Hilsenrath Sets Off To Preserve Bernanke's "Legacy"
Yesterday, when the market was plunging (by less than a whopping 1%, yet magically defending the 13K "retirement off" threshold in the DJIA), we wondered: where is the Fed's favorite messageboard: WSJ "journalist" Jon Hilsenrath. We found out at 3 am, when instead of releasing another soon to be refuted rumor of more easing, we discovered that the scribe was busy doing something very different: discussing the pros and cons of the Chairsatan's legacy.
When the chairman speaks Friday morning at the central bank's annual retreat here, he must once again address whether there is more the Fed can do to get the economy going and whether it is worth taking chances on controversial new programs. All along he has argued these efforts are worth it and appears likely to stick to that line in his speech.
Beyond big issues of the moment—such as whether the Fed will launch a new bond-buying program—a broader question looms in Jackson Hole about Mr. Bernanke's legacy. Long after his term as chairman ends in 17 months, will he be remembered as the Fed chief who did too little to combat high unemployment or the one who did too much and unleashed inflation and financial instability with the actions he took? Critics make both arguments.
So what's the head of the world's most important CTRL-P macro to do?
How Mr. Bernanke acts now depends in part on which he sees as the stronger critique. As an academic before joining the Fed, Mr. Bernanke often criticized central bankers for dealing too passively with financial crises and economic malaise. As Fed chief, he has confronted many limitations to the policies he controls.
If it were up to the market, the answer is clear: "liquidity: uber-alles.
Investors are hoping for more than that. They want clear guidance about what the Fed will do next, though Jackson Hole hasn't been a staging ground in the past for big policy pronouncements.
The problem that even Uncle Ben now grasps is that the most another round of QE will do is buy, temporarily, a few S&P points.
Economists who have looked at the Fed's bond-buying programs don't see them producing big improvements in economic activity and some say the effects wear off over time.
The Fed has purchased more than $2.3 trillion of bonds since 2009, yet the economy expanded at a paltry 1.7% annual rate in the second quarter and unemployment was 8.3% in July, according to government data.
Bernanke's logic is sadly not only 100% flawed but totally inverted:
Mr. Bernanke has argued that when the Fed buys long-term Treasury securities or mortgage bonds, it pushes down long-term interest rates and pushes up prices of assets such as stocks. Fed officials also believe the purchases help weaken the dollar. The combination of lower interest rates, higher stock prices and a weaker dollar spurs spending, investment and exports, top Fed officials believe.
Uhm, if all it took to get the Dow to 36,000 was negative rates on bonds, the Swiss stock market would be at +infinity right about now. That it isn't is merely a factor of just how pervasively incorrect economist thinking about the "liquidity trap" has been. In fact, instead of promising endless accommodation, if the Fed really wanted to force consumers to lock in rates, he would say that the current Z/NIRP policy would only last a X more months, but not more, and watch the scramble to refinance, raise debt, and buy real estate. The resulting surge in asset prices may actually have been able to restart the virtuous economic cycle which has been missing since 2008 when Bernanke and his colleagues broke everything with their pervasive central planning.
Instead, the only beneficiaries from endless easing are the banks. It is no surprise that the biggest supporters of QE are precisely the banks.
Goldman Sachs chief U.S. economist Jan Hatzius estimates that a $500 billion bond-buying program would boost growth by 0.2 percentage point for a year and bring down the unemployment rate by 0.1 percentage point. Alan Sinai, chief economist at Decision Economics, estimates such a program would boost growth by 0.3 percentage point and bring down the jobless rate 0.2 percentage point.
Yet they are both for more bond buying.
"It's minimal but it's something," Mr. Sinai said.
Actually, for your year end bonus, it is quote maximal. As it will be for the hyperinflation which will inevitable arise following the increasing amplitude of deflationary and inflationary episodes, when at one point, following the latest and greatest plunge in prices, the Fed and all other central banks have no choice but to superglue the CTRL-P keys in the on position. After that, go long wheelbarrows.
Finally, and as usually happens, those who tell the truth are those who actually have been in, or just next to, the Chairman's shoes,and no longer have anything to lose by telling the truth. Sure enough:
William White, former head of the monetary department at the Bank for International Settlements in Basel, Switzerland, says in a paper for the Dallas Fed that easy-credit policies have spurred a succession of financial bubbles over decades and made fiscal authorities complacent about bringing down budget deficits.
"Simply following ultra-easy monetary policy is not the solution to the problem," he said.
We presented the paper previously here, but whatever you do, don't present this letter to any of the career academics, none of whom have actually ever held a real job ever, and who are currently in charge of the world's money supply: after all they would rather take the world down with them to either the fire of hyperinflation, or ice of hyperdeflation, before they admit the past 100 years of economic "theory" have been woefully, terminally wrong from the start.
As for what will be Bernanke's legacy, that is not up to a Fed mouthpiece to "objectively" discuss. That will be up to everyone else whose lives will be destroyed by central planning in the coming years.