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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MrBoompi's picture

I agree they have to control the perception and suppress panic because they know there are only about $2 of collateral backing up $100 claims. Can't afford a run on these global banks.

Bruce Krasting's picture

I said that some would say I was all wet. And I did say that this stuff is 50-50.

I was surprised by the minutes. The market was too. Not so visible in stocks. But bonds took a hit, and so did PMs.

I had a "vision" of what Fed policy would look like for at least though the end of 2014. That was not the right vision, based on the minutes. I'm just guessing on why the change.

As for the bet, I don't want to take it. Bad odds. Think about it. The bet is worth $300 today. But if I lose, and we do have QE full speed ahead for the next 24 months, then gold will be 2200 and silver 60. So I would have to pay off $600, twice what I could make (tail risk). I hate doing that.....


Larry Dallas's picture

Credit never lies. Never.

Only because most retail ma'-n-pa's don't have the ability to trade it.

Clowns on Acid's picture

Then bet a 1/4 oz of gold then.

lunaticfringe's picture

meh. Good point. The way things are going ten oz of silver might only be worth 150. That's my mentality. Keep up the good work Bruce. I like you. We all need someone to hate.

fonzannoon's picture

I'm not saying you are all wet. I am saying maybe we just overcomplicate things. Maybe they ordered a pizza and watched a bowl game in that meeting and someone threw those minutes together on Monday.

Ben spent all of 2009 talking about how he was going to have to start raising rates in 2010 to slow growth. Anyone remember that? Ben said he did not buy the premise of a housing bubble in 2006. Why do we give these guys so much credit? They are either evil or stupid. More likely both.

Irelevant's picture

Come on Bruce! You know as well as we do they won`t stop QE EVER. They simply can`t, the system would implode the same day. QE is there to stay for a very long time. This is a debt based currency, without exponentially growing debt the system implodes, it is actually very simple and you know it.

Bruce Krasting's picture

What I suggested is that Bernanke would take a pause with QE before the end of his term.

I said that the new guy could then make their own decision on policy. And that may very well be QE5 etc.

So we both might be right in the long run. What the minutes said to me, was that they were going to back-off by the end of the year.  That is a pause, not an end.

Clowns on Acid's picture

Ya mean that Janet Yellen is a guy ?

spinone's picture

I would disagree.  Based on his August speech  I think Bernanke is going to double down.  We are well into the realm of unconventional monetary policy.  Thats is where Bernanke's successor's options will lie.

max2205's picture

Love them stock market based countries


Irelevant's picture

So what you are saying is that we are looking at a possible marketing stunt?

In your scenario Bernanke unwinds QE only to have his successor say look, Bernanke was a fool, we need QE?! Or, unwind QE have a crash in the 'stock market' and blame it all on the tea party republicans?

The first scenario does not fly, you can`t have your legacy and eat it to. Plus, they are the ones doing the writing of the history books, so `legacy` will actually be what they want it to be.

In either case I don`t think they will stop QE, maybe practice some regrading, make it something about employment, economic growth and stability mechanism, some fancy name, but it will still be what it is PRINTING OF FIAT CURRENCY.

We are on this train for the long haul, money printing will not stop for one simple reason, it can`t. Not for one minute. The Chinese demand money printing as do the people in congress, this is not just about the US, this is global, the Chinese need QE as much as the US. Of course they will continue to accumulate REAL assets, but they need QE in order for hundreds of millions of people to continue producing junk.

This is not about legacy.

steve from virginia's picture


PM markets took a hit, they have priced in more easing. 10% of PM prices is easing and 80% is currency risk, that is Bernanke's real problem. What is a dollar really worth ... should the euro go 'tits up' or if 200 yen buys a buck?


If the Japanese could depreciate that much vs. the dollar, they could sell a few cars and Forex would 'pay off' their 200x GDP debt. That would be something that would reflect badly on Mr. Bernanke's 'stewardship': US citizens would in effect pay Japan's (humungous) debts.


