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Bernanke, Bubble Denier: The Greatest Fed Tool of All

Submitted by EB on 09/06/2010 12:07 -0400

Reprinted with permission from EconomicPolicyJournal.com

Last week, the assorted regulatory freaks have been patting themselves on the back in front of your appointed financial elite, better known as the Financial Crisis Inquiry Commission. Our intrepid printer-in-chief himself made the rounds yesterday morning in the second appearance of his Whip Deflation Now ^TM tour. A translation of his first appearance has been kindly provided by Gary North (part 1, part 2).

We focus on Bernanke's remarks regarding monetary policy, wherein he dodges all responsibility for the Fed creating, then failing to identify, the housing bubble. Naturally, he concludes with allusions that the unprecedented interventionist structure being built will once and for all do away with that pesky business cycle. Before we give away too much, we'll let him dig his own grave.

Monetary Policy and Related Factors

Some have argued that monetary policy contributed significantly to the bubble in housing prices, which in turn was a trigger of the crisis. The question is a complex one [sic: beyond the limits of our Keynesian models], with ramifications for future policy that are still under debate; I will comment on the issue only briefly.

The Federal Open Market Committee brought short-term interest rates to a very low level during and following the 2001 recession, in response to persistent sluggishness in the labor market and what at the time was perceived as a potential risk of deflation. Those actions were in accord with the FOMC's mandate from the Congress to promote maximum employment and price stability; indeed, the labor market recovered from that episode and price stability [sic: inflation in perpetuum] was maintained.

Did the low level of short-term interest rates undertaken for the purposes of macroeconomic stabilization inadvertently make a significant contribution to the housing bubble? It is frankly quite difficult to determine the causes of booms and busts in asset prices; psychological phenomena are no doubt important, as argued by Robert Shiller, for example.8

Note: when your head is lodged within the box's colon, it's going to be a bit difficult to think outside of it and beyond your equation-scribbling peers--but yes, chalk it off to psychology and be done with it.

However, studies of the empirical linkage between monetary policy and house prices have generally found that that that linkage is much weaker than would be needed to explain the behavior of house prices in terms of FOMC policies during this period.9 [And just how many of these studies were written by those currently or formerly on the Fed's dole? Answer: nearly all.] Cross-national evidence also does not favor this hypothesis. For example, as documented by the International Monetary Fund, even though some countries other than the United States had substantial booms in house prices, there was little correlation across industrial countries between measures of monetary tightness or ease and changes in house prices.10 For example, the United Kingdom also experienced a major boom and bust in house prices during the 2000s, but the Bank of England's policy rate went below 4 percent for only a few months in 2003.

Well, everything's relative, isn't it:

Not that there weren't unique factors within the UK that facilitated a bubble relating to housing in particular, but it takes massive doses only of the world's reserve currency to achieve what Jeremey Grantham called in 2008 (as recently quoted by Paul Farrell), "The First Truly Global Bubble:"

From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it's bubble time. ... The bursting of the bubble will be across all countries and all assets ... no similar global event has occurred before.

Congratulations, Fed--you own it all. With respect to the UK, it was especially vulnerable as it was a substantial profit reaper of US securitization efforts. Just what were those London bankers doing with their fees? Buying homes maybe?

The evidence is more consistent with a view that the run-up in house prices primarily represented a feedback loop between optimism [sic: increased inflation expectations as a result of Easy Al's print shop] regarding house prices and developments in the mortgage market. In mortgage markets, a combination of financial innovations and the vulnerabilities I mentioned earlier led to the extension of mortgages on increasingly easy terms to less-qualified borrowers, driving up the effective demand for housing and raising prices. Rising prices in turn further fueled optimism about the housing market and further increased the willingness of lenders to further weaken mortgage terms. Importantly, innovations in mortgage lending and the easing of standards had far greater effects on borrowers' monthly payments and housing affordability than did changes in monetary policy.11

While it's true that politicians lusting after votes created a legal framework over decades that allowed for the relaxation of lending standards to criminally low levels, and it's true that securitization efficiencies facilitated the rapid creation and transfer of credit, another truth is that rocket ships don't leave the ground without fuel. And, the fractional reserve rocket ship required the Maestro and his apprentice to conjure the digital zeros that would be sent out to be fruitful and multiply, thus doing Goldman's work. To be sure, this ship went parabolic in the 80's, but it was that final dose of nitrous in 2003-2004 that kicked off the asset backed securities binge, where everything from student loans to second mortgages to bookie receipts were sliced, diced, rated and sold as quickly as everyone's faith in perpetual asset price inflation would allow.

