Betting On An Infinite Bernanke Put? Not So Fast, Says Fed Governor Kevin Warsh

Tyler Durden's picture

Last week's Op-Ed du semaine was Ben Bernanke's WaPo glowing endorsement of the Fed market put, whose sole purpose was to remind stocks, which ended up drooping on the day QE2 was announced, that Bernanke will stop at nothing to achieve his now primary goal (as loosely interpreted under the Fed's broad, and unsupervisable, mandate) - surging stock prices. This week, however, may likely belong to Fed Board Governor, and former member of the President's working group on capital markets, Kevin Warsh. In an Op-ed just released in the WSJ, Warsh, whose series of accomplishments include being the youngest ever appointee to the Fed BOD at 35, and being married to Jane Lauder of Estee Lauder fame, writes "Lower risk-free rates and higher equity prices—if sustained—could
strengthen household and business balance sheets, and raise confidence
in the strength of the economy. But if the recent weakness in the
dollar, run-up in commodity prices, and other forward-looking indicators
are sustained and passed along into final prices, the Fed's price
stability objective might no longer be a compelling policy rationale
. In
such a case—even with the unemployment rate still high—we would have
cause to consider the path of policy. This is truer still if inflation
expectations increase materially.
" Translation: if gold continues to exhibit a beta > 1 w/r/t ES, then we are screwed, and all Fed policies will have failed. Elsewhere, look for most commodities to open limit up again tomorrow for the nth day in a row as inflation expectations continue to "increase materially" and more and more Fed members understand just what Warsh is saying.

Much more in this surprisingly austere statement by one of the fresher voices at the Fed:

On focusing on the "seller" in the critical economic equation which the Fed now believes is only defined by end consumer demand, a premise that was thoroughly destroyed earlier by Sean Corrigan:

Policy makers should take notice of the critical importance of the
supply side of the economy. The supply side establishes the economy's
productive capacity.
Recovery after a recession demands that capital and
labor be reallocated. But the reallocation of these resources to new
sectors and companies has been painfully slow and unnecessarily
interrupted. We are feeling the ill effects.

On austerity: look for Krugman and fluffer DeLong to go apeshit over this:

Fiscal authorities should resist the temptation to increase government
expenditures continually in order to compensate for shortfalls of
private consumption and investment.
A strict economic diet of fiscal
austerity has greater appeal, a kind of penance owed for the excesses of
the past. But root-canal economics also does not constitute optimal
economic policy.

On consumer deleveraging:

The deleveraging by our households and businesses is not a pattern to be
arrested, but good prudence to be celebrated.
Larger, more liquid
corporate balance sheets and higher personal saving rates are the
reasonable and right responses to massive government dissaving and
unpredictable government policies. The steep correction in housing
markets, while painful, lays the foundation for recovery, far better
than the countless programs that have sought to subsidize and temporize
the inevitable repricing. It is these transitions in our market
economy—and the adoption of pro-growth fiscal, regulatory and trade
policies—that lay the essential groundwork for greater, more sustainable

Stunningly insightful words for a Fed member. They beg the question, however, why was consensual restructuring not on the table when TARP was being proposed? As we have said so many times, the US banks would not have collapsed had their balance sheets been reorganized, even as their operations continued (totally separate from bank liabilities). Now it is too late, which is why a reversion will necessarily require a complete financial reset, and all those who are calling for a methodological process to go back to where we were in the days of late September 2008, when there still was hope, are naive idealists. In this context a return to a gold standard would not make sense at the current price of gold... It would, however make sense, were gold to be priced at around $5,000, or more.

Yet the most stunning tidbit of clarity and lucidity by Warsh is the following:

Last week, my colleagues and I on the Federal Open Market Committee (FOMC) engaged in this debate. The FOMC announced its intent to purchase an additional $75 billion of long-term Treasury securities per month through the second quarter of 2011. The FOMC did not make an unconditional or open-ended commitment. I consider the FOMC's action as necessarily limited, circumscribed and subject to regular review. Policies should be altered if certain objectives are satisfied, purported benefits disappoint, or potential risks threaten to materialize.

Lower risk-free rates and higher equity prices—if sustained—could strengthen household and business balance sheets, and raise confidence in the strength of the economy. But if the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed's price stability objective might no longer be a compelling policy rationale. In such a case—even with the unemployment rate still high—we would have cause to consider the path of policy. This is truer still if inflation expectations increase materially.

The Fed's increased presence in the market for long-term Treasury securities poses nontrivial risks that bear watching. The prices assigned to Treasury securities—the risk-free rate—are the foundation from which the price of virtually every asset in the world is calculated. As the Fed's balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. If market participants come to doubt these prices—or their reliance on these prices proves fleeting—risk premiums across asset classes and geographies could move unexpectedly.

