Money Sage (archive)

This morning, according to news accounts which we presume are reliable, the FED high command has decided to take concrete measures to rectify problems in communication between the FED and the outer planets. (That would be us). According to these accounts, either Dr. Bernanke or his Vice-Chairman, Mr. Kohn, will speak publicly at least once before each Federal Open Market Committee (FOMC) meeting. The objective will be to meet criticisms which allegedly focus on the FED's lack of success in communicating its "message."

We find this development very, very interesting. The slant the FED is giving is that the problem is a technical defect in finding an effective mode of communication with the financial markets, Wall Street, the economist community, business, and the rest of us mere mortals. By focussing attention on the "communication" problem, the FED neatly deflects focus away from issues of infinitely larger significance.

The problem, we would respectfully submit, is NOT a failure in communications. We think that the FED is actually communicating its state of mind and its policy view quite effectively. This state of mind is, as we have noted on numerous prior occasions, largely a fixation on a non-existent "inflation" threat, and an energetic determination to sacrifice the economic welfare of the country on the altar of the holy war on the long-defeated, rapidly retreated Holy Enemy -- "INFLATION." The FED has communicated effectively the same way we all communicate -- through ACTIONS. It's actions have consisted in stubborn foot-dragging from day one, since the sub-prime crisis erupted last summer. Its "actions" consist in constricting, rather than drastically increasing, LIQUIDITY. Its "actions" consist in delaying interest rate cuts for as long as possible in the face of intensifying political and market pressures. It's "actions" consist in JUSTIFYING, RATIONALIZING, AND "EXPLAINING" its basing policy formulation upon LAGGING ECONOMIC INDICATORS AND IGNORING AND DEVALUING THE HISTORICALLY RELIABLE LEADING INDICATORS. These actions do indeed speak volumes, far louder than any words, statements, or congressional testimony. AND THE MARKETS HAVE RESPONDED RATIONALLY TO THE FED'S VERY EFFECTIVE COMMUNICATION BY ACTION -- OR INACTION, AS THE CASE MAY BE. The markets have turned THUMBS DOWN on the Bernanke FED, and have been doing so since last June, when the big rally in the Treasury market began.

The problem, we would respectfully submit, is NOT that the FED is failing to communicate. It is in fact communicating only too well. The problem is that the FED IS IGNORING COMMUNICATIONS COMING FROM THE FINANCIAL MARKETS -- PARTICULARLY FROM THE CREDIT MARKETS. What the mighty rally in long-dated Treasuries, and the concomitant cratering of the junk bond and mortgage-backed markets is telling the FED -- HAS been telling the FED for 'lo these many months -- is that the ECONOMIC PROGNOSIS IS FOR DEFLATION AND RECESSION, NOT INFLATION AND GROWTH.

Our suggestion is just this: since we live in a great democracy, and since all major office-holders are responsible, not only to Congress but to the electorate as a whole, we suggest that Dr. Bernanke be REQUIRED BY STATUTE to hold a monthly press conference. Such a conference would give the central bank and its chairman every channel of communication he could possibly desire. At the same time, such a conference should be open to QUESTIONS, and the Chairman should be constrained to answer.

We would suggest that some mighty interesting questions could profitably be posed at the present time to Dr. Bernanke, among them:
--Why do you base policy upon LAGGING INDICATORS rather than LEADING INDICATORS?
--Why do you denigrate the YIELD CURVE STRUCTURE, when it has been far and away the most reliable of all leading indicators of the economy?
--On what basis do you substitute you and your colleagues' subjective, emotional, frequently erroneous judgments for the far more reliable signals being telegraphed by the credit markets?
--Why have you so grossly misjudged the significance of the sup-prime crisis since its emergence last summer?
--Why do you REMAIN far behind the curve, six months after initial impact of the sub-prime asteroid??

We would just LOVE to get some answers. Why should Bernanke & Co. not be held to account, just as every other high office-holder is?
Insofar as we know, the theory of the Divine Right of Kings was consigned to the ash heap of history in 1789. How long must we groan under the unspoken but currently operative Divine Right of the FED to act as it pleases?

Louis XIV said: "L'etat c'est moi." (I AM the state).

Do we have a new Louis XIV in the person of Benjamin Bernanke??