Guest Post: Mr. Bernanke's Manipulation Nation

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Mr. Bernanke's Manipulation Nation   

Our directorates of Central Planning have reduced us to Manipulation Nation.

Manipulation is the beating heart of Federal Reserve and Central State policies. The centrally planned economy has failed to respond as expected, and so the response is to put more cocaine-laced pellets in the feedbox and encourage the poor starved rat inside the cage to press the bar labeled "debt" to get another pellet of addiction and highly profitable enslavement.

Welcome to Manipulation Nation, a.k.a. the unlimited debt experiment. Think rat cage, one bar to press, and unlimited cocaine-laced pellets.

Frequent contributor Harun I. untangles the many threads of manipulation sewn into the Status Quo:

Historians have attributed the adjective of "great" to many periods of human activity. We've had a Great Potato Famine, Great Bull markets, a Great Depression, etc. I wonder if this period will go down as the Great Manipulation.

Before Congress, when asked if the Fed engaged in manipulation of the stock market, Mr. Bernanke sputtered a bit, then answered coyly that the Fed attempts to "influence the stock market". Disregarding semantics, his answer was unequivocally unacceptable. By trying to influence behavior on such a massive scale, regardless of whether it is in direct support of some altruistic mandate or charter, the Fed, by the Congress that utters such mandates, is elevated to a deity, albeit a critically flawed deity as it has omnipotence but lacks omniscience.

Your recents posts (noted below) relentlessly hammer out an inescapable truth under which its weight the Great Manipulation is creaking and groaning. People are waking up to once arcane concepts only known to professional traders and money managers such as relative performance. Karl Denninger reports that while the stock market has risen rather quickly, purchasing power has actually gone down once taxes and fees are included. Dr. Marc Faber points out the history of stock market moves during periods of rapid money printing as net-net. A good hedge perhaps but not a money maker (but as Mr. Denninger points out it is a loss when fees and taxes are included). Chris Whalen uncovers another subtle manipulation: banking and home building cause economic recovery. In actuality real economic growth, which results in greater prosperity should be the reason for growth in banking and homebuilding.

You committed heresy not too long ago by pointing out that in most cases no wealth is accrued by owning a house. Adjustments for inflation do not create wealth (greater purchasing power), it just takes more currency to buy the same item. Interested persons, those owning houses, wish to make heretics like yourself drink a hemlock cocktail, after all, they have borrowed heavily against their so-called equity and thought they were being smart for doing so.

Few are so self-deprecating as to admit they were caught in the vortex of a decades-long mania in an equally decades-long and continuing Great Manipulation.

Oh yes, the Great Manipulation is continuing full steam. In 1983 Greenspan chaired a commission on how to fix Social Security. In 1985 Americans were convinced to pay higher taxes and all would be well. Today we are borrowing to make payouts. Today Congress and the Administration are trying to hammer out "a deal" that brings down deficits which will ultimately result in lower payouts and raised taxes. But no one wants to talk to the American people about what happened to all the money, the 15% of all incomes that was collected to make SS payouts (a point made on a post). Regardless of whether the money was diverted to other social programs (for our own good), this was a fraud committed by the American government on the American people. Instead of accountability, the bait is being dangled once more.

If I may digress, greater taxation and decreased spending will not work in the long run because debt must and does grow exponentially and greater taxation and spending cuts are linear events.

Ben Bernanke boldly pontificated in his Fed Chairman campaign speech in 2002 that he could, at least theoretically, force (manipulate) people to spend(borrow), by reducing interest rates and unleashing the power of the printing press. This was sweet Siren music to American politician's and debt holder's/seller's ears. They didn't hear or chose not to hear the "theoretical" caveat. All they knew was that this man would continue the Greenspan Put. They heard that he would transfer the savings of the prudent to the pockets of debt holders and speculators. They heard that they could continue to enjoy the political cover of increased public spending without having to raise taxes (and real economic output) to pay for it.

In the Great Manipulation, we are being told that if China allows its currency to appreciate, all will be well. Jobs will be more equally distributed globally and the masses will prosper and be happy.

In reality, population growth is bumping up against technology growth. Automation has replaced much of the manufacturing workforce. What's left are diametrically opposed niche industries that require either high levels of education (at the right schools), or nearly no education at all, resulting in fewer productive people bearing the responsibility of providing for an ever-growing number of unproductive people. Whether for populist reasons or just because humans seem to have a proclivity to simplify by slapping labels on things, or even more probably because of their addiction to conflict, this has been dubbed "class warfare".

