Bernanke's Legacy Problem

Bruce Krasting's picture




The surprise of the week was not the goofy ending to the cliff. It was the minutes from the Fed.


The meeting in question took place on 12/12, just 23 days ago. Some very major announcements came as a result of that meeting. A new, and much more aggressive Fed policy was revealed. For the first time ever, the Fed set a target for when monetary policy would change.


The Fed said it would keep its foot on the monetary gas pedal until unemployment fell to 6.5%, and maybe even lower than that. The economic forecasts that the Fed released showed a consensus estimate for unemployment staying above the magic 6.5% until at least 2015. So that set a bar for any changes in monetary policy years into the future.


The Fed backed up its new long-term commitment to boost the economy by doubling up with QE4 – another $45b a month of POMO buys. In December the Fed set the “needle” for monetary steam at the same level that existed during the dark days of 2009. All in, the last Fed meeting was a precedent setting commitment to extended monetary easing. At least that is how I read it.


And then we get the minutes from the meeting where all these dramatic steps were taken. The minutes read completely different. What the hell happened? I have the sense that there was a conversation that might have gone like this:



Okay, we will go forward with QE4. This is our last chance to do anything for a long time to come. There will be no more QE on my watch as head of the Fed.



But, but Ben…..We just promised…..



You’re kidding? I love it! But I don’t understand. What’s up?



I’m looking at the calendar. I’m outta here it 18 months. Before I leave, and turn the keys over to the next guy, I have to “regularize” monetary policy. So that means we end the LSAP’s this year.



But, but, Ben, the markets will be disappointed. The S&P could fall, interest rates might rise. We wouldn’t want that, would we?



Yeah Ben, we don’t want to upset the apple cart just at the time we have it righted. Remember 1937?



I’ve made up my mind. I will not leave the Fed with a policy that is still in an extreme position. I want to give the new guy a fighting chance. Greenspan did the same thing for me before he handed over the reins.



I’m very sad. I thought we would be able to have fun goosing markets for another two years. Now you’re taking away the punchbowl much earlier than anyone has thought. How will we be able to communicate this to the market? It will be a big shock if we just come out and say that QE is over.



We can control the markets; I’m not worried about that. We’ve being doing it for years now, we should have no trouble doing it for another year.



Gee! What happened to my plan to target monetary policy to unemployment? I thought we agreed to that! Now you’re doing a 180 on us.



I'm not suggesting a 180. We will not reverse any QE. I'll leave that up to who ever sits in this chair next. I would like to bring policy closer to neutral.

We will just have to manage the news flow. We can, and will, control that. We will use our usual sources, guys like Hilsenrath, to help introduce this slowly. After all, we don’t want any knee jerk reactions.


We will sanitize the minutes of this meeting. We can introduce the possibility of a change in policy with the words we use. We just have to vague about it...plant a seed. Yes, we will cause some confusion, but that can’t be helped. Most analysts are so confused at this point, I doubt that too many will take the suggestion we are changing direction seriously.



But, but Ben….this is all coming as a surprise. I’m very disappointed.



(Sobbing) So am I!



Well, all I can say is tough! I have a legacy at the Fed, and I want to preserve that legacy. I will not allow my term at the Fed to end with a policy that must be reversed by someone else on the first day he takes over.


Unless something very significant happens over the next half year, "my" Fed is going to move toward a neutral monetary policy by 2014.


We will continue to drop hints for the next few months, and I will make my final speech in August, at Jackson Hole. I will use that opportunity to confirm what we have agreed to today.



But, but, but Ben….



Drop it Janet. My mind is made up. Meeting over.




Okay, I’m kidding a bit. But this is not so far fetched. Why would the Fed send one signal on December 12 and quite a different one on January 4? When it comes to the Fed, there is always a motive for its actions. The motives are not always clear.


I do believe this development is connected to the “legacy” issue. Bernanke’s term at the Fed will set many historical precedents. To a significant extent, history will judge Bernanke on what he did while chairman of the Fed. But the books will also look at what happened after he left.


