Guest Post: Bernanke In A Box

Tyler Durden's picture

From Jeff Snider of Atlantic Capital Management

Bernanke In A Box

His statement spoke volumes without saying anything.  Yes, he disappointed the hardcore debasement enthusiasts called stock investors, but only at first.  In between the lines of what he did say, it was crystal clear:  Chairman Bernanke wants to do more QE.  “Want” is not really the right word because it doesn’t really go far enough into Bernanke’s canon.  I think it is abundantly clear he believes the Fed needs to do it as soon as operationally possible. 

His concern on the economic issues is expected – anyone with rudimentary economic knowledge knows long-term unemployment can have lasting productive and social impacts or “scars”.  He still seems confused about those headwinds, but at least has resigned himself and monetary policy to the fact that they are very real.

Rather, his attention to “financial uncertainty” and his view of the damage to “expectations” that comes with it is what really stands out now.  Because the Fed is wedded to the rational expectations theory, financial uncertainty can become ingrained into investor psychology, flowing through to consumers and businesses.  If consumers believe banks will be in trouble in the near future, they will act on those fears today.  It is a mortal threat to the carefully cultivated, though utterly useless, appearance that everything is normal and good.  The Fed has created trillions of dollars so that stocks will signal a robust future – and consumers and businesses will act today in the expectation of validity to that rosy, rainbow vision.

The beginning stages of another financial crisis or credit crunch change those expectations radically.  This has to be nipped now, long before it permeates too far into the consciousness of the populace (not just in the US, but globally).

“We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September.”

He said QE 3.0, without really saying it.  The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message.  Stocks threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently).  Gold prices followed on those expectations of a resumption to the willful and wanton dollar destruction that QE purely represents.

If the Chairman can influence a major market rally without ever having to face the growing dissent within the FOMC ranks, then his speech has proven to be a stroke of genius.  That is the essence of rational expectations, making others believe you have magical powers so that they do your bidding without any actual work or direct engagement on your part.

But there is a huge downside to waiting, and Bernanke knows it.  The financial crisis grows while the economy is sliding further into contraction.  Time is not on his side.

So why does he wait?

Simple, Bernanke and QE is in a box – conditions currently in the wholesale money markets, especially the repo market, will not suffer more QE.  As the unsecured Fed funds and eurodollar markets have effectively frozen for banks outside the primary dealer network, wholesale funding has been left to repos.  However, there is already a shortage of treasury bills, the prime, vital collateral of nearly all post-2008 repo funding arrangements. 

QE is nothing more than an extraction of those bills (and notes), creating that shortage in the first place.  So while the primary dealers are loaded up with Fed-created bank reserves, they are not forwarding them to the wider marketplace out of well-founded fears of PIIGS exposures and currency mismatches between assets and liabilities.  Despite an ocean of liquidity at the center, the wider system is now a desert.  The Fed is held hostage by the operational realities of the design of the Federal Reserve system.

Should the Fed embark on a new QE program today, it would simply extract more of that vital collateral, exacerbating the shortage to the point of significant voluntary capital destruction – banks would be forced to take on t-bills at greater and greater negative rates.  This kind of situation is purely deflationary, and nothing scares Bernanke more than that dreaded d-word.

As long as the unsecured markets remain in limbo, and they will as long as the global banking system is hiding its problems, the Fed CANNOT launch another round of QE, no matter how much Bernanke might want to.  In the calculus of monetary primacy, the banking system will win every time, even at the potential expense of stocks and rational expectations.

So the Chairman is forced to jawbone stock investors into believing QE is not yet appropriate (they are constantly monitoring the economic situation), but is still imminent.  Meanwhile, the Fed is actively engaged in expanding the reverse repo program to help alleviate the bill shortage.  While no one was looking, it has taken its aggregate of reverse repo transactions to nearly $100 billion, from only $65 billion at the beginning of August. 

Reverse repos are an exit strategy, not monetary accommodation.  But, in the context of the wider wholesale market freeze, reverse repos expand the amount of treasuries, especially bills, available to be used as collateral by financial institutions outside the primary dealer network.  As much as the Fed adheres to flawed ideology and oft-times inconsistent theoretical constructions, it is not likely to engage in monetary programs that are directly contradictory.  Reverse repos and QE would cancel each other out.

