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Bernanke Talks His Book
Bernanke Talks His Book
Bernanke’s testimony to the House last week and to the Senate yesterday held no surprises. Ben has promised to maintain monetary policy at DEFCON 4 levels for as far into the future as we can see.
The prepared remarks were identical for both presentations. I reviewed Bernanke's 10/4/2011 testimony before the Congressional Joint Economic Committee (Link). There is something missing in the 2012 reports to Congress that was included in Ben's statement just a few months ago. Here’s what he said in October 2011 about inflation:
Longer-term inflation expectations have remained stable according to the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently.
So last October, Ben was touting up the TIPS/Bond spread as a confirmation that the broad expectation for inflation was very tame. In fact, when Ben made those comments in October he was right.
The five-year TIPs/Bond spread was at 1.60%, a very low rate of expected inflation. That's no longer true.
In his testimony to the Senate this week, Ben did not bother to mention that the TIPS spread has blown out since October. He eliminated any reference to the TIPS spread altogether. The reason? Simple, the TIPS spread is no longer telling Bernanke what he wants to hear, so he ignores it.
The following are some charts on the TIPS spreads. First the five-year:
Now the Ten-year:
At this juncture, I’m absolutely convinced that Bernanke is making a biblical mistake. Yes. it will cost Ben his job (and the Fed’s credibility) at some point. But the real consequence will be to Americans in general, and also a few billion people outside the borders.
There is zero evidence today that the US economy is in a crisis and that emergency monetary policies are justified. But Ben tells us differently. He omits critical information that would argue against his policies. I think his omission of the inflation information contained in the TIPs data is equivalent to lying, and he knows it. His disinformation makes all of his words to legislators (and the public) very suspect.
My conclusion is that Bernanke is prepared to manipulate data (and any other damn thing he can lie about) in an effort to make people believe he is doing the “right thing.” He’s not doing what is right for the country any longer. He's in the process of ruining it.
Ultimately, Bernanke will be proven wrong. The longer Bernanke’s emergency measures are sustained, the harder it will be to unwind the mess he has created. Another two years of ZIRP, Twist and QE will bring long-term economic problems to America. The history books will not look kindly on Bernanke and his speeches the past week. I expect they will say:
“The first weeks of February 2012 were the last chance the Federal Reserve Bank had to alter its stance. As of this date, the die was cast; the Fed committed to irreversible steps. The only variable left was time. Twenty-four months later the US economy lost its footings. And when it fell, it took a decade to find a bottom.”
Some say Bernanke is a hero, that he saved the global economy from collapse in 2009. I say that he is a goat, one that will bring us a generation’s worth of trouble. That he ignored ample evidence in 2012 that the economy had long since passed the Emergency Stage will be Ben’s undoing. He's so pregnant with his monetary policy that he can’t see (or just chooses to ignore) that the fire is out, the emergency is over, and his monetary policy should be in the process of normalization. That failure, will cost everyone, big time.
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If I were Bernanke I would maintain interest rates at very low levels. But not Zero. I would be willing to keep interest rates low, but I would never say that I was going to keep them at "0" for another 30 months.(This is the mistake that will trip him up. He will create numerous bubbles, he already has)
The longer this goes on, the harder it will be to get off Bernanke's drugs. He's committing us to a path like Japan's. No growth for 20 years.
Bernanke's other huge blunder was trying to fix anything with Operation Twist. His stated plan was to lower long term rates by selling short paper to buy long paper. What happened since then? The shortest T bill rate rose from 1 bp to 7 bp. The long bond is actually a few basis points higher than before he announced OT. Major fail.
He'd have done better to announce Operation Un-twist. He could have sold $400 billion in long bonds to buy $400 billion in short bills. The result would have been to lower short yields and raise long yields, which would have made the Treasury carry a lot more effective tool for recapitalizing the TBTFs.
Can he do anything right?