I believe that Bernanke would very much like to leave his successor with a Fed that had policy choices. As of today there are no options left. Just more useless QE. I doubt that Bernanke wants to exit with the Fed’s foot planted firmly on the gas pedal. The next guy does deserve a cleaner plate than now exists.


Is the Legacy factor influencing Bernanke? I think it has some sway in his thinking. Consider what Greenspan did before he left. After years of soft monetary policy he ratcheted up the Federal Funds rate 17 times in 22 months. He took the funds rate from 1% all the way up to 6%. Part of that rapid increase was driven to get monetary policy "neutral", so that Bernanke could do as he wished. Not long after Bernanke took over, he took the funds rate down to zero.




Clearly, Greenspan tried to get monetary policy back to neutral before he left, I don’t see any reason why Bernanke would think differently. Are we watching a repeat of history? At a minimum, his legacy, and where he wants the Fed to be when he leaves, is part of Ben's thinking today.


Readers may conclude that I’m all wet with this. That Bernanke’s Fed will never end the easy money policies. And the idea that his legacy has anything to do with current policy is just gas. Readers might be right in that observation. But those who think that the legacy issue is not a factor, have to answer the question, “What the hell happened at that meeting? Why are we getting hints of a change in policy at this time?”

If there is another excuse for the Fed’s apparent change of heart, I would love to hear about it. I can’t come up with anything else. Something has changed, and it isn't the economy. So what is the motivation?



Reading the Fed’s tealeaves is a bit of a fool’s game. The chances of being right are about 50-50. But for the sake of discussion, assume that the Fed was telling the truth this past week. Monetary policy will change over the course of the year. It will go from 4th gear and full gas, to “neutral”.


When I say neutral, I mean that the monthly QE programs would come to a gradual end. It’s even possible that there could be some very small backup in the Federal Funds rate early in 2014. To me, this sets up a very interesting scenario.


There are two schools of thought on the Fed’s QE activity:


- All of the Fed Governors (specifically, Bernanke and Yellen) have stated their belief that it is the size of the Fed’s balance sheet that matters when it comes to measuring monetary stimulus. The vast number of folks who opine on the Fed, also believe this is the case. So the markets, and the Fed believe that “neutral” means that the Fed’s balance sheet remains static.


- A small, but vocal minority, lead by Tyler Durden at Zero Hedge, see it differently. This group believes that it is not the size of the Fed’s balance sheet that is the issue. It is the daily, weekly, monthly flows that the Fed creates with QE that is the critical metric when measuring monetary policy.



The two different views are remarkably divergent in their conclusions. And only one camp will be proven right.


I happen to agree with Durden. It’s the flow, not the size. We have a capital market that has a $20B “bid” in it every week. With each POMO buy, the primary dealers have cash money in their pockets, and they have to spend it. So they buy “stuff”. The stuff they buy with the loot from QE ranges from Treasuries, to junk, to equities. I believe that the constant demand from the Fed is the gas that makes these transactions happen. I believe that when POMO stops, so does the merry-go-round.


The Fed will not stop QE abruptly. There will be a 3-6 month wind-down of the POMO buys. We have been here before, with QE1. Well before the Fed stopped buying, markets started to react to what was then perceived to be the end of the QE party.


To a significant extent, this question, and how the markets answer it, will resolve the fate of the markets, the broader economy and Bernanke’s legacy. So this is a very big deal.


The view of the Fed, that it is balance sheet size not flow that matters, is supported by 95% of the market today. So when Steve Liesman tells you that the Fed is moving to “neutral”, and that’s not a big deal, be wary. The "consensus view" is rarely right in these matters. I think the Fed’s neutral is going to feel as if we are in reverse, and moving backwards pretty fast.


Note: I have long felt that Greenspan's rapid reversal of the Funds rate in 2006 led to the collapse in 2008. Alan tried to "regularize" what he did after the Dotcom bust. Bust went to bust as a result.



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Lucius Cornelius Sulla's picture

So spoke Ceaser, Napolean, Hitler and Lucius Cornelius Sulla.

Haole's picture

I don't get it, are you thinking military coup or something?