This can be interpreted to mean the Fed will be 'more responsible' and not add (excess) credit. This would be wrong interprestation b/c the Fed not adding credit does not mean the private sector will step up and take its place. It means less credit overall and a finance sector liquidity crisis.


Since Janet Yellen has inside track to be next Fed-head, that would be a reason for panic on her part. Maybe Bernanke hates her!



Bollixed's picture

"Why would the Fed send one signal on December 12 and quite a different one on January 4?"

Maybe they're not as good at throwing darts as they'd like to be...

Al Huxley's picture

I agree with you - they won't end 'QE' because they can't end QE.  Because QE isn't really a measure taken by the Fed to 'stimulate the economy'.  It's a euphemism for debt monetization.  Put 1.5 trillion+ a year in new issuance out to the market without the Fed buying a large chunk of it, and where do you think interest rates would be?  And with a 16 trillion and rising debt load, the gov't can't afford interest rates to rise at all, as it would immediately make clear what most for the moment are willing to ignore - the whole situation is unsustainable and doomed to collapse.  There's no way to earn out of this one through spending cuts, tax increases, or magic incantations.  It's all about kicking the can as far as possible now.  


So the next best thing is to leverage the complicit media and put out some WORDS suggesting the possibility of QE ending, and hope that this has the same effect on the markets (particularly commodities) that actually taking some action would have, and then rely on the collective disinerest and short attention span of the public to forget about what was said after the desired knee-jerk reaction occurs.

Ghordius's picture

+1 note also how much "media legwork" is necessary, compared to Greenspan's mumbles

Water Is Wet's picture

This comment is better than Bruce's article.

Muppet Pimp's picture

If the last couple of years have taught us anything, it is that they ramp the market the most when things look bad.  This keeps the sheeple believing that any truth tellers are kooks and conspiracy theorists because their 401(k) says so.  But around my area, you cannot go anywhere without hearing people talking about the truth anymore. I have a habit of paying attention to what others are talking about when I am out.  And the unwashed masses are waking up to the fact they have been and continue to be lied to by our 'leaders'.  Pay attention to what people are talking about next time you are at bar or restaurant, etc.  The truth is surfacing and people are pissed off (as they should be).  The jig is up in the next couple of years.  Lets hope our egotisitical leaders are working on a new system behind the scenes, or they are far more incompetent than even we might surmise. 

A group of seniors were having lunch at the table next to me railing on and on about how Obama is a bald faced liar and that taxes are going up on 77% of the people and how he claims deficit reduction but there is no substance, etc.  People are starting to figure it out.

The entire world is suffocating in debt.  Losses on odious debts will have to be taken at some point.  He who sells first sells best.  

If the new system is to function right and be robust the TNTF banks, among other monopolies need to be broken up.  We need major anti-trust actions to blow a hole in the all of the groups who have their boot on our necks. Real monopolies and monopoly money are at the heart of our problems.  On the people side, values need to come back.  "If it feels good do it" leads to the peoples ruin (1963 to present).  People need to learn all the old school values, including saving money, and taking the time to teach their children right from wrong.

barliman's picture

Nice concept - breaking up the TBTF banks, etc.

It hasn't happened in the past 100+ years here in America ... so, absent public mobs dragging Jamie Dimon to a guillotine ... I would not hold my breath.

I think Bruce is overthinking the legacy aspect and missing a political aspect.

Bernanke has been the main enabler of the trillion dollar plus budget defecits. If the 10 YR was at 5.00%, the funding of the defecits would end in 12 months because servicing the debt would either become an unbearable burden the politicians have to solve ... or they would bring on a Minsky moment in less than 12 months by trying to ignore the 5.00% rate by running $ 3 trillion defecits, then $ 5 trillion defecits, then ...