Good catch, Bruce. Bernanke is either pig- headedly continuing to create an inflationary environment or the banks are a LOT more insolvent than previously believed
No on 1, yes on 2.
Why not both?
Of course - congress is fully complicit in this, so they're not going to ask questions. What's going to happen to the debt service costs if he lets rates rise? Then they won't have any of your money left to attempt to buy your vote with!
I'm going to bet against you on that one.
I say that there is not a single member of Congress who caught that Bernanke was sand bagging them with the inflation data.
I also say the same clowns don't read the Blogs, so they will remain clueless.
I've known a number of our legislators over the years. I've never been impressed with their knowledge on the issue. They are politicians. Not thinkers.
bk
Bruce, If B.S. Bernutty pulls the emergency measures, the skanks, pensions funds, bond funds, and insurance funds fail. He's boxed himself in.
It's nice to conclude that he could pull the "emergency" measures and conclude that the cost would be minimal. Methinks you might want to shore that conclusion up with some, you know, analysis.
I agree.
Pretty sure all of the evidence points to a crisis.
Crisis? In February of 2012?
Okay, I'm interested, tell me what segment of the economy is in crisis??
The private sector economy is doing okay. The car companies will be making 15mm cars a month for at least the next 4 months (big). The S&P 500 has more cash then they have ever had. There are no big banks that are going tapioca any time soon.
We have today emergency - crisis monetary policy. I maintain that is no longer justified.
Bruce, I like your work and consider you one of the 'must reads' on this site. One small correction though, the car production is annual rate (not monthly), and the number will be closer to 14 million (up from 13 million last year at this time). Thanks for all of your contributions.
UNEMPLOYMENT
and
REAL ESTATE
Two of the biggest reasons to panic, and you think everything is fine? SSTF is in the red, the debt is rising, we have not had a budget for three years, and everything is fine? I'm disapointed, Bruce.
My old home in CA is dropping like a brick (prime suburbs). Buyer took 2 loans to cover the down payment and the loan. As of today he's down 40%!. I would respecfully disagree with Bruce on this also.
Maybe Bruce doesn't know about MERS, the 136 count felony indictment handed down yesterday over forgery/robosigning at DOCX, or the fact that new home sales collapsed to an all-time record low last month, or that falling home prices and delinquent mortgages remain the basis for bank solvency/capital requirements.
Or maybe none of that matters to the economy.
That would be zero official evidence.
Remember, "economy" is equal to "stock market". I think it is quite fair to say there is zero evidence that the stock market [US economy] is in crisis.
Sigh, we used to have a better class of trolls on ZH ...
"Is is better to say nothing and be thought a fool than it is to open your mouth and remove all doubt." Mark Twin
Yo, Mr. zero evidence ... what does a technical analysis of a market slowly moving up on diminishing volume and increasing bullish sentiment indicate?
What does it mean when the forward looking forecasts indicate that the future P/E will be lower than the current P/E?
What is the rough total of derivatives exposure in the shadow banking system?
What is the net exposure of the TBTF banks with regard to MBS's, CDO's & CDS's?
What is the net exposure of the companies traded in the stock market to the potential collapse of the euro?
At 22 weeks & 1 day you need to READ MORE, THINK A LOT MORE, & NOT COMMENT because right now, you're proving the validity of the Mark Twain/Samuel Clemens statement.
barliman
My first thought was his post was snark, but I don't know anymore.
At least Master Bates and Johnny Bravo would argue their troll posts, now it's like dump and run.
Also, GrandSupercycle seems to be MIA.
Million Dollar, that guy is a troll's troll. The deadpan delivery with that guy is out of this world.
Bruce great reporting! But one of these days you are going to hear a helicopter over your roof and the sound of assholes in black suits running towards your door wearing dark glasses! Because how dare you tell the truth!
Well, I can tell you this. They are reading me. They are reading Zero Hedge. And they are reading your comments.
Say hello!