HurricaneSeason's picture

It used to be as Lee Iacocca said "As goes General Motors, so goes the nation." There were only hundreds of thousands of autoworkers. There are millions in the service and millions in the civil service supporting them and even millions more in the private sector selling them stuff for big bucks. Some of the only jobs that cant go to China or Malaysia. It is "As goes the military, so goes the nation, now."

q99x2's picture

Since the US is just outright attacking nations, (mostly killing Arabs and Blacks,) why doesn't the NWO bring some of the spoils from war home and redistribute it? My Government handouts aren't going as far these days.

HurricaneSeason's picture

AND they rebuild Iraq so we can blow it up again in a couple years when they try that Euro or Gold Dinar crap again.  Yeah, I dont get it, why not take the oil and give them a casino like the Indians?  Beads, right now, then casinos in 200 years. You know they're harvesting those poppy plants in Afghanistan. Those are 25 square mile poppy fields and you can see them from space and we control the air space. Where's all that money going? I estimate $2 trillion a year street level and pill level. Supposedly they occasionally pay the locals to destroy one of the fields, not with napalm or fire, but by harvesting it and rumor has it that some of it makes it onto the black market. They supply 90% of the worlds supply and when we leave, the Taliban will burn it.

dogfish's picture

Obozo is re-elected that is all that mattered.

HurricaneSeason's picture

It was a rigged election too. He got 90% and up in many precincts. Some he got 100% of the vote. Nobody even mentioned that that looked suspicious.

warm breeze's picture

Actually, they did. Check out (world net daily)

moneybots's picture

 " I have long felt that Greenspan's rapid reversal of the Funds rate in 2006 led to the collapse in 2008."


The horse leads the cart, not vice versa.  The boom in mortgage debt lead to the bust in mortgage debt.


The crash in the investment banks did not occur from what happened in 2006, it happened from what happened in 2004- the investment banks were granted leverage waivers.  At 30 to 1 leverage, a 3% loss bankrupts. 


The FED is now leveraged up over 50 to 1.



moneybots's picture

 " To a significant extent, history will judge Bernanke on what he did while chairman of the Fed. But the books will also look at what happened after he left."


Yep.  After Greenspan left and the crash occurred, Greensp[an was no longer called The Maestro, considering people could now look at the mess he actually caused with his easy money policy.

The same will hold true for Bernanke, for the mess he is creating now.

Dr. Sandi's picture


 " To a significant extent, history will judge Bernanke on what he did while chairman of the Fed. But the books will also look at what happened after he left."

History is written by the weiners. And there's not a book alive that can't stand a good rewrite.

WhiteNight123129's picture

Let s drop this nonsense getting in the game of chicken entrails reading, look over decades, and what do we see? Utterly non sensical policies from the lack use of reserve requirement to not paying attention to total credit etc... etc... Situation is very bad at best dire at worst.


A. Buttle's picture

Spank the Bernank!

Wm the Shrubber's picture

Minutes were simply misdirection from the Fed, a distraction from their committed strategic plans.  Keep markets guessing thus keep control of end results.  It's all part of the game.  I agree that QE is with us for an indefinite future, and that flow not stock is what matters.  Curtail the flow and reap the whirlwind.  Equities are the only visible indicator of Fed "success".  If they go, it all goes!

the grateful unemployed's picture

makes you wonder if they discussed the official minutes at the meeting, or Ben said, I'll take care of it

Dr. Sandi's picture

Are you implying that the official minutes aren't the official minutes? That would be cheating.

zenon's picture

While the question of what changed between Devember and early January is pertinent, there are 2 more issues that meed to be addressed:

First, why in spite of 3 1/2 months of QE3 (from the september announcement to now) has the Fed's balance sheet only expanded by very liettle and is down by 4B from a year ago? They were suppossed to be expanding it by 40B per month (or 85B according to most analysts). Was QE4 a bluff?

Second, why did the equity market not react to the recent minutes while gold and silver got dumped? Now, admittedly, gold and silver were the focus of a selling campaign as the bullion banks were too short and had to shake out some of the weak longs. But what about equities? Were the equity markets perfetcly "insulated" by market intervention or are they due for a delayed reaction? In all the years that I have spent in the markets, I have yet to see such perfect insulation, if that's what it was. I thought I had seen it all until the last 2 days.