The cue for more QE, then, is t-bill rates.  If the shortage resolves itself at some point in the coming weeks, then the green light is on.  There is no doubt that given that green light, Bernanke will take it – he has to if for no other reason than monetizing the debt (which may not be a problem right now, but it will be at some point).  The question for September is, among other pressing concerns, whether or not the unsecured markets thaw enough to remove the squeeze in repo collateral.  If that does not happen, stocks are certainly not positioned for a second consecutive episode of crushed QE expectations.

It may not matter anyway.  The selling we saw in early to mid-August was precipitated by the banking squeeze to begin with.  Should that intensify, the expectations of stock investors outside the general banking system will be the least of our problems.  For now, Bernanke’s mystique will be tested in the coming weeks.  Moral suasion is good for the textbooks, but it usually has little use during a real crisis.

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caerus's picture

nobody puts bernanke in a corner

egdeh orez's picture

Bernanke in a Box = Dick in a Box

spiral_eyes's picture

Ben, the two of us need look no more 
We both found what we were looking for 
With a friend to call my own 
I'll never be alone 
And you, my friend, will see 
You've got a friend in me 
(you've got a friend in me) 

Ben, you're always running here and there 
You feel you're not wanted anywhere 
If you ever look behind 
And don't like what you find 
There's one thing you should know 
You've got a place to go 
(you've got a place to go) 

spiral_eyes's picture

ha. when we were at 1890 i called a 1700 trough, and the next stop after that $2100. we've had 1704, now let's see what the upside is. 

Richard Weed's picture


Monetary expansion (ie debasement of the dollar) does not have to occur only at the short end of the curve... The Bernank can very easily monetise the debt by buying long dated treasureies, agencies, or mortgage bonds... thus also achieving the objective of lowered long term rates for US corporations and household mortgages.

mayhem_korner's picture

thus also achieving the objective of lowered long term rates for US corporations and household mortgages.

Lowering long-term rates for mortgages is irrelevant at this juncture.  Those who would be candidates for refinance are either underwater or already at 4-and-change percent.  Squeezing mortgage rates to 3.25% isn't enough for a refi wave.

As for corporations - who can refinance - all that would do is further inflate off-shore accounts steeped with cash that businesses don't want to repatriate for tax reasons.

Bottom line: massive, massive heaps of dollars being kept out of circulation.  All spring-loaded for a REAL dose of inflation when the currently-leaking, dollar-confidence dam finally gives way.

imapopulistnow's picture

Tax holiday is right around the corner.

mayhem_korner's picture

Won't put dollars into circulation - just a tax-free dividend to those holding the keys.

AldousHuxley's picture

Bernanke will wait for US Treasury and ECB to take action first


zhandax's picture

Monetary expansion (ie debasement of the dollar) does not have to occur only at the short end of the curve..

And indeed, it did not.  I have a problem with the author's contention that the problematic issue here is an artificially induced shortage of t-bills for collateral; QE2 sucked out the belly of the curve (notes) rather than bills.  I would like to hear his viewpoint absent this assumption.

Mountainview's picture

He doesn't dare to mention that all Q1,Q2 and more ends up in China, OPEC and rest of Asia. As long the US doesn't address this problem, Mister B. will continue to push on a string...

tunckar's picture

Bernanke in a box= Bernanke in a CELL

Drag Racer's picture

he just didn't fully explain the box. there is more to it.

History of Oil

boiltherich's picture

Thanks for the link DR, I only got about to the first world war but I bookmarked it for later when I have time for the whole show. 

adeptus's picture

nobody puts bernanke in a corner

That's right, because like he said at Jackson Hole...

... "I've got plenty of tools.... INCLUDING MY NEW SECRET BAZOOKA" 

Check it out:

Spastica Rex's picture

He said QE 3.0, without really saying it.

No, he didn't. Wishful thinking has no limits.

Spitzer's picture

ZIRP for 2 years and no QE ?

You are an idiot.

kito's picture

you really have to get that whole talking to self thing looked at

Snidley Whipsnae's picture

I am reading a lot of speculation about a hypothesis... in other words, hot air...

Bernanko left the door open to anything at the next FOMC meeting and for good reason...

The situation is changing hourly, not daily, not weekly, not monthly, hourly!

No way Ben knows what is going to come out of the next 2 day FOMC meeting. The Fed has been playing for an hour at a time.

Ben, and his Fed cohorts, are hoping that Oblammer takes some meaningful action on the fiscal front before the next FOMC meeting...

That is the reason for the delay, imo... If you don't believe this then explain all the blather emanating from the Fed governors in the last few days about 'the Fed can't do it all, we need fiscal help'... The Fed is near the end of rabbits in hat and is scared... for good reason...