_{Source: Robert Prechter}

Bernanke continues:

The high rate of foreign investment in the United States also likely played a role in the housing boom. For many years, the United States has run large trade deficits while some emerging-market economies, notably some Asian nations and some oil producers, have run large trade surpluses. [Can anyone say Chinese/Saudi Dollar peg or BOJ intervention ad infinitum?] Such a trade pattern is necessarily coupled with [state enforced and manipulated] financial flows from the surplus to the deficit countries. International investment position statistics show that the excess savings of Asian nations [ah, the bane of Keynesians everywhere and always] have predominantly been put into U.S. government and agency debt and mortgage-backed securities [good dog], which would tend to lower real long-term interest rates, including mortgage rates. In international comparisons, there appears to be a strong connection between house price booms and significant capital inflows, in contrast to the aforementioned weak relationship found between monetary policy and house prices.12

Though, debunked prior, if there are any more doubts:

Bernanke continues:

International investment position statistics show that the United States also received significant capital inflows from Europe in the years before the crisis. Europe's trade has been about balanced over the past decade or so, implying no large net capital flows on average. However, substantial gross flows occurred in the years running up to the crisis. Notably, European institutions issued large amounts of debt in the United States [and why wouldn't they with low rates and the continued promise thereof?], using the proceeds to buy private-sector debt, including securitized products. [Borrow low from Fed, lock in higher rates with Fannie/Freddie wink-and-a-nod-guaranteed debt and other "AAA" rated products. Seems like a no brainer.] On balance, the effect of these sales and purchases on Europe's capital account balance approximately netted out, but the combination led to growing European exposures to the kind of distress in U.S. private-sector debt markets that occurred during the crisis. The strength of the demand for U.S. private structured debt products [as a result of Al's predilection for bank philanthropy] by European and other foreign investors likely helped to maintain downward pressure on U.S. credit spreads, thereby reducing the costs that risky borrowers paid and thus, all else being equal, increasing their demand for loans.

Even if monetary policy was not a principal cause of the housing bubble, some have argued that the Fed could have stopped the bubble at an earlier stage by more-aggressive interest rate increases. [or perhaps not lowering them thirteen times in a row the first place?] For several reasons, this was not a practical policy option. First, in 2003 or so, when the policy rate was at its lowest level, there was little agreement about whether the increase in housing prices was a bubble or not (or, a popular hypothesis, that there was a bubble but that it was restricted to certain parts of the country).

First, even before "2003 or so"--at the September 24, 2002 FOMC meeting to be exact--there was already discussion of the emerging "bubble" in housing, with the term used several times, including this curious exchange amongst the Committee recorded in the transcript (yes, the very type of transcripts that were once denied by Greenspan to exist):

[MS. BIES:] ...Rising house prices have sustained the consumer’s wealth position against falling equity markets, and any decline in house prices could have significant impacts on consumer spending. However, since I still have a house in Memphis for sale, I’m less inclined to believe that there’s a widespread bubble. [Laughter]

MR. GRAMLICH. Is that house for sale?

MS. BIES. Oh yes.

VICE CHAIRMAN MCDONOUGH. Still.

CHAIRMAN GREENSPAN. Are you bidding?

MR. GRAMLICH. No, I’m just pointing out that there’s a bubble.

