Cashin's Cliff Notes Of Bernanke's Playbook

Tyler Durden's picture

Earlier in the week, UBS' Art Cashin noted that some traders were re-reading Bernanke’s speech of November 21, 2002 on countering inflation. Prior re-readings had given clues on things like QE1 and even Operation Twist.

The primary theme of the speech was - what can the Fed do to fight deflation (and stimulate the economy) if the Fed Funds rate fell to zero (aah, those simple golden years). Here’s how Mr. B. set that phase up in 2002:

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.


There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

So, here we see the precursors of at least two subsequent Fed operations. Remember the pledge to hold rates flat into 2014? And, the other suggests quantitative easing with a slight hint of “Operation Twist”. But, hold it, let’s look at the next paragraph:

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

That’s a real Operation Twist and a hint of mortgage buying.

But these weren’t the only arrows in Bernanke quiver. He talked of pegging rates to a specific rate in longer years, citing Fed success before Fed-Treasury Accord of 1951. He suggested that the Fed might get money to private companies (currently barred) by changing acceptable or qualified collateral from the banks. Mr. B. noted that the Fed might influence the currency, though that is not its normal venue. There is even the possibility that the Fed could widen its tolerance bands for inflation.

Most of the operations, however, tend to be means to make money available or easy. With nearly $2 trillion in excess free reserves that doesn’t seem to be the problem. Inducing spending is the problem. Of all the suggestions, the wider inflation tolerance may be the only one that may do that.

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mayhem_korner's picture

The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.


I for one don't see any ambiguity here.  Et tu?

vast-dom's picture

total insanity! how are these even called financial markets? they are coordinated ponizi schemes under the guise of legalized theivery and corrupt commisions. 

buying up toxic mortgages from banks at this stage won't help either. they have their IV of infinite liquidity. they will sit on said mortgages nested into shadow books if need be.

the only way QE will work at this stage is by DIRECTLY INJECTING POPULACE and not banks. and that will not happen.

Manthong's picture

A time to be born, a time to die, a time to sow, a time to reap..

Americans know it’s time to be austere, Bennie Boy.

They will bring their own close and their cash closer.

It will confound you that your “policy” isn’t getting the behavior that your precious equations predict.

-Long resale shops.


PS. Maybe  you need a new “stall” variable in one of your velocity models.

Better put a hundred or two FRB PhD’s that never had to live in the real world on it.

Precious's picture

Greenspan killed capitalism.  Bernanke buried it.   Saul Alinski thanks you all for your cooperation.

jekyll island's picture

I'm tired of this.  End the Fed.

Bananamerican's picture

"Greenspan killed capitalism.  Bernanke buried it.   Saul Alinski thanks you all"


Forget that nigga!

No bitches.... HERMAN GOTTLIEB is the muthafucka who took us all down with his uh, incredible COMMUNIST Power!!

Remember that name....

America was just humming along until HERMAN GOTTLIEB put his shit into it....uh yee-uh


XitSam's picture

A time to tar, a time to feather, ...

newworldorder's picture

I want to give you an up arrow but your PS: statement is preventing me from doing so.

Most Americans do not know that its time to be austere. Only those who have experienced prolonged job loss and inability to pay their mortgages or Are so far underwater they will never catch up are experiencing these major economic problems

Those with dual incomes/retirement accounts who have not experienced job loss or have not worked and are on public assistance/disability/SNAP benefits are not fully financially implacted.

My definition of of fully financially impacted is - no long term job, no unemployment benefits, cant pay your mortgage, have not paid your mortgage for 6+ months, savings are depleted, have health care problems that impact your ability to work. These are the people whose numbers have been growing steadily for the last 3 years. They used to be the unfortunate few - They are now the unfortunate many, without real solutions to their real problems.

boogerbently's picture

EVERYONE knows it's time for austerity.

We're just at odds about WHO needs to give up WHAT.

Heaven knows we wouldn't want to cut into anyones welfare, food stamps, free school food.....


Enforcing regulations regarding responsible investment practices, increasing taxes that were lowered in 'better times".

Compromise ! Forget it, that's like giving in ! LOL

eclectic syncretist's picture

Well there has been some talk of cutting individuals free checks ala baby Bush, which would certainly be (at least temporarily) inflationary.  I think if we're just patient here it's all going to come out in the wash.  The Fed isn't going to boost employment or even stabilize prices, because it can't, and that is beginning to become obvious.  They are only going to save the banks, which is about all they've ever done.  Someone is going to have to take the blame for what's coming down the road very shortly, and the Fed, banks, and politicians will have a hard time finding a scapegoat and saving themselves. 

Pool Shark's picture



We've all seen this movie before... it's called "Japan: 1989-present."

 As Koo correctly observed; in a balance-sheet recession, ZIRP will only be used by companies and households to deleverage. You can't jumpstart the engine by flooding the carburetor... 


Cognitive Dissonance's picture

The only way they are going to jump start this engine is to push it (and the car it's in) off a cliff and start over. And when the inevitable comes about those who have transitioned their money/currency/colored beads from the old paradigm to the new will have once in a century opportunities to become very very wealthy.

HAhyperion's picture

And what exactly is the transition or path? Have they not corrupted everything? What'sleft that has not been manipulated? 

vast-dom's picture

it's quite amazing that BB would cite Japan as any model of any policy. and it shows how twisted he really is.


in other news Dimon gets all "old testament" and calls for eye for eye for TBTF banks while he's playing with essentially bail-out monies. it's beyond farce. at this stage the sheeple deserve what they get!

Precious's picture

Most people in the old testament would agree that Dimon should be stoned.

vast-dom's picture

locked up in a tiny cell with 24/7 live video feed would be much more modern and much more punishing. a little Foucaltian discipline and punish for Dimon.