The Great Manipulation is not necessarily a conspiracy. The flight crew of a passenger airliner is not engaging in a conspiracy when trying to keep passengers calm during an emergency. However, it is along this thin line where contradictions and perversions exist. State secrets in a democratic republic could be considered a necessary oxymoron. Completely incompatible and self-contradictory is the idea that a self-governing people need to be kept in the dark about the true aims of the state. However, we are to accept that it is necessary to protect us from our enemies, whoever they might be. This immediately opens to door to the perversions of greed and corruption and lessens the ability of the self-governed to govern wisely.

Economic truths cannot be plainly stated by any high-ranking public official lest a panic in the markets is set off. If a politician is so bold as to state the truth, especially one we do not wish to hear, they will most assuredly lose the next election. As you have pointed out in previous posts, this creates an atmosphere where lying becomes banal. The idea of a government by the people for the people becomes a cliche.

If the GM is a conspiracy, surely the conspirators must know that they will kill the golden goose (labor). As the wages of those who are productive are effectively reduced to that of subsistence, they will, at different points along this continuum, opt out. To conduct a reductio ad absurdum, there will be plenty of goods but nobody with the money to purchase them. Under this circumstance how do the wealthy stay as such?

To be balanced, we must consider the complexity of human beings. We are very critical of government but must acknowledge the fact that when some of the most enlightened economic bloggers got together, they could all agree on what was wrong but could not agree on the fix. We must also consider the nature of markets. Viewing the same set of data, two participants come to completely opposite conclusions, therefore, one will buy believing that they will be able to sell it at a higher price, and one will sell believing that they will be able to buy it back at a lower price. Given time horizon a person can be wrong but still win. Such is the complex nature of human interaction.

The biggest problem with the Great Manipulation is that it must increase in amplitude and complexity at an exponential rate in perpetuity. It cannot. They are not trying to land the crippled aircraft, they are trying to keep it aloft with all engines out and a glide ratio that's telling them "we're not gonna make it". It's hopeless, they just can't say it, or so they think.

Therefore, it must all come crashing down. It must because no one is consciously going to cause a mass die-off -- and if we are honest, that is what we are facing as economies cannot produce enough revenue to support unproductive sectors of the population and all resources become limited. This is something that most cannot or do not want to comprehend. Barring some technological breakthrough that doesn't get caught up in decades of testing and analysis, the human system will forcibly shrink to a level that is sustainable by its environment.

Perhaps, as a new renaissance emerges, the lessons learned from the Great Manipulation will lead to something better. If history is any guide and human nature remains fixed as it is, the only thing that will emerge is the beginning of another cycle that ends in catastrophe.

Thank you, Harun. Here is an excerpt from Bernanke's 2002 speech: (Revisiting Bernanke’s 2002 Playbook):

A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

The insane assumption Bernanke makes is that the only meaningful metric people use when deciding to take on debt is the interest rate. This is the classic "false precision" offered by apparently "precise" data: if other causal factors can't be quantified with sufficient precision, or quantified at all, then they're ignored by the model.

This removal of all the other important causal factors renders the model useless. Bernanke's model completely excludes the first step of the process of a potential borrower deciding to take on debt, which is the mindset in which taking on debt at any rate of interest seems financially prudent and beneficial in some important way, i.e. buying a new refrigerator on credit when the old one fails.

At that point in the decision tree, the potential borrower may decide to pay cash simply because he has jumped out of the debt cage, and no longer wants any more debt, at any rate of interest.

Also outside Bernanke's limited model is the enticement of low interest rates for malinvestment and speculative gambles. For example, let's say a solvent citizen calculates that the cost of credit has fallen to the point that borrowing to speculate with "nearly free money" becomes highly attractive.

The citizen borrows money from a credit card with a low introductory rate, and puts up no collateral. He then opens a brokerage account and enables margin borrowing. This gives him another 50% of low-cost cash to gamble with. With no collateral and thus no real risk other than a bad credit report, the citizen has followed up Bernanke's enormous incentives to borrow and malinvest/speculate by doing just that.

Then, when the speculations implode, the lender turns to the taxpayer to make good the speculative losses.