... but you get the picture. It is so MUCH easier to announce a QE4 policy on December 12th, wait to see how the fiscal cliff drama plays out and if the politicians just shit the bed again (which they did), then the Fed releases a set of December minutes saying, "Fuck you all, we'll just stomp on the brakes!!!"

(Anyone naive enough to believe the Fed would not "tailor" the minutes to meet the need of the moment, hasn't gotten high up enough in a multi-national corporation to KNOW this is done every day.)

Legacy, schmegacy ... Ben wanted to put a warning shot across the bow of the politicians. Now he can sit back and watch the "Debt Ceiling Crisis Part Deux" play out and see what happens.

What is the date AFTER March 1st when he will be testifying before Congress?

Muppet Pimp's picture

Oh what a tangled web we weave,
When first we practise to deceive!

- Sir Walter Scott

Fred Hayek's picture

What'd Walter Scott have to say about people like Dimon, Blankfein and Bernanke who are practiced veterans at deception?

Optimusprime's picture

Read his history of Napoleon and find out!

nope-1004's picture

If Bernocchio cares about his legacy that much and his vanity requires lying about it, producing global consequences, then the guy truly is a narcissistic sociopath.

I don't think it's legacy, I believe it's desperation.  The movement away from the USD by other nations is happening quite fast, with meetings being held in other nations exploring alternative trade mechanisms, excluding the US.  These types of events, while warranted, are the types of events that the Fed is trying to control while not present.  QE damages the Fed's reputation and confidence in the USD, so my view is simply that the Fed will tell whatever tale it needs to tell to keep this pig afloat a little longer.

As much as I dislke Bernocchio, I'd like to think that all he cares about is his legacy, but it seems so self centered and shallow with all the global issues going on today.

I'd love to see Ben follow Greenspan and put rates back up to 6%.......... lol.


Al Huxley's picture

I don't think Ben is a sociopath - he seems to nervous in front of the cameras, and appears to be uncomfortable with bold-faced lying.  I do, however, think the system as a whole is largely owned and operated by sociopaths and psychopaths, and they write Ben's script.

fonzannoon's picture

Jamie Dimon looks much more comfortable spewing shit. Looks like he even enjoys it.

Fred Hayek's picture

Of course he enjoys it. He'd be a failure out on his ear if not for corruption and manipulation. If all markets were free he'd be spending his day asking people if they want fries with that.

knukles's picture

Jamie is a believer.
He is one of the Masters


(auction: almost new, infrequently used nictating membranes, letter of providence of J. Dimon)

Snakeeyes's picture

Bernanke's legacy is market manipulation and creating a Hoover Dam of owning gov't bonds. Hope the dam doesn't break!

a growing concern's picture

The man who sold the world...

andrewp111's picture

If Obama does the trillion dollar platinum coin thing to circumvent the debt ceiling, Bernanke could be forced to unload much of his QE stock early. Otherwise, interest rates could go nominal negative. The trillion dollar coin will shift the center of monetary easing from the Fed to the Treasury.  It will allow Bernanke to exit gracefully.

And I interpret Greenspan's "regularization" differently. It wasn't about "legacy".  I think Greenspan was desperately trying to damp down the housing bubble. He was stymied by the persistence of low long term rates no matter what he did at the short term. In the end, he realized that the whole shit pot was going to blow sky high, and he got the hell out of Dodge before it blew. He retired and dumped the whole mess in Ben's lap.

Clowns on Acid's picture

andrew - pull yourself toward yourself. If this Huffington Post supported "platinum coin" idea is even considered, ...think about it:

  • The US is essentially going on a PM based standard.
  • Platinum prices soar, as does gold. Exactly what the Fed doesn't want to happen.
  • US bonds get absolutely skewered. long bond = 7%. 
  • Miners will do well however.......
Winston Churchill's picture

With an implied overnight devaluation of the dollar of what exactly ?

99.999% as near as damnit,prolly a few more places but thats semantics.

