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Modern Fed History Signals Bernanke's Resignation
by John Tamny, (VE Guest Contributor)
Just four days after Fed Chairman Ben Bernanke laid out his rationale for the latest round of quantitative easing in the Washington Post, Fed Governor Kevin Warsh, in a veiled slap at the Chairman, offered up his dissent, and on no less than the Wall Street Journal's editorial page. Though Warsh voted in favor of Bernanke's plan, his op-ed spoke volumes about conflict within the central bank that so far has revealed at least one public dissenter in the form of Kansas City Fed president Thomas Hoenig.
Modern history says this doesn't necessarily bode well for Ben Bernanke's future as head of the world's foremost central bank. Indeed, if broad discontent about QE among major economic eminences outside of the Fed is even remotely representative of unhappiness within, Bernanke may soon face a revolt. If so, his tenure as Fed Chairman could soon be coming to an end.
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For background, all we need to do is return to the year 1987. Paul Volcker was Fed Chairman then, and while in the years leading up to '87 his interest rate decisions had mostly been met with votes in his favor, by then many of his allies on the board had retired or resigned, and had been replaced by Reagan appointees. Most notably, Manuel Johnson and Wayne Angell were two Reagan appointees who used market signals - commodities specifically - to inform their views on whether or not inflation was a problem.
At the time in question commodities were declining and market rates of interest were falling too. Though the Fed's targeting of the short-rate for cash is problematic on its face, market signals were calling for rate cuts by the central bank.
The problem then was that Volcker did not agree. More of a rate hawk than the newer Reagan appointees, Volcker held firm with his view that he wouldn't support a rate cut, particularly if central bankers in Japan and West Germany weren't ready to do the same alongside him.
Ultimately Volcker was caught unaware by how very much the four Reagan appointees (Martha Seger and Preston Martin the others) were of the mind that the discount rate needed to come down. And when it came to a vote, Volcker's two allies on the board did stand by him, but the Reagan appointees all defected on the way to the Fed Chairman being outvoted.
As William Greider noted in his book, Secrets of the Temple, Volcker was furious, and worse, the very public way in which his authority had been questioned made it apparent to the world that he'd essentially lost control of his Fed. Volcker actually motioned that he would resign right away, but Treasury Secretary James Baker convinced him to stick around.
But later on in the year Volcker not only faced opposition from his board members on the rate question, he also suffered what Greider viewed as subtle attacks on his authority from the money center banks effectively on his watch. Specifically, Citibank's John Reed and other major institutions with exposure to bad Latin American loans chose to work them out on their own, free of Volcker's guidance.
Having been undermined by his underlings on the Federal Reserve Board, along with heads of the major banks under his regulatory control, it was very apparent that Volcker was Fed Chairman in name only. With his term coming up in August of 1987, Volcker was still willing to stick around for another, but only if President Reagan publicly backed him.
Reagan withheld the kind of public endorsement Volcker sought, and while the former Fed Chairman is oddly lionized today by Reaganites possessing short memories, Reagan's stance was understandable. Indeed, not only had the President suffered Volcker's persistent stubbornness on interest rates, Volcker had also leaked against the Reagan tax cuts with regularity, not to mention that his three-year flirtation with monetarism (1979-1982), far from strengthening the dollar as modern mythology suggests (the dollar's rise and gold's fall began when Reagan won New Hampshire in 1980), nearly made him a one-term President.
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In short, Volcker had been a difficult Fed Chairman for the President, plus his troubles inside and outside the Fed made it apparent that he'd once again lost control. Volcker retired, Alan Greenspan was nominated as his replacement, and the rest is history.
Returning to the present, Thomas Hoenig as previously mentioned is on record as being against the Bernanke Fed's (Richmond head Jeffrey Lacker is another) persistent and vain efforts to stimulate the economy through monetary machinations. As for Warsh's op-ed in the Wall Street Journal, for a Fed Governor to be so explicitly critical of the Chairman's policies on the Holy Grail of editorial pages suggests strongly that he planned the piece well in advance, and that he didn't go out on a limb in such a public way without the backing of others on the board.
If so, logic says that much like Volcker before him, Bernanke has not only just control, but also some amount of credibility with the Fed board members beneath him. And if history rhymes as they say, it's a fair bet that Bernanke could soon enough face Washington-style pressure to "retire" with as much grace as possible.
This too might explain why Treasury yields have begun to rise. Simple logic tells us that markets had priced in QEII long before Bernanke announced his plan, so it's perhaps fair to assume that the decline in Treasuries in concert with weak stock markets is a signal that markets are pricing in a looming change in policy; one that would halt further quantitative easing. As for stocks, ultimately it will be a market plus for Bernanke to resign a job he's proven unequal to, but with a lack of information always a market negative, investors are selling shares until they know for certain how change at the Fed will play out.
Ultimately what's being suggested here is pure speculation. Still, the body language of certain members of the Federal Reserve Board of late speaks to unhappiness about the central bank's direction. If true, past history hints that Bernanke, increasingly a joke outside the Fed, is losing his grip on the inside on the way to him stepping down.
