Money Sage (archive)

One of two things is happening in the stock market: either panic reigns supreme, or else the market senses that a deep, deflationary recession impends. One thing is crystal clear: the market judges that Bernanke & Co. still dont't GET IT!

Indeed, we found Bernanke's congressional testimony to be rather astounding. Instead of a mea culpa, we had another iteration of his inept forecasting. Most striking was not his adverting to his inflation worries -- we will overlook this as a ritualistic central bank incantation against the ancient enemy. No. What was incredible was his insistence that the economy would be growing in the second half. Has Dr. Bernanke ever heard of the word "evidence," we wonder? What, pray tell, are these assertions based upon? Our illustrious FED chairman can hardly ask us to place credence in his prediction based upon a non-existent previous record of successful forecasts. These, obviously, never occurred. Indeed, Bernanke's forecasts consisted of piling error upon error.

Bernanke, we should recall, was Greenspan's point man in the deflation panic of 2001-2003. He was out in front, warning of the dire consequences of deflation, insisting on the necessity of bringing FED FUNDS down to 1%. Bernanke earned the nickname during this period of "helicopter Ben" because of his repeated assurances that if a FED funds rate of 1% didn't work, the FED could go down to ZERO AND, ADDITIONALLY, could purchase every Treasury security of ANY MATURITY offered for sale in the market, thereby flooding the economy with money and precluding deflation. His panic was premature by some years, it would seem. Moreover, his role as expositor of the Greenspan line, and his service as a one-man claque demanding MORE MONETARY EASE helped create the necessary preconditions for the subsequent real estate and sub-prime bubbles.

His more recent forecasts have consisted in repetitive assertions that the sub-prime problem was solved (these assertions began in August), a stubborn insistence that the sub-prime crisis would not spread outside of the mortgage-backed realm (since proven dead wrong), sunny forecasts about the economy, and describing the real estate depression as a "correction," soon to "bottom out," as they say on Wall Street.

This record of ineptitude and lack of foresight can hardly be expected to inspire confidence. And, sure enough, the equity market responded today with a 300-point sell-off during and after Bernanke's congressional testimony, thereby rounding off what has been the worst January in 104 years. The Treasury market soared, dissing on Bernanke's inflation-phobia. Which raises a very interesting point. Perhaps Bernanke's newly defined role as Defender of the Faith of Hard Money constitutes a reaction against the catastrophic consequences of his earlier performance as Guardian Against the Threat of Deflation. It would be ironic indeed if Bernanke remedied the 2001-2003 error of excessive monetary looseness in the face of a very mild economic downturn by now making the far more serious error of acting out the role of inflexible inflation hawk in the face of a vastly more serious financial crisis and potential deflationary recession of significant magnitude. Our Fed Chairman does not want to repeat past errors. Clearly, he prefers to make a new one for each new occasion.

Indeed, we think this is precisely where things now stand. Bernanke's artful attempts to subtly shift to Congress and the White House the burden of fighting the deepening economic weakness and the ominous trends in the banking system, the real estate sector, and the consumer/retail sector are part of his effort to facilitate the continuing FED strategy of foot-dragging, of generating the minimal amount of liquidity, and of reducing interest rates as little and as slowly as possible. You see, it is up to the government to take FISCAL measures. Please leave us, the Knights of the Monetary Round Table, alone to continue our holy war against INFLATION. This is the message.

Bernanke has shown mucho audacity in defying the markets. We wonder if the fact that he has a secure government salary and retirement, an existing retirement fund which according to news accounts has less than .5% of its assets in equities, facilitates his Olympian detachment.

Bernanke is a living demonstration that a very high I.Q. can translate into a seriously defective policy. The key to successful monetary policy formulation is common sense, a focus on leading indicators, and a personal strength fortifying the policymaker to defy conventional wisdom, the lure of career advancement, and the opinion of fellow central bankers. It seems that our FED chairman is not encumbered by these attributes. His continuing failure to grasp the nettle will be a costly one for many ordinary -- and even some not so ordinary -- Americans, for our economy, and for a sense of psychological stability.

Thank you, Dr. Bernanke.