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A Dispirited Fed Chairman Emerges From Jackson Hole
This article originally appeared in the Daily Capitalist.
"[M]ost of the economic policies that support robust economic growth in the long run are outside the province of the central bank." — Fed Chairman Ben Bernanke.
A thoroughly chastened and discouraged Fed Chairman Ben Bernanke gave his annual speech last Friday at the Fed conference in Jackson Hole, Wyoming. After reading this year's speech, and then re-reading last year's speech, I found his tone gloomy and dispirited. This is a far cry from the younger, more confident Ben Bernanke who in 2002 told Milton Friedman at his 90th birthday party that Milton was right about the Fed causing the Great Depression and "we won't do it again." Of course Milton was right about the Fed but for the wrong reasons, which could be part of our problem.
If you have followed Bernanke's speeches over the years, at least since the Crash of '08, you will get a flavor of the man. Like all Chairman his tone has to be sober, reservedly confident, and in control. Unlike The Oracle, Chairman Alan Greenspan, who gave little clarity or direction at all, Dr. Bernanke has tried to be more "transparent" in communicating Fed policies. It is my impression that while he has tried to exude confidence, he is now clearly discouraged. As well he should, since none of the Fed's "suite of tools" have worked as intended and almost every forecast the Fed has given since the Crash has been wrong.
This malaise seems to have infected the leaders of other central banks as well as they convened with the Chairman last weekend. Perhaps there is something in the air at Jackson Hole.
Dr. Bernanke is always quick to remind us that the actions of the Fed were responsible for saving the world and averting disaster at the critical moment during the "Panic." It got him on the cover of Time. The only problem is that he has no way to prove that. The few papers I have seen on the topic (Blinder& Zandi; Brave and Genay; Gagnon, Raskin, Remache & Sack) have not been very convincing. Of course our own David Stockman has plenty to say about that topic (here and here).
If we even give him that point for the sake of argument, then nothing since then has worked. It's got to be discouraging for him.
This latest speech is Exhibit No. 1.; he announces basically nothing new. It is what he didn't announce that was significant, much to the regret of an anxious Wall Street.
What has changed is his tone. Here are some quotes I picked out of this year's and last year's Jackson Hole speeches to give a comparison in his tone and outlook. I don't think I'm cherry-picking comments, but these quotes do illustrate my point:
I will let you go back and read all the forecasts made last year that were wrong, but here is an example: "Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place." I need not remind you that industrial production has fallen for the past 13 months. Also recall that the big fear last year was deflation and Dr. Bernanke opened the door to QE2. Their one "triumph" over the year: they licked the deflation thing – July 2011 CPI +3.6% and PPI +7.2%.
This year Dr. Bernanke expressed the Fed's dismay for so badly misjudging the economy and the forces behind our boom and bust: "we have learned that the recession was even deeper and the recovery even weaker than we had thought." That kind of misjudgment is what destroy economies.
It gets worse though.
The Fed has long maintained, and Dr. Bernanke reiterates it in this speech, that the cause of the recession was the financial "meltdown." That is akin to saying the sickness of our patient is due to the fever rather than its cause. The Fed as an institution has no clue why we have economic malaise. If it did perhaps there is something they could do to help us recover.
What caused our recession/depression is the Fed itself. By manipulating the money supply they create cycles that lead to false booms based on money steroids, and we go bust when the money drug is withdrawn. The result is a huge supply of things people don't want (this time, houses and commercial real estate) and the burden of debt. This is the Forever history of the boom-bust cycle. This is something the Austrians figured out a long time ago (Mises, Theory of Money and Credit, 1912).
Yet Dr. Bernanke, after all the Fed's failures, says ingenuously:
The Federal Reserve has a role in promoting the longer-term performance of the economy. Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability. Low and stable inflation improves the functioning of markets, making them more effective at allocating resources; and it allows households and businesses to plan for the future without having to be unduly concerned with unpredictable movements in the general level of prices. The Federal Reserve also fosters macroeconomic and financial stability in its role as a financial regulator, a monitor of overall financial stability, and a liquidity provider of last resort.
Ignore for the moment that this sounds exactly like central economic planning. This statement is exactly the opposite of what they are achieving.
Here though, is the frustrating part for Dr. Bernanke personally:
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view ...
Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.
I would like to think this is a revelation by Dr. Bernanke, leading him to question his econometric neo-Keynesian-Monetarism, but instead he has concluded that "economics" just doesn't work this time. He acknowledges that "normally" economies can recover by themselves, which they do. He is puzzled though why this "virtuous circle" of restoration is not occurring now. It is "unusual" he says. It is unusual if you don't understand why it's happening.
The rest of his speech is devoted to chastising our politicians for being fiscally irresponsible.
We are witnessing the failure of contemporary economics on a grand scale. These policies are being played out on the worldwide stage much to the same result. Europe is experiencing a culmination of years of failed policies.
What concerns me greatly is the next step. It doesn't look likely that the Fed will embrace Austrian theory economics.