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About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channe
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NO! NO! NO!,I want his FORESKIN tacked to the Feds front door.
I am tired as hell as these bstds who have killed us retire, quit resign, and dissapear..Wealthy beyond our wildest dreams.
Pay Back is Hell.............Bernie stays.
In a closed economy the Bernankes printing might have had some domestic effect. To date the Bernanke has saved the New York criminals, endorsed bonuses for failure and kept China loaded with U.S. cash robbed from American children.
Obviously this guys got to stay, results be damned.
Why do people bother to analyze the plot lines of puppet shows?
This article is as relevant as arguing over who is the best professional wrestler.
Just another day in the circus...
BoBo Brazil with his famous cocoa-bump is the best-ever pro wrestler, bar none!
So let's just go into fantasyland and say CONgress doesn't increase the debt ceiling in April/May. That would effectively tie the string around BB's balls and castrate him and further QE endeavors.
The anti-Fed movement is growing as gas prices are over $3 again--and since all QE really does is increase commodity prices it just ultimately hurts the pocketbooks of the majority of citizens. More and more people are becoming aware of this, right and left, and they wan't it to stop.
Obama, if nothing else, is a politician and if the backlash is loud enough (now that Larry is out of the picture), Timmay and BB could be next. Once again, this is fantasyland, but never hurts to have hopium for a good cause.
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And you thought groping by TSA was bad, wait until you're sent to a concentration camp!! God Bless America!!!
by Anonymous
the america i knew is gone---i dont even want to leave the house anymore--people dont even talk to each other anymore------only to get what they need and? then run back home-----its sickening-----really
leave the Bernk alone...Prez Barry might put Eric Holder in at the Fed
I'm not sure replacing the captain of the Titanic after hitting the iceberg would have changed the course of events.
Is the main criticism of BB coming from the Street saying QE2 is to small to be effective, or should not have been attempted?
Are the appropriate monetary policies explicitly understood and the problem is now finding a tractable Fed Chairman to implement them?
If so, whose policies -- the Fed's, the Admin's, the TBTFs' or (ha-ha) those of Congress?
Nice historical article. Especially pointing out what the Reaganites all forget, that it was none other than Ronald Reagan who set the stage for the current mess that we're in, by bringing in Greenspan. As well as that other utter economic failure of Trickle-down Economics.
Thank you for posting this.
Two key differences between Volker's Fed and Bernanke's Fed:
1. Reagan appointed governors who opposed Volker, Obummer stacked the Fed with inflation-danyer "doves"
2. The Street was not too "impressed" with Volker, while they literally owe their current wealth, employment, apartments and summer houses, Porsches and Ferraris, and of course every cent of the bonuses for 2008, 2009 and 2010 to none other than Bernanke. He literally bailed them out and showered them with cash. Bernanke's position is not under any threat.... other than... perhaps... if there's another million man march in DC, and that one is agaisnt the Fed
Bernanke is only the chosen FRONT MAN by the Federal Reserve's key owners as everyone here at ZH knows the USA President only gets to pick from a few people **the Federal Reserve assigns**. Look towards the owners of the Fed, many based in the City Of London, for who the next front man could be.
Bottom Line: Bernanke is a puppet for his handlers who are the real owners of the Federal Reserve Central Banking System.
Meet the new 'boss' (Greenspan, Bernanke, etc), same as the old 'boss'.
If Bernanke resigns I will donate $100 to ZH.
Won't happen...
You could still donate, you saw it here first, right?
I'm just sayin'...
http://www.youtube.com/watch?v=gqsT4xnKZPg
Inflate or die.
Bernanke and all FED members know that, ignore the posturing.
He votes in favour and then writes an editorial in the WP criticizing what he voted in favour of. Yeah, right..........
Once you go down the money printing road there's no coming back.
The issue in my opinion is not if The rest of the Fed board lost confidence in Bernanke, it is if he is still doing the administrations bidding. IE does Obama think he has a better chance for a second term with or without Bernanke in charge, the large term ramifications of his policy decisions and the opinion of the Fed board members beneath him are not part of the equation.
"The issue in my opinion is not if The rest of the Fed board lost confidence in Bernanke, it is if he is still doing the administrations bidding."
BWAHAHAHAHAHAHAHAHAHA!!!
As if.
He has blown so much what he does with the bernank is meaningless.
He lost my second vote long ago, and now we are going to watch the next two years of death by papercuts. The republicans will let the economy continue to skid at the bottom of the tank for the next two years. How I let myself believe the 3D chess thing evaporated with every back room deal he cut with the insurance companies, and was buried when he conspired with BP to coverup the magnitude of their responsibility, and now he is a total pussy being held hostage by that hack kyl over the START treaty.
His monoterm ticket is punched.
goldman is probably already picking out the office. will he be in power central, or relegated to Jersey City? that's the only question left.
I sincerely doubt that Obama has the stones to do anything except bend over for Bernanke.