Hello, and may a suggest a location for your next bag and grab:
20th Street and Constitution Avenue, NW
Washington, DC 20551
(202) 452-3000
Thanks in advance for your service.
Too bad they can't understand them, otherwise they might figure out how they've been suckered in like the rest of the herd, and choose to redirect their efforts.
There was never any "emergency" except for a handful of banks that used the threat of collapse to get bailed out. Then they doubled down by looting the middle class through inflation via debt monetization. Bernanke is just the guy in the projector room changing the reels. He doesn't decide anything. He's either manipulated into making these decisions or simply told what to do. Giving Bernanke's minutae any weight is an exercise in futility. It's kabuki, all of it. The real problem is unelected central bankers, unaudited central banks, and unprosecuted criminals.
LOL..that much I do know Bruce..t'was just a wee bit of tongue and cheek:).
I take your point on the removal of the TIPS reference in his testimony, but it's worth mentioning that last year the derivatives market (zero-coupon inflation swaps) was showing much higher inflation expectations than TIPS were, a situation that had been in force for several years in the US and the UK. That is, TIPS were selling for notably less than they ought to judging by the expectations in the derivatives market.
Since then, the inflation basis has closed, and so while it's true that the inflation breakeven is higher now than it was before, I don't think it's true that this necessarily indicates a true change in inflation expectations. I think it's more a matter of (1) different liquidity conditions (the same impulse that has driven real yields in the nominal market, let's be honest, negative) and (2) the Fed's promises of extended ZIRP making the huge duration risk of TIPS look less problematic.
Just my $0.02, of course.
TIPS?!?! Here is a tip for everyone, if the interest on an investment is negative this is not an investment and should be refered to as a bill. Does anyone have a clue as to what the interest is on these so-called "infaltion-protected" securities is? BTW - TIPS have been exploding up ward since last August.
You're late to this party. I've been saying at the end of his tenure Bernanke will be carted off in chains and sent to prison. Welcome to the reality of the intended destruction this man is doing to our country and currency.
Good luck with that. As a board member of the BIS he has FULL immunity from prosecution for any policy he wishes to pursue.
Surely you don't think that banksters can be held accountable, do you?
Corzine's out shopping for office space and a Hampton estate. What does that tell you?
I'm thinking at least DEFCON 2 myself.
Subprime is contained.
Goldman has priced it in.
BK -
Butting in to catch BK's eye: What if Ben knows how bad it is (the systemic risk) and is fully aware of (secretary is on the phone to Jimmy C) how much talk-up CNBS (CNN, etc.) is doing, etc., etc. What if he further knows that open QE3++ may be his last cannon ball - but he doesn't want to use it?
What if he's happy to allow the investor class to believe (rightly) that he must openly use QE3++ (eventually) and they are bidding up the inflation insurance protection assuming that QE3++ is forthcoming.
What if that's fine with him because it further reinforces the happy growth story because the markets are going higher (partly thinking QE3++ is coming any minute)? Now he's giving the "markets" their last shot - or just giving himself a little more room to manoeuvre later. He can hold off the pumping that much longer.
Either way that omission (lie) works toward the success of his efforts. We all know that the debt is going to balloon and ever more fiat will be needed to pay for it until Kaboom!(Well, maybe he is that delusional - but I doubt it.). We just do not know when. That gives him leverage - emotional leverage.
The increase in QE3++ believers plays right into his happy-talk hands and into the needs of the bank and brokers and politicians to buy time.
Eh?
Of course, Greece blows and it really is QE3++ to infinity and beyond.
No, BK. Out here in the real world (beyond the Beltway) everything is running on debt. Entire economy now a bubble. Cut off the leverage, and it all goes. Right now. Given the profligacy of fiscal policy (Obama + Congress) Shalom Ben is doing about all he can do: ZIRP and monetize, extend and pretend. There is No Way Out except systemic collapse.
"All are guilty, but some are guilty than others."
Inflation is transitory.....