At the same meeting, Federal Reserve Bank of Atlanta president, Jack Guynn, said:

Although I would not yet characterize price developments in housing as a general housing bubble, I’m hearing more and more reports of what might be characterized as purely speculative housing and property deals, mostly in Florida. These deals are all driven by claims that sound as if the property can be resold in a few months or a few years at a nice profit so at current interest rates how can one pass up such an opportunity. Of course, there’s a bit of a Catch-22 in that these slow adjustments induced by low interest rates have served to sustain some measure of stability as the economy works through other adjustments. While I’m certainly not suggesting that we consider any policy tightening at this meeting, I do think we may already be in a bit of a policy trap. I recognize that some downside risks remain, including some potentially large and negative shocks, but I do not think we should exacerbate our long-term problem with still lower interest rates unless the downside risks loom larger or the negative shocks are realized. Thank you, Mr. Chairman.

The FOMC would go on to lower rates twice more, eventually to 1%, then keep them there for a year. Later, at the June 29-30, 2004 meeting, Mr. Guynn would say:

If I am correct, then we run the risk of pursuing a more accommodative monetary policy than we intend, with the likely outcome being a higher rate of inflation than expected. There’s a temptation to downplay the risk I’m raising. After all, the U.S. economy has functioned quite well with low inflation rates and with a negative real short-term rate, and some see continued resource slack as taking pressure off prices. But I suggest, given the recent combination of expansive fiscal and monetary policies, that our low inflation rate is most likely the consequence of heavy support for the dollar provided from abroad and a willingness on the part of foreigners to invest in this country, compensating for the low U.S. saving rate.

Accordingly, the connection between monetary policy and foreign investment, discussed previously, was expressed by at least one member of the FOMC. But, back to Bernanke, now:

Second, and more important, monetary policy is a blunt tool; raising the general level of interest rates to manage a single asset price would undoubtedly have had large side effects on other assets and sectors of the economy. In this case, to significantly affect monthly payments and other measures of housing affordability, the FOMC likely would have had to increase interest rates quite sharply, at a time when the recovery was viewed as "jobless" and deflation was perceived as a threat.

Here we see the central banker's innate twin fears of the falsely perceived "liquidity trap" and the CB's mortal enemy: deflation. For the record, Ben, the recovery was "viewed as jobless" precisely because the Fed serially over-accommodated through printing, and never let the bust part of the business cycle assume its proper role of adjusting for prior artificial accommodation. That is, Fed money printing so grossly exaggerated capital structures that securitization itself became an end, with the production of collateral secondary. (Indeed, toward the end, even collateral became unnecessary with such financial innovations as CDO squared).

A different line of argument holds that, by contributing to the long period of relatively placid economic and financial conditions sometimes known as the Great Moderation, monetary policy helped induce excessive complacency and insufficient attention to risk. Even though the two decades before the recent crisis included two recessions and several financial crises, including the bursting of the dot-com bubble, there may be some truth to this claim. [No, it is one of the truths.] However, it hardly follows that, in order to reduce risk-taking in financial markets, the Federal Reserve should impose the costs of instability on the entire economy.

Replace "reduce" with "induce", and one wonders what good purpose at all the Fed serves:

However, it hardly follows that, in order to induce risk-taking in financial markets, the Federal Reserve should impose the costs of instability on the entire economy.

Bernanke concludes:

Generally, financial regulation and supervision, rather than monetary policy, provide more-targeted tools for addressing credit-related problems. Enhancing financial stability through regulation and supervision leaves monetary policy free to focus on stability in growth and inflation, for which it is better suited. We should not categorically rule out using monetary policy to address financial imbalances, given the damage that they can cause; the FOMC is closely monitoring financial conditions for signs of such imbalances and will continue to do so. However, whenever possible, supervision and regulation should be the first line of defense against potential threats to financial stability.

In other words, the Fr-oddulently created Financial Stability Oversight Council and the Office of Financial Research will now paper over insolvency on an institution by institution basis, while the Fed will retain macro control over papering over system-wide insolvency.