NoControl's picture

I would really like to see some of these points addressed by some here more learned than myself.

mind_imminst's picture

"The Fed will not stop QE abruptly. There will be a 3-6 month wind-down of the POMO buys. We have been here before, with QE1. Well before the Fed stopped buying, markets started to react to what was then perceived to be the end of the QE party."


Ask anyone who shorted bonds what happened at the end of QE1. They got creamed. The FED not only kept buying. They bought more and more. They cannot stop buying as long as the government keeps spending. QE will not end. It will not go into neutral. QE will increase. Remember that Greenspan had a roaring asset bubble economy to buffer his higher interest rate. Bernanke does not. Right now we have debt bubbles that are not even creating illusory wealth such as what happened during the housing boom. The inflationary policies will continue in 2013, IMO.

the grateful unemployed's picture

right and right, their job is to let the air out of the roaring asset bubble economy slowly enough to prevent severe dislocations, or outright economic failure. this is a controlled crash. and just thinking who would want the job? i think not anyone who looks forward to the challenge of forming Fed policy - that's pretty much written in stone for the next couple decades - but someone whose ego and sense of drama draws him (or her) into the spotlight.

justsayin2u's picture

Bennies legacy will be a shrug and a point to Greenspan, Clinton, Graham.

the grateful unemployed's picture

pretty cogent post, although greenspan raised interest rates to counter the animal spirits in the stock market? and he had lowered them to build some buffer against Y2K? which it turned out wasn't a problem at all.

and its all about perception (yours) and the way they seek to manipulate the perception (again yours) that they really have an exit strategy. the Fed could have set a date for change in policy based on a rise in green(span)house gases, that would signify that economic activity was picking up. there are even more arcane methods, but this one will do (since the BLS owns the labor report, as well as the CPI, lets just do a bit of legerdemain here, and flip from one to the other - like chicken for beef - hedonics) that should confuse the suckers.

Bernanke can sit on the fed forever if he chooses. in political circles he is known as a fed chief who can play ball - the BofA Merrill cramdown on shareholders - he will go to criminal lengths to support his government bosses [and yes the Fed is now officially a branch of UST] remember Ron Paul wanted the Fed to open their books so he could see what Greenspan was doing for Nixon, because the checks on the slush fund at CREEP were written off a prominent Mexican bank... and he also wonders what they had to do with Iran Contra, remember Greenspan said the GHWB was the most meddling President he served under - he never said he resisted his meddling

nice art tho Bruce, now take off the gloves and write the real article

max2205's picture

All this is a secret war against China attacking the bond market in 2008.

We killed their stock market as a result

War maybe over and no QE defense required. China had the overthrow and a new premiere.

We get to read about it in 20 years when it's declassified

AldoHux_IV's picture

The very fact you speak as if the fed will be around much longer to see an eventual unwind is amusing, but to your point there are 2 ways to opine on the strategy of greater fools: 1. Interest rates and how money should be priced-- especially now that LIBOR is obsolete and the BOE possibly joining the ranks of debasement i.e. central bank moves have seen BOJ and BOE philisophically 'step it up' 2. Credibility-- setting up a typical DC like kabuki theater to restore credibility to the fed especially leading to the transition of fed chair (as you somewhat pointed out as legacy i see more as a false sense of duty to restore credibility).

Either way, the mere fascination and slight obsession the financial community will have about the balance sheet and unwind (as most 'successful' participants have front run the fed) will be the equivalent of a slight unwind as rates begin to 'normalize' based on communication alone i.e. they may be testing how much of a cushion they have to move.

More importantly, the discussion needs to be about dismantling the fed and reforming the financial system if we are ever able to truly recover from the financial crisis ergo: fuck the fed and fuck what they say-- it's another slight of hand to ensure it continues to transfer wealth.

Lucius Cornelius Sulla's picture

The USG cannot survive without the FED and the banksters.  The only option for the USG is default.  They cannot afford a hard default so they need to the FED.  Same goes for the rest of the fiat currencies and their central banks.  The whole thing is a CONfidence game.