If Oblammer doesn't announce some helpful fiscal policies in his upcoming speech... and how can he without support from congress... well, look for more 'experimental economic policies' from the 2 day meeting...

No matter what is done we are screwed in the long run... the fundamentals are not going to be changed in the next month... the world economy is still screwed... The real choice is still what it has always been... write down the bad debt or suffer the fate of Japan...

Smiddywesson's picture

Agreed.  Bernanke is Barney Fife with only one bullet in his shirt pocket.  He blusters and bluffs, but he doesn't want to fire that last bullet because he will then be disarmed.

css1971's picture

The situation is changing hourly, not daily, not weekly, not monthly, hourly!

Well, they may want you to think that... Truth is the processes involved have been in place for decades.

Truth is that they hold their beliefs dear and would much rather see the US... The World... destroyed than admit they are fundamentally wrong and that they are not as smart as they think they are.

Vanity. It means more of the same.

jekyll island's picture

I don't think it is vanity.  The Bernank works for the superelite bankers, any move he makes will be done to increase their wealth.  His delay in QE or whatever the hell he is going to do is done to allow the bankers to take a position, probably in the opaque, unregulated CDS market before he announces intervention and they rake it in.  Like taking candy from a baby.  I think you are a little stupid for attributing this to vanity, the Bernank is a patsy who is told what to do.  I agree with you that destroying the currency doesn't matter to them, it is just another opportunity to transfer wealth from the sheeple.  Politicians won't stop it, they were bought years ago.  

disabledvet's picture

Actually he works for the government. And insofar as the government is concerned he's done great.

jekyll island's picture

He works for the government just like the Federal Reserve is a government agency.  He works for a bank.   One of his major roles is to keep the goals of the government and his bank in strategic alignment.  

Kayman's picture


Monetary Policy should be long term in view, not running around chasing whatever the current algoes in the stock market are set at.

Bernanke made a mistake by announcing ZIRP for 2 more years.

Fish Gone Bad's picture

Give me an 8 letter word for economic criminal.  Bernanke.


oobrien's picture

We're all fucked with a capital F.

If Bernanke raises rates, we go into a deflationary depession.

If he keeps rates the same, we end up in endless recession.

So what's a boy to do?

oobrien's picture

That's NOT true.

I'm actually a misunderstood genius.

And I'm going to tell you cunts something now.

This economic crisis is so dire that it will lead to World War III.

There's no other way out.

Pure Evil's picture

And the award for the biggest doomer and gloomier for the night goes to...  OOBRIEN

Personally, I prefer the extraterrestrials angle, but nothing like a global genocide to get folks to click-bait his link.

Spitzer's picture

He is an idiot. In the Asian financial crisis in 1997 (400 million people) , no money was printed yet they had crashing inflation.

It is no possible for the US to have deflation.

oobrien's picture

Brother, I was in South Korea in 1997.  It was the hardest hit of all the Asian countries.

Prices on the peninsula stayed the same.  There was no inflation.

But what do I know?

Spitzer's picture

The South Korean Won, weakened to more than 1,700 per dollar from around 800.

Thai Baht fell by 60%. You are an idiot

oobrien's picture

The currency lost value.  But prices remained steady.

I was there.

oobrien's picture

Let me see...

We're in Afghanistan, Iraq, Yemen, Pakistan, Libya...

Now we're talking about Iran.

Nothing like controlling the entire Middle East.

No, this won't lead to war.

BigDuke6's picture

You can put up that link as many times as u like but I aint clicking it.
Why ? I don't recall reading anything sensible by you, including the drivel u've posted above... U were in Korea ? Fuck u , i was in nam then cambodia past the doh lung bridge...
And judge dredd slewie, our newly appointed hard nut sez ur a troll.
So earn my respect and I'll click ur link mofo

oobrien's picture

Fuck you, cocksucker.

Do what you will.

By the way...

My link is shit.

I just have a fledging video blog.

I'm sorry I called you a cocksucker.

I'm drunk on soju.

God bless, brother.



Id fight Gandhi's picture

Another newbie link monkey? How about paying zh for an ad instead?

mayhem_korner's picture

I'm actually a misunderstood genius.

Aren't we all...

I say lucidity is worth 50 IQ points.

Newsboy's picture

Thank You for the insights, Jeff!

Aguadulce's picture

"Put you in a pine box wit nine shots from my glock fellas." - Nas

Man I'm bored on a friday night...

A Lunatic's picture

Sound like a good opportunity to visit the ZH archives.