The last sentence is the ultimate kicker as it captures precisely what will happen when the realization that things are slipping outside of the Fed's control spill over to Wall Street (and then to MainStreet). As Warsh says: "The Fed can lose its hard-earned credibility—and monetary policy can
lose its considerable sway—if its policies overpromise or under deliver." As the bulk of the world, and the vast majority of the population already have no faith in the Fed, the acknowledgement that this process can capture everyone, including a ponzified Wall Street, whose fortunes are embedded in the proper functioning of the Fed, should be cause for huge alarm. Since if even the Fed realizes that the risk that the world will look beyond the fake price facade created by Bernanke exists, it is only a matter of time before the transition from hypothetical to real is completed.

As Warsh's words resound with more members of the FOMC and Fed BOD, and especially as 3 new hawks join the voting ranks next year, not to mention Ron Paul's new role, all those betting that "EVERYTHING" will go up under QE2/3/4/etc, may want to promptly reevaluate their thesis...



Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Brokenarrow's picture

Uh-huh.....interesting piece.

Now--run out and short the YM all in! In two months you'll be BK.

Whatever Fed officials leak to the public? Do the exact oposite.

Personally, I have been certain that the US equity market would crash for the last 400 s&p pts.

Yeah, Baby! Go all in with your bad self.

russki standart's picture

The cake is already baked... even if the Fed changed policies overnight, the USD will self destruct since higher interest rates will BK the US government overnight.

Turd Ferguson's picture

Exactly! Thank you, Russki, for saving me from having to type the same thing.

Same old Central Bank bullshit. This is nothing more than a response to thids:

All that's left is talk and it's working, at least tonight. Mr. Governor's op-ed got himself a 50bp kick in the USDX. HellyBenny might have to give him a little more sizable Christmas bonus.


bigdumbnugly's picture

wait a minute.  less than one week from the QE2 announcement a fed governor is coming out with this claptrap?

what, did he just now awaken from a rip van winkle-like slumber?

i either smell desperation or ass covering.  or both.


cswjr's picture

Whatever the reason, it's very unorthodox.  As a matter of course, FOMC members don't discuss what occurs at FOMC meetings, at least until the minutes come out.  Not that he disclosed anything material.  Still... odd.  Maybe BB is having some misgivings.

ebworthen's picture

Ass covering was my first thought; head-fake and obfuscation my second.

This was a very interesting read on why the markets could just keep going up (yes, the man is in jail, but some compelling arguments):



NumberNone's picture

Agreed.  Warsh thanks for the insightful analysis after the house is already on fire and burning to the ground.  Would have been fucking nice if you had given this all a bit more thought several years ago.  Frightening that you have to actually see the flames licking up the sides of the building before you realize that it was gasoline you were actually pouring on the fire and not water.  Maybe admiring your Economics PhD kept you busy.

RockyRacoon's picture

I'm in the ass-covering camp.  He can point back to this when folks say, "We never saw THIS coming!".  Yeah, right.   What they meant to say was, "We saw it but we hadn't finished the looting at that time.".

Buddha_Gorilla's picture

My $'s on smokescreen.  Carefully orchestrated PR to reinforce the Fed's credibility in public while they undermine it in private.  Of course, my $ isn't worth what it used to be.  :)    

Spitzer's picture

Thats right.

The dollar would even have been done in 08 if they didnt temporarily instill some more confidence in it by bailing out America Inc.

Now that everyone has refinanced to lower rates, the gap that bankrupts the banks is even smaller.

RockyRacoon's picture

I'm about to do my part and move from a 5.25 to a 4.00 rate.

Always glad to pitch in.

Dollar Damocles's picture

The (most recent) massive worldwide run on the world bank (FED) that began over a decade ago (visible in the USDX and the Gold's long-term charts) is not going to be satisfied by a mere $5,000 an oz gold.  Ultimately a currency's value will come into balance with the productive capacity of the issuing nation and it's underlying assets.  Wealth follows capital structure (the ability to produce wealth) and so does purchasing power.  Asia is where it is at and they are going to drain western gold like vampires until gold is revalued to a price that will let it function without suppression in the role that it has ALWAYS served - the ultimate settlement and balancer of international trade imbalances.  The USD is toast - $5000 an oz gold, hahaha don't make me laugh.  How about 30k an oz gold in todays dollars, and 1Trillion dollar an oz gold in Bernanke dollars - more realistic.

AndrewJackson's picture

Yep you are correct. The only thing that is politically acceptable is high inflation. Thus, the bernanke put through QE(Infinity) is well protected. Might as well go buy some longer term pm call options.

justbuygold's picture

Exactly correct.  The Fed has no choice but to keep monetizing and buying U.S debt becuase there are no other buyers, they have all evaporated or are now sellers.  The Bernake put is almost infinite and the numbers will only get bigger and bigger which will in turn cause other debt buyers to become more and more on the sell side.  I say " almost infinite" becuase it will end one a U.S  default.


Got Gold ?