While economists can call for the targeting of this-or-that inflation rate or this-or-that interest rate--credit aggregates, monetary aggregates, employment rates, etc.--the fact is, until business owners, especially small business owners, are unshackled from the institutionalized competitive advantages bestowed by the government upon their less efficient and better-connected rivals, prosperity for all will continue to decline. We could, as some suggest, force banks to lend by imposing a penalty on the $1 trillion in excess reserves held by banks at the Federal Reserve (as opposed to paying them 0.25% interest on such), which by the way, would lower interest rates further, not raise them--no matter how hard you wish. Just how much of this money would chase loans versus how much would be redirected into other investments is unknown. With the new myriad statutes, we're probably just a few short steps away from regulators forcing banks to make loans en masse to privileged groups that own small businesses. However, didn't we try this already with sub-prime? Sending unlimited good money after bad, cloaked in the "security" and moral hazard of government guarantees is what got us here. We don't need to "get money in the hands of consumers" or "make banks loan to small businesses", or advocate anymore madcap schemes for the Fed to implement. We need to let businesses figure out for themselves how to satisfy consumer demands on a fair playing field, and let consumers decide when they want to consume versus save. This does not require the gentle coaxing of the central planners. It precludes it.

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Mon, 09/06/2010 - 19:18 | 566367 Wags

The Miscreants at the Fed, Goldman Sachs et al, Freddie & Fannie, and in Congress are just stalling for time. They have looted us all.

The S & L crisis was barely over in 1995 and they ran the same scam again on a larger level.

Mon, 09/06/2010 - 18:45 | 566334 doolittlegeorge

this is interesting if you still believe that "there was a housing bubble." this of course is BS. The fact that Alan Greenspan couldn't see the greatest credit bubble in history is a very interesting concept. Something tells me the American people will be waiting a LONG time for an explanation. In the meantime we have a thing called "a thing" and it's starting to bite now. My recommendation? Avoid the dentist. They have weird theories on "pain" and "recovery." Great article otherwise....

Mon, 09/06/2010 - 18:04 | 566299 Hang The Fed

I'd almost swear that Bernanke is a fucking modern-day Dickens, in the sense that you'd think he gets paid by the word when he's yapping in front of Congress. If he's like this all of the time, it must take him a half an hour just to order at a restaurant.

The longer it goes on that clowns like this are at the controls (and, giving THEMSELVES on-the-job performance reviews, no less), we're completely, totally, and irrevocably screwed. You know what sort of people it is that you find in government? People who have no practically useful skills in any other arena outside that of spewing complete and total bullshit. Without government, these guys would be human door-stops.

Mon, 09/06/2010 - 22:39 | 566484 i-dog

When they spout out their meaningless drivel, they need to be taken to task in very clear terms by every single media commentator with any self-respect. We need to pressure the media to report accurately rather than being part of a CRIMINAL CONSPIRACY.

When they lie to cover up, instead of just dismissing it as "more BS" they need to be told that they are committing a FRAUD - in large headlines. When they transfer money to vested interests then, rather than just dismissing it as "more pork barrelling", they need to be told that they are EMBEZZLING taxpayer funds.

We need to continually hold them to the same standards to which they hold us.

Mon, 09/06/2010 - 18:25 | 566311 Monkey Craig

that's hysterical.

I see Bernanke as a confidence man.

Mon, 09/06/2010 - 20:14 | 566404 Hang The Fed

Hahaha, he's certainly a con-man of some breed or another.

Mon, 09/06/2010 - 18:41 | 566332 doolittlegeorge

they all are confidence men of course. it is their job to "lie" so to speak although of course we use "other words" to describe it. of course far be it from me to tell you to "get a phucking job" with all the "freebies" out there. interestingly it is the Republicans who have the keen insight into this "freebie thing" and are wondering "where's my bailout." i thought "democrats are Santa and Republicans are God." How did these roles get reversed? I must say i've become very confused in this "brave new world."

Mon, 09/06/2010 - 21:50 | 566468 Hang The Fed

Whether they come from the left or right side of the aisle, politically speaking, is becoming totally irrelevant. Politics has become nothing more than a puppet show to give people the illusion that they have control over the direction that society and the economy will take. In fact, regardless of affiliation, they all bow down to the Fed...that "fourth branch of the government" that exists and operates independently, with no auditing, review, or accountability to the people that it ostensibly serves.

Mon, 09/06/2010 - 17:59 | 566296 DoctoRx

Great post, EB. Thanks!