Bollixed's picture

That assumes the end game is to save the USG as a sovereign entity, and as it appears presently, that is a leap of faith by the people. TPTB don't appear to share that goal.

Think One World Government.

Lucius Cornelius Sulla's picture

We'll see how much love the world central banks have for each other when the BOJ implodes.

Rainman's picture

Good point. Only one of the Big 4 needs to falter, forcing all assumptions and future schemes to be reset to panic mode.  

stant's picture

qe until she blows up, they have no way to end qe. catch 22

Mr. Hudson's picture

This massive debt will grow and grow until the U.S. cannot pay on the interest. Then the Fed will do what FDR gave the Fed the power to do: confiscate every square inch of property in the United States.

magpie's picture

If they already own all of the MBS issued, that makes it a moot point.

Irelevant's picture

They don`t need the propriety. The FED is a bank, banks deal in money not in buildings. Propriety implies taxes, servicing, banks are not interested in this. They don`t give a fuck about the `proprieties`. They need to keep the debt slaves chained to the propriety. That`s why they are doing everything to keep rates low, offer refi, and so on. If the people realize they are in NEGATIVE QUITY, as is the case in all of Europe (except maybe Germany), and have to pay 30 year mortgages that amount 3-4 times the actual price of the propriety, who da fuck would continue to pay? They don`t give a flying fuck about the proprieties, they want the hamsters to stay and work and pay FOREVER.

Bárðarbunga's picture

I'm still at a loss to see what socially accepted behavior has to do with any of this.

You're not trying to spell PROPERTY are you?

spinone's picture

The FED already owns 90% of the stock in the country, through its subsidiary the DTC.  The investors are just the beneficiaries.

Lucius Cornelius Sulla's picture

The one factor that must horrify the FED is USG deficit spending.  The shear size of the deficit boxes them into a corner that demands low, low rates for a long, long time.  The USG is gambling that deficit spending will stoke enough growth to wean them off of debt.  It appears that the FED may be losing faith in this strategy.  At some point, credit markets will demand higher rates to compensate for risk of default.  So it could be that the FED is getting skittish and trying to send a signal to Congress to get their fiscal house in order.  After all, there is only so much "good" debt that the FED can monetize before its balance sheet losses credibility.  As the USG becomes a credit risk, the purchasing choices become more and more sketchy.

HurricaneSeason's picture

They are sending them a signal to cut their deficits in half. The Fed uses mortgage backed securities that are worth 1/3rd what they claim for capital, that they then leverage, to buy 90% of the treasury bonds? The bankrupt cities and counties probably buy the rest. Who will demand higher interest? The entities like China and Japan quit a long time ago. I look for the Fed to "buy" 2 more trillion and then try to get the debt they hold to slowly pay a higher interest. They don't want a $10 trillion balance sheet that could be called fraud, but they don't want interest rates to go up quickly or their capital turns to shit. Like it isn't already. The Bernank is going to choke. If they can cut the deficit in half, the Fed can slowly accumulate capital that would have been enough for the purchases they have already made.

GMadScientist's picture

Do all interventions involve gimp masks, aluminum bats, and nitrous tanks?!


TheFourthStooge-ing's picture


Do all interventions involve gimp masks, aluminum bats, and nitrous tanks?!

The most effective ones do.

TheFourthStooge-ing's picture


If there is another excuse for the Fed’s apparent change of heart, I would love to hear about it. I can’t come up with anything else. Something has changed, and it isn't the economy. So what is the motivation?

Perhaps panic? The Fed is operating in uncharted waters, as the current global economic clusterfuck has no historical precedent. While some aspects of this situation may resemble the Great Depression and other aspects may have similarities to Japan's lost two decades, there are significant differences as well.

Although the veneer of theoretical mumbo jumbo and obfuscatory mathematical jargon which surrounds the field of economics is formidably thick, it is still, at best, a social science. The elaborately complex models used by the Fed are, at their core, nothing more than exercises in curve fitting based on historical data. Such an approach is fine for things like Newtonian motion at non-quantum levels and non-relativistic velocities. However, when dealing with non-linear dynamic systems, such as national or global economies, such modeling is guaranteed to fail, not gradually but catastrophically, at some point in time.