Jack Napier's picture

I4NI was Hammurabi's law in ancient Babylon. In the OT they only stoned homos. Jamie Dimon, hard to get a more unisex name really. But c'mon people, these guys are all just doing what they're told. Anyone who makes decisions will never show their face. Stop hacking at the limbs of the hydra and let's chop its head off. How to do that you say? Buy silver.

Whoa Dammit's picture

Bernanke's cliff notes in one word: Print

Cognitive Dissonance's picture

"Of all the suggestions, the wider inflation tolerance may be the only one that may do that."


Considering that "real" inflation is 2 to 3 times higher than the officially stated inflation rate I would say they have already widened their inflation tolerance.

pods's picture

So you are telling me you haven't fallen for the "100 calorie" packs line of marketing?

You know, more for less?


youngman's picture

I am thinking the Fed right now is more worried on the EU than the USA...all those off books casino gambling stakes might be called in here.....and the Jamie Diamonds might have to talk to the politicians again in front of the cameras

odatruf's picture

I'd prefer he and his ilk face a panel of members from one of the other branchs of our federal government.

RobotTrader's picture

All Bernanke has to do is start buying overshorted stocks and start creating some epic squeezes.

That is all it takes to get the momentum turned.

Way too much easy money to be made, the speculators will jump all over the long side.

Unprepared's picture

He's already doing this, bitch

adr's picture

Yes because the Fed buying corporate stocks truly means the underlying fundamentals of those corproations is truly strong.

What a pathetic fucking joke.

pods's picture

If they start doing that (in the open) that would spell the beginning of the end.

Three years from now the FED would own all treasuries, all the companies on the S&P, and half of Europe.

Eventually people would just not obey anymore and the FED would be able to do nothing about it.


distopiandreamboy's picture

Tl;dr:you will buy risky assets because I'm going to destroy your purchasing power

XitSam's picture

Buy something, but it ain't going to be risky assets.

asteroids's picture

Statisticians have been able to predict the outcome of elections with a high degree of probablility for decades. Sunday will be no different. I'm sure the FED and every other banker knows the results. This would explain their "conference calls" over the last week or so. I would be watching the FX and credit markets carefully today. That will be the tell.


Basically if no one is going to spend money, the cocksuckerz over at the Fed will inflate even more thereby forcing people to spend before 'their' money devalues and purchases less.

LowProfile's picture

They should be careful what they wish for, yes?

Vincent Vega's picture

There was a story on Bloomie yesterday that one option for the Fed might be to extend the 2014 pledge out to mid 2015. As has been said many times on ZH: ZIRP 4evar!

Cursive's picture

Reading these excerpts from Bernanke's speech leads me to the conclusion that he and his econometric brethern think that we are all just mice that can be hearded through a maze to get to the cheese.  The central bankers share a very totalitarian and dehumanizing view of the world.

john39's picture

what do expect from satanic bankers who believe their special "god" selected them to rule the planet?

pods's picture

And to be honest, we pretty much are just hopping on the the wheel daily to power their lifestyles, so it is not like they had a bad idea.

Inhuman, evil and sociopathic, but not ineffective.

It really is the Matrix, except the machines are fractional reserve banksters, and well, we are all their copper tops.


newworldorder's picture

You may be just a number, but as a consumer unit, your (but -sp?) belongs to them.

AllAboutTheBenjamins's picture

I liked that picture on the main page for this article

fonzannoon's picture

This is so fkin boring already. Nice day out...

xtop23's picture

Public delevering. QE ain't gonna do it this time. The jig is up.

Everybodys All American's picture

Yeah wider inflation. In other words fake growth.

adr's picture

The real issue is China. Chinese manufacturers are eating each other. There isn't enough business to go around and the world has actually prodced enough inventory of products to last the next three years, even if total world manufacturing stops.

Chinese suppliers are cuttng prices, reducing minimums, paying for overseas shipping. All in a desperate attempt to gain any business. They are selling products at cost just to keep factories open. Because of the Chinese stimulus programs all of the manufacturers are sitting on massive stockpiles of raw materials, bought to support far higher growth rates. Materials they need to pay for. They can't get enough business to pay fo the materials they bought. I have never seen desperation before like I have in my Chinese suppliers right now. They are begging for orders, but I can't order anything because my accounts already have too much inventory.

What happens if you lend a guy $100 and he says you'll get back $200, and you go out and spend $200 on credit expecting to get paid the $200 to pay the bill, only to have the guy leave you a message saying he doesn't have the money?

The answer is, unless you can find the guy and take something worth $200, you're fucked. Essentially that's the world economy right now.

How does more QE help this? QE doesn't lead to banks and investors buying finished products. It leads them to buy base commodities and paper stock, it allows directors to inititate more corproate stock buybacks, allowing them to cash out big. 1%ers don't buy made in china bulk inventory at Walmart.

Making commodities more expensive doesn't help the chinese manufacturers already sitting on too much raw material. Making gasoline and food more expensive doesn't help what's left of the working class buy some of that overproduced inventory sitting on shelves. Stocks going up 30% doesn't help a population with no money to invest.

QE is an economic atom bomb. The blast might not kill you if you're protected enough, but the ensuing radiation and slow agonizing death will make you wish it had.

onebir's picture

Interesting info - thanks for posting it.

I think you're basically right, but there's one way QE might help short-term: I've read Chinese manufacturers have been use some commodities as collateral. (Especially coppe.r)

So if QE delays/prevents commodity prices dropping too much, it might delay/prevent a wave of bankruptcies (&/ bank failures) there. Does that make sense?

Whether that's worth it (especially long term) is another matter...

Matt's picture

The moral of the story? Don't spend money until you're holding it in your hot little hands. Promises of money are not money.