Mon, 09/06/2010 - 17:36 | 566274 Sudden Debt

So in short Benny B. means:

SCREW YOU GUYS, I'M GOING HOME

Mon, 09/06/2010 - 17:12 | 566245 DudleyDoRight

Another significant contributor to the current mess was the utter failure of the regulatory agencies, including the Fed, to prohibit subprime lenders from making usurious loans.

Everyone should recall the lesson of Fleet Bank's rapacious lending tear through the South in the early to mid-1990s. Fleet made loans knowing that many of the loan recipients could not repay the loans. Fleet didn't care b/c it had a good LTV on the loans and would make its money back when it foreclosed. What was the regulatory response? I'd characterize it as a slap on the wrist.

What lesson did the subprime lenders of the world take away from this? It didn't matter to the regulators that you were basically forcing a significant percentage of people who received these loans from their homes. All that mattered was that HPA keep on going up, never mind the morality of making these loans.

Well guess what, these types of loans blew things up barely 10 years later! Had the regulators simply done their jobs in the 1990s, Angelo "Hmm, 90% of my option arms won't pay" Mozilo (or WAMU or NC, or...) would not have been making these loans.

But no...let the market decide. Markit, schmarkit...this philosophy utterly failed us (those who didn't benefit from the bubble, but paid higher property taxes and are now jobless or worried about it). If people (the lenders in this case) won't of their own volition do the right thing (no you don't need to maximize profit all the time...leave something on the table for others), then the state has to do it for them.

I hope Prof Warren (even though she is from harvard) becomes the head of the new consumer protection bureau at the Fed, I hope that she actually acts to protect consumers, and I hope she publicizes the first act of obstruction from within that you know will come.

There were many negative feedback loops that led to the current crisis. Let's hope the consumer protection bureau reverses one of the negative feedback loops.

Mon, 09/06/2010 - 18:35 | 566324 doolittlegeorge

Regulators of what precisely? I would say this: the government itself is the "primary dealer now." So when you "throw the borrower under the bus" are you sure we're talking "the borrower" or are we talking "THE BORROWER"??? THE BORROWER of course is THE GOVERNMENT in case you were wondering....

Mon, 09/06/2010 - 17:40 | 566277 Mitchman

As you point out, the regulators failed miserably in the 90's and they failed miserably in the 00's. So why do you expect yet another NEW regulator to make things better?

Mon, 09/06/2010 - 21:09 | 566418 chrisina

The regulator has systematically been using neoclassical economic theories that have failed miserably at making the correct quantitative predictions about the real world.

The New Regulator must junk those failed theories and use those that have succeded in making the correct quantitative predictions about the real world. The theories of the post keynesian school have consistently made the correct quantitative predictions, as they have correctly integrated the role of credit on the economy and its destabilizing consequences which neoclassical theories have completely ignored.

The patient is consulting a doctor who is using a broken instrument. And the doctor is refusing to acknowledge the fact that his instrument is broken. No wonder the patient is going to die if he doesn't rapidly change to a doctor who uses a working instrument.

Broken instrument = neoclassical theories (neo keynesian and monetarist)

Working instrument = post keynesian theories (Minsky's model of financial instability plus Moore's theory of endogenous credit money supply)

Our only chance of survival is the following course of action:

1. Nationalize the Fed so that it doesn't answer to a group of private mega banksters but to the people of the USA.

2. Fire Bernanke and the whole FOMC and replace them with economists who understand the importance of the role of credit and the consequences of financial instability.

3. Fire Geithner, Summers and the bunch of morons who are the "top economic advisers" to the PotUS. Replace them with people who understand the same thing as in 2.

4. Let the new team decide what is the correct course of action going forward.

Mon, 09/06/2010 - 22:11 | 566475 Mitchman

Great. Just what we need. A new set of experts to replace the old set of experts but this set of experts will do a good job because they think the way that you do. Perfect.

Tue, 09/07/2010 - 01:55 | 566736 chrisina

No, not because they think the way "I" do, but because they think the way the real world is.

In the real world the supply of credit leads over the supply of fiat money : just look at a time series of change in credit vs one of change in M2 and you'll see that change in credit always precedes change n M2. This is the exact opposite of what neoclassical and austrian economists believe.

No wonder they can't pilote the economy, their theories are empirically refuted.