The failure of Bernanke's "unlimited purchases of securities" strategy to reinvigorate the real economy is built into his limited model. Debt is not just a function of interest rates. The Bernanke model of juicing the economy is akin to the behavioral "experiments" in which rats receive a pellet laced with cocaine for pressing a bar. Soon enough the rats are slamming the bar and consuing so many coke pellets that they expire.

Mr. Bernanke proposes that this single behavioral bar and an unlimited supply of cocaine pellets is all the economy needs to prosper.

Implicit in Bernanke's simplistic model is the notion that there are no limits on the "good" of unlimited debt, and no "bad borrowing" is possible, or recognized. Is adding more debt to the monumental mounds of debt already crushing the nation truly a 'solution" to a stagnant economy? Or is adding more debt, at any rate of interest, actually adding to the problem?

A case can be made that the more accurate predictive model is the stick/slip-criticality model, which can be described by the piling up of grains of sand. As the pile grows ever higher and larger, it appears stable. But at some unpredictable point (it is, after all, a complex system), a single grain of sand--a small event--triggers a large consequence: the pile collapses in uncontrolled cascades and slippage.

Bernanke's blindered model of "unlimited purchases of securities" is adding sand to an intrinsically unstable pile of debt whose stability is entirely superficial.

Both the failure of Bernanke's policies and his resignation to "pursue other opportunities" are both easily predictable.

What is the end result of manipulating interest rates to levels that encourage malinvestment and speculation? The erosion of the real economy and the eventual collapse of debt sand pile.

Comment viewing options

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

If you look at the seemingly hesitant performances of the FED's in front of most congressional or senate commitees, saying things like I can't remember where that 58 billion went, or nope, cannot confirm or deny gold in knox, or any other such blatant irregularities...


you realize that these guys are playing exactly to plan and book of some higher power or script. One big picture look and you can see the patterms unfold, long and short, TA style.

Like a tall ship, this game is rather exquisitely rigged.


risk-reward's picture

Like a tall ship, this game is rather exquisitely rigged.

Good stuff, ORI !!

GoinFawr's picture

Well, for Trav that depends entirely on the pigmentation of the demographic living near the nuclear plant.

Trav might say something like,
"If it's brown, flush it down. If it's yellow, please stay mellow."

DocinPA's picture

Might want to consider stockpiles of guns 'n' ammo, too.  As well as food.  And tools.  Well, you get the idea.

LawsofPhysics's picture

Preaching to the choir on ZH. 


Tyler, where is your analysis of the Pandora IPO?  You just know we are all waiting.

Bananamerican's picture

Harun just rocked my world....

good stuff

LaLiLuLeLo's picture

Anyone see Cramer praising uncle ben yesterday? It was ammusing to say the least

hedgeless_horseman's picture

Cramer is in full co-operation mode. "is cooperating fully with the investigation," CEO Daryl Otte told The Post.


Cramer, the host of "Mad Money" and a former hedge-fund manager, co-founded in 1996. He remains a commentator on the site as well as chairman of the company's board.

LaLiLuLeLo's picture

in full GS-goon mode. * I'm here. no, now I'm here... over here!!!*

notice how all the investigations started happening after chris cox left the building. he should be held accountable. even hbo's "TBTF" made him look stupid

Abitdodgie's picture

If the rat gets tired I will take over , you take one for the team and all that

hugovanderbubble's picture

Pandora´s Thunder box¿?:)

HelluvaEngineer's picture

Wow.  If we fill the gap this morning wonder how fast we'll roll over.

Oh, and this is a relief:

YesWeKahn's picture

How many people have the IQ to understand all this? They only understand simple concepts such as interest rate, gas price, unemployment. This is exactly what Bernanke is expert at: he uses these simple concepts to manipulate the mind of the regular joes.

Nothing To See Here's picture

It's not as much a question of IQ as it is a question of having corrupt systems of information and education.


"If all the sources of current information are effectively under one single control, it is no longer a question of merely persuading the people of this or that. The skilled propagandist then has power to mold their minds in any direction he chooses, and even the most intelligent and independent people cannot entirely escape that influence if they are long isolated from all other sources of information.”

- F.A. Hayek, The Road to Serfdom (Chapter XI - The End of Truth)

alien-IQ's picture

the truth is that it's really not that difficult to understand. It's all common sense.