Instead they will try the same things again. ZIRP has been continued to 2013. Perhaps the Fed will reduce interest on excess reserves, or not pay interest at all, in order to encourage banks to lend. Perhaps it will pursue "Operation New Twist" and roll its portfolio over into even longer term maturities. Perhaps it will reduce bank reserve requirements temporarily (assuming it could get by Dodd-Frank and Basel III).
Then there is QE3, more monetary stimulus through direct injections of cash into the financial markets.
If there is one thing that Dr. Bernanke believes in it is his Monetarist view of the Great Depression. That view says the Fed caused the depression because it reduced money supply which dried up credit. The other view that Dr. Bernanke believes, a neo-Keynesian view, is that by pushing money into the economy in times of a "liquidity trap" people will spend the money, stimulate new economic activity, and thus, a recovery. Dr. Bernanke understands that QE is a last option monetary weapon and that it should not be overused, lest "inflation" get out of hand. Presently, in the view of the Fed, "inflation" has been moderate. Thus there should be no great harm from a bit more "inflation" since quantitative easing will stimulate growth. By this reasoning there is no reason to not do more quantitative easing.
The next step after "dispirited" is desperation. It is our belief that the economy will continue to stagnate with creeping price inflation. It is difficult to predict how long this period will continue, but we look to things like industrial production, manufacturing, money and credit, and the real estate markets to give us an indication of the path of economic growth. Presently these indicators are negative in our book; the economic forces that would allow recovery are moving too slowly.
What this means is that during the presidential election cycle, politically sensitive economic indicators such as unemployment will remain negative. This will result in a lot of pressure on the Fed and Dr. Bernanke to "do something." Like all former Fed Chairmen, it will be hard for Dr. Bernanke to resist these calls from politicians. He will earn his moniker as "Helicopter Ben" and unleash more quantitative easing, a dangerous and regressive policy. Like most drugs it becomes less effective over time. It will further destroy real capital and delay recovery.
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QE does not eliminate debt, it just restructures / reshuffles it. The problem with the worlds economies is TOO MUCH DEBT and like the laws of gravity, "all debt must be reconciled" by payoff or default. So all that is happening is a rearranging of the deck chairs on the USS America. We have hit a debt ridden iceberg and the captain of the ship, one Bernank, is feverishly flailing away tryig to bail out the water.
Today's rally was to clean out the weak shorts and maybe they take it higher tomorrow but one thing is CLEAR. The longer term trend has changed to the downside and short term bounces notwithstanding, its only a matter of time before the trend exerts itself.
The Fed has managed to keep assets levitated by depreciating the dollar and with ZIRP, they have pretty much shot their wad. All they are doing now is reshuffling debt from one entity to another and at some point the Fed becomes irrelevent when they die from the toxicity of the debt they swallowed.
Debt is not the same as cash and it is money we have borrowed from the future. The debt to cash ratio is staggering and Fed desperately trying to stop the implosion. Like a black hole, forty years of accumulated debt is sucking everything into its vortex. Stay liquid.
Right on.
Ron Paul & Austrian economics is the best solution to the greedy oligarchy running this country. Think when Dr. Paul installs Austrians at treasury, the fed & justice dept. thinks might get shaken up a little bit?
It's election year, which means Obama will direct Bernanke and whoever else to spend and print as much money as necessary to make sure he gets re elected. It's really that simple! We will see 4 more years of that clown because there are enough sheep that will be easily manipulated to vote him in again, he knows very well that he just needs to keep enough Americans stupid enough and he will remain in office!
Both Bernanke and Obama have that look on their faces and a depressed tone in their voices that I have
noticed lately. It's as if they know something really bad is coming and they have no way to stop it.
They can't tell us because it would cause panic, so they are just going to take further steps to try to delay
the inevitable. I get the feeling that pending doom is not far off and the end game has already started.
I agree. I don't watch TV cuz I don't have one, but the last few times I have seen these two clowns live (on someone else's monitor) I was impressed by what their body language is communicating. Obama in particular, the ebullient, springy creature he was is now a drooped-shoulder, worn-looking kinda guy.
As one who voted for him as a harbinger of truth, I am offended each time ZH and others feature one of his "please help me" reelection campaign ads. Is there some way to send that fool a "negative donation" I wonder. Maybe I should ask for my 2008 money back?
He deserves what is coming to him. And, cynically, those who engineered his victory were certain that, at the end of it all, it will be a cold day in hell before we ever see another minority, esp. Af-Am, in the White House.
As if a tool feels anything.
"...the economic policies that support robust economic growth in the long run..."
I am every day thinking more and more that there is truth to the idea that the Fed is actually not only powerless to affect change, but is not even calling the shots as most at ZH denizens seem to think. The ESF is actually giving the Fed marching orders.
The ESF is the power behind the power behind the Fed. The Fed after all is just the banking system, ultimately even the banking system answers to higher authority. Everyone seems to think the tail is wagging the dog when the tail is actually a pretty little distraction while the other end of the dog has real teeth.
Most of the traders and older people here know about the ESF, though many have so underestimated it's power they might not recall what it can do. It did the Marshall Plan in order to rebuild a whole war torn continent even as US debt topped 120% of domestic product by the end of the war. Most of the younger have never even heard of it. Look it up:
The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention. This arrangement (as opposed to having the central bank intervene directly) allows the US government to influence currency exchange rates without affecting domestic money supply.