Bernanke may simply be trying to steer the ship back toward a place where failure, although more likely, is more predictable, before turning control over to a new captain. His legacy would then be that, although the weather started getting rough and the tiny ship was tossed, with Ben Bernanke at the helm the Minnow wasn't lost.

Haole's picture

QE will stop in a year or so?


Yeah, ok...


Winston Churchill's picture

Just channeling Jean Claude;

"when it gets serious you have to lie".

fonzannoon's picture

why is this so hard? those minutes probably are put together two days before they release them. they thew in those few lines to spook commodities and cause a gold selloff. so far in 2013 the market is up very nicely and gold is flat/down. perception management. 

Ben knows they can never stop qe so the next best thing is to try to show that it does not have any ill effects. he can hand the torch over with qe still in effect and no one gives a shit. when it falls apart later ben can say "well when i was doing it things were fine"

DR's picture

"perception management"

That was my first thought that Ben was practicing some behavior economics-trying to skim some market froth . But what if there really is a strong disagreement about the current easy money policy and the next chairman goes hard for a reversal? Ben promised QE until UE6.5/2.5 but he might be out of office before that happens.


The markets are priced for perpetual QE.

GMadScientist's picture

I'm sure people had similar reservations (pun!) about Ben at Greenspun's ignominious departure, but the kid turned out to be alright...the next guy (Timmy, Jamie,...) won't rock any boats.

sangell's picture

Since it will be Obama who nominates the next Fed chairman/woman and the Dems will still have the Senate why would there be much change in Fed direction?

Element's picture

Well at least she's not a goy, that would be so wrong.

(how much more obvious could they possibly be though, makes me laugh every time I see some asleep-at-the-wheel fool still trying to assert central banks aren't a globalized kyke bankster organized-crime gang, when the evidence of it is everywhere)

Dr. Sandi's picture

You forgot to mention that the same people who owned Reagan Bush Clinton Bush now own Obama, and they are still in charge of the Fed direction.

lunaticfringe's picture

Very interesting premise Bruce. I am still mulling it over. That level of vanity would not be unheard of, but I don't think that's it.

I think it is simpler. Governments prevents panic. That's what they do. They telegraph and intervene on behalf of their corporate and banking cronies. Those guys are not nimble and they get crushed in panics. They are the owners. They own this place. And they sure as hell hate surprises from the people they own.

The Fed has been doing what politicians do. They tell us they are doing QEternity and then when the irrational exuberance becomes too much, they come out with a wet blanket like those Dec. minutes. Remember Bruce- the equity markets didn't go down, did they? Why not? This is manipulation. Pure and simple. Tell us one thing but do something entirely different. Those minutes, quite frankly, were absolute bullshit. Contrived. A restatement of what normal people might do that sounded reasonable given this great "recovery" that is going to happen any year now.

It's not going to happen Bruce. They know that. One failed bond auction is all it would take. QEternity extends through Bernanke's term. It has to. The next guy will have to continue the policy or face the music of rising interest rates and trying to find the money to refinance 4 trillion into higher and higher rates. All those minutes were meant to do was to keep other currencies and commodities at bay. That simple. 

A very economical and credible way of driving competing markets down. Words.

It was more intervention and manipulation. Like the CFTC raising margin requirements 5 TIMES on silver. Why? Who won? Why would the CFTC give two shits whether silver was 50 bucks or 100 bucks? The intervention was done strictly on behalf of the governments bank- JP Morgan. The silver market has never recovered. People suddenly realized that the owners could get the rules changed to suit them. Recently the CFTC lowered gold's margin requirments but left silver untouched? Why?   

QEternity stays. Manipulated markets stay. The game is rigged to keep everyone and all capital in equites. Period.   

I will make you a straight up wager that QEternity will not end before Bernanke leaves. I think a ten oz bar of silver will be a sufficent wager. I might have one laying around.