I've managed to explain such matters to people whom I was surprised to find understood it in the end. It's just a question of how you word something...what examples or metaphors you use. It's called "knowing your audience". When Charles writes these articles, he knows his audience therefore has no need to dumb it down. When we take this information and try to convey it to friends and family who may not be the sharpest knives in the drawer...we need to chose our words and metaphors more carefully. We need to know our audience. Even if it means we cannot show off all the financial lingo we have acquired over time.

Often, the failure is not that "they" did not understand is that we failed to clearly communicate it. Don't blame them for not getting it...blame yourself for not getting it across and try harder. The sign of true intelligence is the ability to take a complex idea and simplify it so that a child can understand it.

Bananamerican's picture

"The sign of true intelligence is the ability to take a complex idea and simplify it so that a child can understand it."


and it's why effective teachers are so prized...'tis a rare gift

John Law Lives's picture

<<<  Manipulation is the beating heart of Federal Reserve and Central State policies. The centrally planned economy has failed to respond as expected, and so the response is to put more cocaine-laced pellets in the feedbox and encourage the poor starved rat inside the cage to press the bar labeled "debt" to get another pellet of addiction and highly profitable enslavement. Welcome to Manipulation Nation, a.k.a. the unlimited debt experiment. Think rat cage, one bar to press, and unlimited cocaine-laced pellets.  >>>

One of the greatest article intros ever on this site (imo).  Classic!

Silverhog's picture

We just hit a soft patch of shit about 1500 miles wide.

Rusty Shorts's picture

Oh Shit

Hey Tyler, O/T but looks like we may have our very own Fukushima.

hedgeless_horseman's picture

Pray that levy holds. 

At least parts of the Ogallala Aquifer are getting refilled. 

Stares straight ahead's picture

At what point is a nation defined as insolvent?  I have heard that if every asset in the US was sold, it would be worth about 55 trillion dollars.  Since our current liabilities are in excess of 63 trillion, aren't we officially insolvent?

Shell Game's picture

People will continue to be distracted and manipulated away from any healthy path forward as long as they keep seeking top-down solutions to this mess.


jackinrichmond's picture

great article !  

it's ironic that the fed's manipulation of the markets is not bringing buyers into the game - just the opposite, it is driving people away in disgust..  no one wants to play in a rigged market (unless you're an insider).  the bernank and his ilk think they are saving us, but in actuality by not letting the markets clear, they are making it much, much worse.

i-dog's picture

"the bernank and his ilk think they are saving us"

No, they don't! Their agenda is not our agenda. You (and many others here) need to put your iCrap down and pay attention!

centerline's picture

But I thought deficits dont matter....  LOLOLOLOL.

Nice work again CHS, and same to Harun.  It is impossible to talk about the macroscopic/macroeconomic picture without talking about human nature, politics, governments, etc.  

Caviar Emptor's picture

Right! Reagan proved it! (Dick Cheney, 2002)

apberusdisvet's picture

Interesting interview with the DOE head marxist, Dr. Chu on CNBC this am on the efforts of universities (publicly funded of course) to arrive at solutions for more technical breakthroughs on electric cars or something similar.  I wanted to yell at the screen.  "Hey asshole who is going to have the 40g's to pay for this new technology in any appreciable volume".  Certainly not the rapidly disappearing American middle class.

Caviar Emptor's picture

Just to set it straight: Bernanke is not a straight up "Keynesian". He's a devout follower of Milton Friedman. He believes that monetary policy will prevail over all problems in the economy. The long line of Friedmanites going back to Greenspan and Volcker also backed Supply-Side economic politics, which in large part contributed to our current situation: they created a 3-decade long slide in real incomes, they encouraged outsourcing and offshoring, they instigated regressive tax policy (cuts for upper incomes, raises for middle) because they believed that wage inflation was the root cause of stagflation in the 1970s. We know what happens when you offshore America's industrial and manufacturing base. Notice that yesterday China's data showed manufacturing was expanding, whereas our Empire manufacturing survey showed contraction. We also know what happens when wages and incomes swoon for 30 years. They also began a massive increase in public and private debt levels. I know I'm going against the grain of Tyler's orthodoxy here, but there it is, someone had to speak out

centerline's picture

Interesting stuff to consider.  Thanks.  And...