Can you see how rich and pregnant those two sentences are with power, unlimited power?
What is Europe going to do about Greece? The Greek two year note is now at 50%, not a typo, fifty percent. As of this morning Finland said the only way it would participate in the second Greek bailout would be if Greek assets, all of them including their land, art, national treasures, were held in a separate account in neutral Luxembourg (a county of Germany that technically is an independent nation).
I am pretty shocked that ZH did not plaster the boards with that news. Because what it amounted to was Finland said the only way it would contribute to a Greek bailout would be for Greece to end it's own sovereignty, sell itself to private parties and other governments to pay their debts. And that a neutral (German) nation would administer it's breakup. Greek debts would be paid but only by ending Greece as a nation because they can't handle doing the right thing and thus have to be broken up to others that can.
I expect Greece to leave the Eurozone before COB Friday.
The spider in all this web is the ESF. In German it is der spinne. Why do you think we have allowed the Chinese to peg the yuan to the dollar all these years? We could have stopped it with import duties that in essence made the ForEx what we wanted it to be. Same with Philippians and Mexico. I used to see Vietnam on a lot of clothing labels but not lately. Because they had to choose which nation they had closer economic ties with, the consumer market in the USA for their T shirts, or China where they get most of their rice. Funny thing is the Sacramento Valley produces more rice than all Asia imports. You get where I am going with this don't you?
There is a power, it dwarfs all other powers. It is not the vengeance god of the Jews, it is not the Illuminati of novels, it is not the Fed, or the Rothschild's, I am not saying they do not exist, but all of them answer to the ESF owned by none other than you and me. The housing slump, unemployment, even such things as population matter so little it is a joke. Issues like peak oil, global warming, nuclear threats, biological warfare, no more than dinner conversation to those who run this. The net and the assholes that think themselves important enough and educated enough to comment are also just a side joke to them. The USA has been far more successful than you might understand, so successful that even the USA itself no longer matters. Those that really rule us do so in secrecy, but we scarcely register on their minds, they re so far beyond the bounds of the four F's (fight, flight, feeding and sex) that it is as if we are nothing more real or useful to them than a river, or a beach. Nothing we say or do will change it. They are so powerful and beyond us even nuclear war would not stop them from their sybaritic lives. We can kill all of us, but they already have handy hidey-hole's filled with food and artificial sun, and Aston Martin convertibles and peace, nothing we say or do will change it. We are owned one way or the other and the sooner you get used to it the sooner you can find your own peace in your slavery.
Okay -I give up. Who are they? I won't be able to find peace in my slavery or sleep well until i know who my masters are.
+1.0e10. I also get disappointed when I hear the one-dimentional jew bashing, the illuminati conspiracies, chairsatan, the welfare queens, the evil banks that wrote you a loan that you signed, etc. They all exist. some are as bad as we say they are, but your post puts it into perspective.
For the tldr's "Always be yourself, unless you can be batman. you are not batman"
... he is now clearly discouraged. As well he should, since none of the Fed's "suite of tools" have worked as intended ...
The folks here insist the Fed Head is serving a master other than the American people and their economy. If this is true, it is possible that the Fed's tools have worked exactly as intended. And if that is true, the Fed Head would be quietly, privately, exuberant, while perhaps being publically "discouraged".
Yea but Obummer and I have saved or created a gazzillion jobs!! sic!!
I think you are right on Richard - he's either criminally stupid, or criminally right on with the intended effects of his plan - I think it's the latter. I don't believe those in power (real power- not some figurehead puppet like Obama) are stupid. I am quite certain that they evil, though. Too bad the average American sheeple has the IQ, knowledge and understanding of the average sheep. Like the sheep, we are about to get sheared. Looks like Rick Perry will be the Sheppard tending to the flock. The wolves will have a filed day. All they need to do is supply with booze, drugs, pretty young hotties (male of female, apparently) and the wolves will pretty be able to spend a lot of quality time with the flock - kind of like it's been with the last three sheppards -Clinton, Bush and Obama.
My - oh - my. I guess we will need to factor in that possibility as well. Hurts though, doesn't it?
It only hurts when I laugh!
How could The Bernank possibly justify siphoning off $1.2 TRILLION of taxpayer funds to foreign banks to allegedly "help" kick-start the American economy?! How does he explain that this will re-start American manufacturing? How does he think this will encourage American R&D into new fuels and value-added technology? How does he suggest that this will create employment for American social science graduates?
He's either a fucking moron or a fucking tool of the Luciferian Globablists ... and I know which one I think he is........
My take is that the Fed policy represents the compromise or vector resulting from the various interest pulling to different directions.
The TBTF banks enjoys the interest rate differential, and elimination of counter-party risks. ZIRP is a mixed blessing (and some of the banking industry reps oppose it).
The Treasury benefits from ZIRP on the gorwing debt, and easy funding of ever more Treasury bonds.
Observe taht the Fed's ultimate charter is to preserve the status-quo. It is locked into this role untill its own demise.