Or are you now going to suggest we need to throw away empiricism just because it doesn't satisfy YOUR gut feel, the way YOU think?

Mon, 09/06/2010 - 15:47 | 566159 RockyRacoon

We could, as some suggest, force banks to lend by imposing a penalty on the $1 trillion in excess reserves held by banks at the Federal Reserve (as opposed to paying them 0.25% interest on such), which by the way, would lower interest rates further, not raise them--no matter how hard you wish. Just how much of this money would chase loans versus how much would be redirected into other investments is unknown.

Is there any reason to believe that the excess reserves wouldn't go into creating a stock market bubble next? At least the banks have greater "control" over this market than they do a bunch of rag-tag, scruffy, tobacco-spittin' business folk who tend to squander money when offered at low interest rates.

Mon, 09/06/2010 - 18:33 | 566322 doolittlegeorge

ooooh. I like where you're going with this one, Rocky. Of course I've been told "equity guys are a little on the weird side" so I'm a little unclear as to "the control thing" to which you speak. I believe they were called Lehman something or other.....

Mon, 09/06/2010 - 15:30 | 566142 Robert J Moran

CE:"We've determined that the Fed's welfare system for the elite political and financial sectors is essentially working fine. The decimation of the American middle-class and destruction of the rest of the economy is unfortunate but completely unrelated. However, its critical to note that we do feel bad and wish you all the best."

A brilliant distillation of the high priest/baffle them with bullshit/central bank doublespeak! Good luck going from the 'favored financial ruling class' model to a more sustainable, equitable socioeconomic construct!

Mon, 09/06/2010 - 18:31 | 566319 doolittlegeorge

yes but the beneficiaries of said "bailout" on Wall Street have been "denuded" as well. I fail to see the "victory" here.

Mon, 09/06/2010 - 14:46 | 566080 Kayman

Have Bernanke and Greenspan no shame? Without the careless and profligate expansion of money and credit, this economy would not have collapsed.

They either believe their own bullshit (which I doubt) or they shamelessly lie to protect their puppet masters.

They remain oblivious to the lives and families they have destroyed to protect the chattering classes.

It is "let them eat cake" time. You are not hungry, you are not unemployed, you have not lost your home and your credit.

America has now become the world's largest welfare state- subsidizing the very criminals that destroyed the country through extortion of the middle class.

First, control the message. The classic Fascist move. Insulate yourselves by repeating the same lies. And always remember to blame your victims- hey, kid, ya shoulda known we was gonna f..k you, so stop crying.

And always reward yourself for your clever crimes. Bonuses all around gentlemen, Bonuses all around...

Ah... Goebels would have admired Bernanke's lies, delivered without blushing.

Mon, 09/06/2010 - 18:29 | 566316 doolittlegeorge

hmmm. these are interesting thoughts

Mon, 09/06/2010 - 14:41 | 566073 Mitchman

It is clear to me that the problem with the FED is the dual mandate imposed by Humphrey-Hawkins. The FED (to the extent it should exist at all) should be in the money business-not in the employment business. To the extent it has this dual mandate, it has used the dual mandate as a cloak to inflate (and thereby devalue) the currency at every opportunity since the passage of H-H back in the 70's.

We probably cannot eradicate the FED, but repealing H-H and getting the FEd back to the old business of growing the money supply 3% a year would be a good leash on these tools of TPTB.

Mon, 09/06/2010 - 16:13 | 566170 chrisina

You can try to grow the fiat money supply at 3%, or in line with economic gowth, or whatever, but it won't change the simple fact that in today's world (not the dream world of monetarists), credit money is growing much faster than fiat money supply.

Under fiat fractional banking, money supply should always equal credit supply plus cash in reserve. Reality is that total credit money is $52 trillion and broad fiat money supply is only $8.5 trillion.

Reality is that we live in a pure credit money system and not a fiat money system. As long as Bernanke and his monetarists friends have not understood that simple fact, we're going to have complete inept morons in charge of piloting the financial system.

Far more important than constraining the growth of the fiat money supply we need to find a way to control the growth of the credit money supply so that it stays at a more or less constant credit/GDP ratio.