Talking toilet paper.i

Dr. Sandi's picture

The trillion dollar platinum coin, or 'Trilly', will not have anything to do with the value of the metal in it. It will be just like the U.S. coins of today.

The metal content of the coin is carefully chosen to be worth much less than the face value of the coin. The treasury doesn't want to tie up capital by having coins worth the face value. That's called seniorage. Thanks to inflation, they have to keep changing the metal to keep it cheap.

The Trilly will be the same. They supposedly have to make it from platinum to get around various annoying treasury laws meant to keep the money honest. The platinum content will not in any way resemble the actual face value of one trillion dollars.

I think it would be appropriate to have the 'Trilly' weigh in at 1.913 troy ounces of platinum in honor of the founding year of the Federal Reserve. That would give it a metal value just under $3000 bogusbux today.

And that's major league 'seniorage.'

andrewp111's picture

Now we have a name for it - "The Trilly".  I think it will be called the "Obamacoin" though. Maybe Obama's Trilly. And seigniorage is a perfectly routine process. The Trilly just takes it to the extreme. And see this about the Trilly.

Dr. No's picture

Trillion dollar coin idea.


No one is taking that seriously. It is a comics page ploy to sell blog advert clicks. Anyone who thinks it is a good idea is a mental infant.

andrewp111's picture

The Krugster is pushing the idea. That means it is getting seriously consideration by the Democrats.

Dr. Sandi's picture

This mental infant thinks it's a great way to kick another block from under that old Buick of financial fraud sitting in the front yard.

The faster they hollow it out, the faster the reset happens.

I won't have the energy and resources to pick myself up if they kick this 55 gallon drum of toxic waste much further down the street.

Dr. No's picture

One doctor to another, Just default then.  Dont bother with the coin.  Besides, who would accept such a coin?  Might as well have ed e. neman on the face.  If you force the recipient by gun point (threat of war or prision), what is the reciepient going to do with it?  Back to my point, just default.

Besides, since the largest debt holder is the FED, if you forced them to take it, you just gave $1T to the FED.  Was that your intent?  The FED would then put the $1T on its books and loan out (10:1 no doubt) the money.  Mass inflation.  Doesn hurt the coin holder, since they are that the front of the line.  It hurts you.  


Once again, if you cant pay the debt, default. Why bother with a gimmick? to look clever? 

GMadScientist's picture

But as perception management (a key element of debt-ceiling kabuki canon), on behalf of those same mental infants, it's a stroke of brilliance.

What a MacGuffin!

Bindar Dundat's picture

Exactely right. It is crazy and that is why the coin (s) will be minted.   I figure about 100 of them to wipe out any debt in one fell swoop. 

The U.S.A. will rule the world again in financial terms.  The Russians and the Chinese will get killed by this.


Dr. No's picture

If the goal is to wipe out the debt, just default. Why bother getting a die made to stamp a stupid coin? Just call all debt null and void.

If a coin was made, you'd be paying the asshats who are loaning a drunken sailer who is in debt $17T back. Personally, I think those idiots should take a little more risk. The government should start a real path toward default rather then stupid clever tricks.

Like I said , the coin is a stupid blog idea to get clicks.

sansnobel's picture

Hang every one of these traitors publicly.   Nuff said

GMadScientist's picture

Okay, but you have to dig the unmarked lime pit.

SafelyGraze's picture

for anyone who can attend a coin show .. the recent pm price-drop is manifested very clearly as a lack of ag/au on the sellers' tables

the effect is non-linear: a one-percent drop in price produces a fifty-percent (or more) drop in metals on the show-floor

max2205's picture

Bonds peaked last summer

They knew then.

max2205's picture

Ben tried all year to narrow mortgage rates closer to the 30 yr bond rate

Know what, the banksters told him to stop, they were making a killing on the spread. N

The banks own the fed now IMO. Maybe they always have

Ben had to give up on that and that's all qe was used for. So qe max ends in a whimper