Vampyroteuthis infernalis's picture

How long before this dissenting voice gets canned for telling the truth?

gimli's picture

Ya know, there could be other reasons for commodities to continue their current trajectory -- this could help a bit:


snowball777's picture

Addressing the same forum, Israel's Defense Minister Ehud Barak was pessimistic about diplomatic engagement halting Iran's drive for a nuclear weapon. "Based on experience and looking at the example which they (the Iranians) are using, which is probably the North Korean example, you can easily see ... the objective is to defy, deceive and deter the whole world," he said.

Because Israel never defies, deceives, or deters the whole world. And especially not with respect to say the proliferation of nuclear weapons.

STFU, hypocrite.

Arthur's picture



Barak is just stating the obvious.  Do you think Iran only has peaceful intentions for its nuclear program?     Israel is presumed to have had the A-Bomb for almost 40 years, if they admit having the bomb then everyone in the neighborhood has to have one too.  Israel is coy about the A-Bomb but clearly projects a MADD deterrent policy.   Who thinks Iran wants the an A-bomb for the same reason?  How many countries and terrorist groups are pledged to the destruction of Israel and how many to Iran?



The majority of the Arab countries don't want Iran to have the bomb either.


Ivanovich's picture

I'm sorry, why would corn and wheat go up because of this?  Or soy?  or cocoa?  or....

RockyRacoon's picture

From the article:

Early Sunday, the influential Senator Lindsey Graham (R. South Carolina), member of the Armed Services and Homeland Defense committees, said: "The US should consider sinking the Iranian navy, destroying its air force and delivering a decisive blow to the Revolutionary Guards." In an address to the Halifax International Security forum, he declared "They should neuter the regime, destroy its ability to fight back and hope Iranians will take the chance to take back their government."

Good move, Graham.  I'm sure that destroying half the country would give the man on the street a motivation to do what the U. S. would like to see.   The Iranians would probably "welcome us as liberators" as well.

plocequ1's picture

How dare Warsh question the Emperor. We can not have this. The Emperor is displeased. This drama is so fucking obvious, It makes me cringe.  Nice media for all the subduded mass to watch and enjoy while they play with their Ipads.

Turd Ferguson's picture

If you think this is genuine dissent, you're f-ing crazy.

This is simply SPIN...a blatant attempt to verbally support the $. Interestingly enough, on a light-volume Sunday night, its actually worked to the tune of 50 bps in the USDX.

No doubt, CNBS will pick it up and SPIN it like crazy tomorrow morning. All the while, the Fed cranks up another $4B in POMO at 11:00. 

Buddha_Gorilla's picture

+1.  Expect more "verbal inflation" as cover for more monetary inflation.  I'm probably just paying closer attention, but it does seem like we're hearing more and from more board members (and in more prominent places) these days.

beanieville's picture

It's funny you mentioned "f*cking obvious" when it didn't seem obvious to you that the market would go higher on grounds of quantative easing.

johngaltfla's picture

Exactly. The myth that anyone is going to do anything but go along to get along within the Ivory tower is a myth. The Emperor will simply smite those who dare oppose him.

Lapri's picture

Warsh still voted yes on QE2.

Seems like his article is to appease those Europeans and Chinese and Brazilians hyperventilating over Ben's QE2.

Good cop, bad cop routine.

Walter_Sobchak's picture

a central banker will always cry out in pain as he cuts you in the jugular.

Fred G Sanford's picture

Good point. Warsh's vote for QE2 says it all.

Bob's picture

Pretty obvious spin to me as well. 

Nevermind's picture

Warsh is an E. coli in Bernanke's punchbowl...not a Tootsie Roll. 

Heh heh's picture

This is the Michael Jackson market. Dr. Bernanke brings it up and takes it down.

Charles Mackay's picture

Since when do three potential dissenting  members consistute a majoirty on the FOMC, assuming they they actually will dissent?

Jim B's picture

Agree!  It is suprising to here more than one voice of common sense @ the FED!

gwar5's picture

She's my favorite vampire

Rodent Freikorps's picture

Here is a tribute to her in latex...with guns.

Underworld - Our Solemn Hour


ebworthen's picture

Reminds me of my ex-Wife; it was a good 20 years from 19-39.

trav7777's picture

reminds me of mine too...didn't get anywhere near 20 lol, just too batshit crazy

Djirk's picture

Looks like Estee Lauder makeup

magis00's picture

I see what you did here.

RockyRacoon's picture

You know what they say: 

Somebody, somewhere, is tired of putting up with her shit.

Revolution_starts_now's picture

Margin Call Bitchez,

sorry I couldn't help it.

Nat Turner's picture

A real Michael Jackson market. Where's my bleach, bitchez!

hamurobby's picture

" Translation: if gold continues to exhibit a beta > 1 w/r/t ES, then we are screwed,


Yes, looking for nice new furniture.

lolmaster's picture

Krugman and fluffer DeLong


got em.

more generally speaking this is just the last b-boy (hint: not break) to be tasked with creating diversionary cover for the real game plan. 

we are clearly headed to a ron/rand showdown.