Today banks are allowed to create as much credit money as they want, creating the deposits when they extend the loans, and don't wait passively for the deposits to come in order to create loans. Then they look for the reserves later. The whole system is completely the reverse from what Bernanke and his monetarist friends believe.

Required reading for Bernanke should be “The Endogenous Money Stock” by Basil Moore, Journal of Post Keynesian Economics, 1979, Volume 2, pp. 49-70.

Mon, 09/06/2010 - 16:53 | 566228 ViewfromUnderth...

You nailed it.

And...(deep breath)... Bernanke is right where he says supervison and regulatory response is the better control mechanism for "bubbles"....but he was strangely quiet at the time. Property bubbles require abundant lending, first and preferably lax lending criteria. Those are the two key elements. Lowering interest rates helps but if credit is restricted, no bubble.

Tue, 09/07/2010 - 01:23 | 566720 anonnn

"...lax lending criteria."

Merely clever-speak for fraud.

Excerpt from:

http://www.lrb.co.uk/v31/n10/john-lanchester/its-finished

"Northrop Frye somewhere defines ‘irony’ as involving a state of affairs in which words have a different meaning from their apparent sense. ...

The RBS corporate report is like that. (So are their slogans: ‘Make it happen.’ Make what happen? A £100 billion tab for the taxpayer?) The section on corporate citizenship at the beginning is particularly good value. The firm is involved in plans to increase general levels of financial education. ‘When people have been educated about money and how to work with financial services firms they are more likely to make the right decisions and to avoid difficulties.’ That’s true, but you can also just rob post offices. ‘RBS is a responsible company. We carry out rigorous research so that we can be confident we know the issues that are most important to our stakeholders and we take practical steps to respond to what they tell us. Then occasionally, we blow all that shit off, fire up some crystal meth, and throw money around with such crazed abandon that it helps destroy the public finances of the world’s fifth biggest economy.’ See if you can guess which of those sentences is not in the report. .."

Mon, 09/06/2010 - 19:26 | 566372 chrisina

And permit me to add that abundant lending requires ponzi asset speculation. Which means abundant lending requires rising asset prices.

So it's exactly the reverse of what monetarists believe : rising prices cause the credit money supply to grow and after this the fiat money supply to grow.

Which is demonstrated by empirical evidence if one cares to look at time series of inflation and broad money supply one sees that inflation leads money supply by at least one year.

The real world is actually the exact reverse from what neoclassical economics predicts with its bankrupt theories. Money supply growth doesn't cause inflation, but the other way round. I think it's high time the Fed, our Government, and those who advise them put those bankrupt theories in the dustbin and start reading the works of B. Moore, H. Minsky and A. Graziani. At least their models make predictions which are in line with reality.

Mon, 09/06/2010 - 18:28 | 566314 doolittlegeorge

precisely

Mon, 09/06/2010 - 14:49 | 566085 Kayman

Mitchman

Good point(s). I have still not heard a satisfactory explanation why the money supply should be growing faster than the economy.

Even JMK called it taxation by stealth.

Thank you.

Mon, 09/06/2010 - 14:59 | 566107 Mitchman

Glad you liked the post, Kayman. I like a lot of what you write as well.

Just thinking aloud with you, the sacrosanct H-H "dual mandate" (as the MSM so lovingly likes to call it) didn't keep Volcker from doing what he thought was the right thing and taking interest rates to 21% and bringing on a recession and unemployment. So to me, whenever the likes of Bubble Ben hides behind the "dual mandate", I can't help but see it as total bullshit justifying the water carrying he is doing on behalf of the TBTF.

Mon, 09/06/2010 - 15:16 | 566126 EB

Let's not forget there are actually three mandates according to Section 225a of the FRA, with the third begin "moderate long-term interest rates"--conveniently ignored by the Fed since the Volcker days under the guise that price stability and moderate LT rates usually go hand in hand. Conflation of the second and third mandates conveniently allows the Fed to ignore the relationship between overly-accommodative policy and price in-stability.

Mon, 09/06/2010 - 15:40 | 566149 Mitchman

Excellent point. Thank you.

