployed, not just a statistical notion? 

I don't any love for the lies and deceit that Ben and Gary Gorton and Fred Mishkin to name a few use to hide their roles in this mess.  They should all be out on their ass. 

But how bad do things have to get before people see their self-interest is connected to the interests of others outside their own backyard?  Just sayin'.

Catullus's picture

Joseph Salerno on "Macroeconomics of the Fed: Mainstream and Austrian" from Feb 2010.  The inventory accumulation hypothesis is incorrect.



Strider's picture
On Ben Bernanke's Pathological Inability To Learn From The Lessons Of The Past.

You can count me in those ranks of not learning from the past. Unlike most all humans guys like Bernanke get to write the future which has really fud-dup the perception of the present. History no longer matters here in the rabbit hole. Only the future past.

Ever get the feeling we're creating the worry and they are crawling up our wall? Im going to query that hooka smoking caterpillar about this.

Bear's picture

The real problem is personal integrity and courage. BB will repeat the path of yesteryear (Keynes) because if it fails, he does not have to take responsibility since he was simply replicating the steps that were 'successful' in mitigating the Great Depression. Of course, he is totally wrong since the Great Depression did not have to be Great if not for FDR and his lunacy.

We will continue to print, pump, and bail until we have repeated Japan '91.


DavosSherman's picture

Bernanke said at Milton Friedman's birthday party that more money would have prevented the drop. He will destroy the dollar - no matter what. He is a f*cking moron.

doublethink's picture


We The People


As the country struggles with a 9.7 percent unemployment rate while financial stocks surge, 57 percent of Americans have a mostly unfavorable or very unfavorable view of Wall Street, versus fewer than one-quarter who have a favorable opinion. Banks are viewed badly by 54 percent of poll respondents, and 60 percent have a negative opinion of insurance companies.




dumpster's picture

country struggling with 22% unemployment lol

the nostrums that Bernie is unaware, is missing it ,, is this or that  misses the point ,

these government types in high platforms of deceit,, are well aware ,, they play off a script,

why is it that they all get it so wrong .. the reason is they know and the game is to keep analysts trying to solve a question of their game plan

the answer is they are liars , play script reading .. tap dance .. with a full agenda to advance their presence at the expense of others ,  they are part of the group .

who are in high places because they sold their selves early  for these positions ,,

and now they pay the price .. a give back to their place in society's thrust  for position /


if any one has access watch glen fords .. brother hood of the bell.. or google the script . 

the price of sucess is to sell your self to the dark forces ,,



dark pools of soros's picture

back when bulletins had 456 pages!

verum quod lies's picture

I like the overall title them of the "Pathological Inability To Learn From The Lessons Of The Past". Also, I just read the piece that Tapeworm suggested. For what it's worth, I thought it a really good piece.


One point of the piece (besides the BB and the Fed not really learning or even getting economic causation sorted out correctly), and related to the not learning theme, is that during a time like now (i.e., real economic contraction, although not necessarily reflected in the GDP numbers initially, but showing up in real unemployment to some degree) is that a country that relies on exports should probably try not to shut its exports down (vs. one the imports which is not in the same boat). This makes simple basic sense. If true, and it makes sense to me, then a Germany should tend to try real hard now to keep its trading block together, yet they seem somewhat reluctant to do so, vs say the U.S. who shouldn't care so much about keeping global trade together (vs. its position in the 1930s when it sould have) vs Japan who should, etc. My takeaway is that generally when economic history reverses itself but repeats on the contraction front is just when you want to reverse your policies (i.e., fiscal and monetary) but you are typically left with the BBs of the world fixated on the contraction event and not the dramatic change in economic positioning, and hence the not learning. Otherwise, it's the people and selection process that sucks and I am giving them way too much credit for screwing up in such an obvious and spectacular way.


Anyways great suggestion Tapeworm.


halcyon's picture

Why don't you start acting like adults.

"Bernanke is wrong, because he accomodates with cheap money. Hyperinflation will ensue!"

"Bernanke is wrong, because he doesn't stop deflation risks from materializing."

Had you actually studied central bank history, instead of reading some crap conspiracy theories from Jekyll Island, you'd actually understand that it's not an easy trick to pull off the dual mandate.

Even if one believes all the conspiracy-nwo-enslavery crap, one has to think logically within the bounds of those assumptions.

Currently FED has no incentive to blow up in a deflationary spiral with all the crap in its balance sheet, so mark my words that they have studied all the possible deflation stopping tricks in the book and then some.

Now, you can all claim that they are powerless to stop the oncoming tide (time will tell), but to childlessly claim they have not studied the history or learned the lessons is just silly.

What do you think they do every day at the fed? Pick their noses? Write silly inflammatory blog posts misunderstanding central bank policy?

Grow up.



verum quod lies's picture



First, nobody knows everything, including BB and his staff. That is one reason why, sometimes, debating ideas in an adult setting without worrying about “experts” can be useful. Second, assuming BB is correct because "he has studied the Great Depression" and has a Ph.D. in economics, etc. is dead wrong. For example, I have a Ph.D. in economics, have written articles, etc., and have interacted with people at the Fed, yet you called me a conspiracy theorist, child and whatever else. I can tell you firsthand economics isn't like chemistry or physics (as you seem to imply with your juvenile response) and you might consider accepting that fact. Also, in economics, and especially macroeconomics, there isn't a one for one correspondance between theoretical knowledge in the field (or number of people on staff) and practical effectiveness. From my limited experience, I’d say if anything there is an inverse relationship. Third, economics, especially macroeconimcs, tends to be ruled by schools of thought/belief. For example, the majority of macroeconomists directly or indirectly subscribe to something you may have heard of called ‘Keynesianism’. A central tenant of such a thing, espoused by no less a personage as, for example, Nobel laureate in economics Paul Krugman, is that deficit spending often is a good thing (actually, Keynes noted that it could be useful for fiscal policy in the short-run). Anyway, most of the macroeconomic staff over at the Fed believe things like that. That type of thinking, or more accurately described as a belief, can end up with the notion that the solution to too much debt is more debt. Absurd, yes, juvenile, yes, but nevertheless something that will bring you right back to repeating, if not rhyming your way through macroeconomic history. In short, you can call people who do not find the output of the Fed useful names all day. Doing that though does not change the reality that they really do not analyze their basic assumptions, which invariably are wrong and causes them to make major basic mistakes in their policies (e.g., loading their balance sheet with low-grade mortgages); much like your assumption that people that write about how silly BB and company are really the silly ones because they don’t buy into BB and his staff’s macroeconomic fetishes and/or 'too-big-to-fail' policies . Finally, no BB and company, and you, either haven’t learned useful lessons from history or just choose to ignore them, largely based on wrong economic or other assumptions. For example, the answer to too much debt isn’t more debt, or purchasing mortgages to be loaded onto the Fed balance sheet, etc. Finally, don't assume they actually know what the hell they are doing, because their actions indicate that as a low probability bet; and even if some Fed employees do know better, they are clearly not the ones making the final decisions. I would suggest you take your own advice and try to think outside the "bounds of those assumptions" (i.e., your assumptions about the Fed and its staff, and your assumtpions about other people posting here).


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