Along the way, countries like Mexico and China were more than happy to pit the equivalent of slave labor and complete lack of enviromental controls against everyone else in order to pull that industrial capacity to thier side.  China's frantic pace of internal construction and development ahead of a population who can really afford it should be tell-tale of the bigger global plan they have had.  The big question is whether it will work out for them - or have they tragically miscalculated/underestimated.

baby_BLYTHE's picture

Milton Friedman and his Chicago school buddies were monetarists (perhaps more properly Neo-Monetarists).

Friedman is Bernanke's idol. Ben is a Monetarist with a Keynesian twist (in regards to his wanting the government to increase the debt ceiling and not make any significant cuts)

mayhem_korner's picture

Bernanke is nothing of a monetarist.  Monetarists, in the pure form, would never print money; they believe in regulating money supply via interest rates.  Bernanke's purpose with his helicopter is to monetize the fiscal policies - so what he's doing is more Keynesian than monetarist.

"Good" monetarism would maintain interest rates at some real level to keep money supply in check.  Greenspan and the Bernanke have done none of that - simply made it too easy to borrow.

Friedman abhorred the thought of money printing - he called it criminal.  He believed in indirect intervention via interest rates.

Monetarism has not been deployed in its pure form.

TexDenim's picture

The insane assumption Bernanke makes is that the only meaningful metric people use when deciding to take on debt is the interest rate. This is the classic "false precision" offered by apparently "precise" data: if other causal factors can't be quantified with sufficient precision, or quantified at all, then they're ignored by the model.

This is so true. The most devastating assumption economists make about the great herd-mass of humanity is that they are as socially crippled as economists, and that they substitute Mr.-Spock-like logic and analysis for the crippled emotions that fail them socially.

centerline's picture

Rational behaviour is contextual (and postional).  Debt saturation is clearly the prime example.  Reinforced now by the concept that added debt no longer adds to real GDP, but in fact may decrease real GDP.  THe realization that at some point the economic equation become worthless has to scare the pee out of people whose thinking is predominantly linear.  I am sure that Bernanke is smarter than this - but to think he can control the situation is beyond comical.

rlouis's picture

Makes one wish Bernanke would jump out of his ivory tower and end his misery, might reduce ours as well.

I am Jobe's picture

Infamous Quote from Mayer Amschel Rothschild

"Give me control of a nation's money
and I care not who makes the laws."

Madcow's picture

rats + cocaine pellets ... 

yes, but only if the money supply (credit) can double again. if it can't then the system will collapse due to a plain and simple lack of new new money to feed all the previously issued bonds and rents and whatnot.  

you either have to give the debtors 2x the credit to continue to service their debts - or you allow deflation to take hold and recognize that the future is parabolic increases in default, foreclosure, bankruptcy, etc. etc. 

can't have it both ways :(


Sancho Ponzi's picture

Turbo Timmy could send everyone who filed a 2010 tax return with an AGI less than 100k a check for $20k. He could clear the checks without borrowing any money and without increasing debt by simply clearing the checks (or direct deposits). 

At first glance some may be inclined to believe the result would be rampant inflation as the money supply explodes by about $2 trillion. But I'd wager virtually all the money would go toward paying down debt with most of the rest going toward purchases of durable goods such as badly need vehicles, refrigerators, etc.

Paying down debt leaves the citizens with more purchasing power, more options to move to where the jobs are, etc. Paying down debt provides badly needed reserves to banks and financial institutions. Company and personal balance sheets would improve. When inflation does start to heat up Ben can begin raising interest rates. 


Hondo's picture

The real question is should one have to out guess the FED to run a business, or lead a normal life.  Should we the citizens accept being jerked around like puppets on a string in order to accomodate the elite and banking sectors.  Shouldn't common sense rule decisions and shouldn't one be able to use their own (and suffer the consequences thereof) brains to make decisions instead of having to out guess people who are truly less eductated than they want you to believe??????

GoinFawr's picture

USD up against its fiaty peers, Au up too; again.

"Divesting while the divestment is still good"™
"Divestment while the divesting is still good"©

What ever happened to the "USD down/Au up, Au down/USD up" crowd?

TELL is on like Don King's Bong.

baby_BLYTHE's picture

The FED was heavily critized after unleashing QE2.

Come QE3, I suggest the Printer consider a different form of transport

GoinFawr's picture

I've got these slightly used teleport pods from the mid 80's he's welcome to. They still work just fine, honest.