Mon, 09/06/2010 - 14:15 | 566030 williambanzai7

MUSIC FOR ZOMBIES http://2.bp.blogspot.com/_wkgIzuqJM0w/TIQ5ZLGLH8I/AAAAAAAAFz8/Z7N_Uin-8q... Lying SOBS!

IDEAS ARE BULLETPROOF

http://williambanzai7.blogspot.com/2010/09/ideas-are-bullet-proof.html

Mon, 09/06/2010 - 14:12 | 566028 Dismal Scientist

Agrarian, Industrial, Technological economies have risen and been superceded in the US and UK in that order. The Experience economy follows, while Asia lags one step behind in terms of the sequence. We seem to be struggling to make the transition to the Experience economy. Who wants to bet that TPTB are rereading Aldous Huxley's 'Brave New World' as the means to keep the sheeple in line ?

http://en.wikipedia.org/wiki/Brave_new_world

Mon, 09/06/2010 - 14:01 | 566007 JR

If it’s hard to determine whether FOMC policy had an effect on housing prices, as Bernanke says, it’s hard to determine whether it had an effect on the labor problem, and it’s hard to determine whether its needed in the economy at all. And, so, the answer to every question is, it’s hard to determine the answer to that.

Maybe we should just let the results speak for themselves and get this hands-on-know-nothing out of the way. And get back to laissez faire and Adam Smith and let the invisible hand of the market self-regulate the marketplace through self-interest, competition and supply and demand. The latter created the American Dream, for millions. But since the 1913 coup d-etat, the bernankes at the Fed have reduced “the wealth of nations” to a fistful of multibillionaire insiders only.

The Fed needs Yogi Berra to answer these tough questions. To sports writers after a tough game he would say: “I wish I had an answer because I’m tired of answering that question.”

Mon, 09/06/2010 - 15:04 | 566113 EB

To invert another Berrism:

A dime ain't worth a nickel anymore.

Mon, 09/06/2010 - 13:02 | 565902 jpritikin

"We need to let businesses figure out for themselves how to satisfy consumer demands on a fair playing field, and let consumers decide when they want to consume versus save."

No, we need much more fundemental adjustments than that. We need a platform for social justice. http://sites.google.com/site/justiceplat4m/

Mon, 09/06/2010 - 21:25 | 566454 Imminent Crucible

"zero interest credit"? --no firing synapses.

"Almost zero interest credit" was sufficient to destroy our financial system. If free credit were extended to every citizen, what possible constraint would be left on consumer demand? Free credit for everyone would result in the expansion of the money supply to effective infinity overnight.

The most direct route to social justice is to end the Fed. Now.

Mon, 09/06/2010 - 13:21 | 565941 EB

Okay, I read it, and it seems like more of the same interventionist beltway nonsense:

Instead, every natural citizen must enjoy the benefit of zero interest credit, making a clean break from the slavery of savings.

"Social justice" implies humans are to be trusted as arbiters of such. History has demonstrated this kind of power creates slave masters.

Instead of switching bureaucrats, it's time to question he necessity of bureaucrats, period.

Mon, 09/06/2010 - 19:06 | 566353 Fred G Sanford

EB: Great article. I am not optimistic that we see a fair playing field any time soon.

Mon, 09/06/2010 - 13:55 | 565993 Dirtt

Yes! Thank you.

Mon, 09/06/2010 - 13:44 | 565971 MarketFox

EB nails it....

Instead of switching bureaucrats, it's time to question he necessity of bureaucrats, period.

The income taxes...individual/corporate need to be eliminated....the lobbyist system needs to be eliminated with mandated state control and collection....ie 50 sovereign states to some degree....Washington needs to be converted to condos and needs to adjoin the nearest state....ie tourist attraction of American History....

Mon, 09/06/2010 - 12:53 | 565887 CulturalEngineer

The Bernanke testimony... short version:

"We've determined that the Fed's welfare system for the elite political and financial sectors is essentially working fine. The decimation of the American middle-class and destruction of the rest of the economy is unfortunate but completely unrelated. However, its critical to note that we do feel bad and wish you all the best."

Bernanke, Bubble Denier: The Greatest Fed Tool of All

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