On Bernanke, Wage Deflation, Norwegian Mortgages, and the PPIP Scheme

Ben Bernanke Detractors and Defenders
I was sure that Fed head Ben Bernanke's especially weak appearance in front of Congress last week to discuss the BAC/MER deal would open a debate on his reappointment. The president reiterated his faith in Bernanke, and no serious grumblings were found from Congress. I found this puzzling because Mr. Bernnke was far from open in his testimony, and his reliance on the good old "I dont recall" line was at best a blatant lie.

Mish Shedlock penned a very harsh piece that was up Monday and I would ask you to take a look at it. Mish's summary:

Summary:
Bernanke is a disingenuous liar with a memory problem. He is also an economic dunce who does not understand the cause of [the] great depression nor could he spot a housing/credit bubble visible to nearly every blogger in the country. However, like his mentor Greenspan, Bernanke believes that every problem can be cured by throwing money at it. Finally, he is a creative, political power grabbing hack who gives memorable speeches about throwing money out of helicopters.

While the tone of the article is indeed a bit rough, I find it hard to argue with the specific points Mish makes regarding Bernanke's performance.

Of course, not all are of the same mind.

The Mish piece highlights a Caroline Baum article where she sums up the situation:

It would be hard to find someone more suited for the job of Fed chairman than Bernanke. His performance yesterday has nothing to do with his unique qualifications for the position. ... Unless President Barack Obama wants a solo pilot, he would do well to tap Bernanke for a second term.

Mrs. Baum makes no sense with this paragraph. I would wonder if Bernanke being a student of the Great Depression is as much of a bonus as it is claimed. I mean, in what way, shape, or form is the current economic backdrop even remotely similar to the 1929-1940 period?

Also in the "Bernanke is not so bad camp" are Calculated Risk and Jim Hamilton (of Econbrowser). CR related a piece from Econbrowser that he agrees with:

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.

I can agree that character attacks are over the top, but again we see this idea that just because Ben Bernanke is smart he must be doing the right thing. As far as I know smart people can make the wrong decisions, it is not a providence for the dumb. Stupid is as stupid does and all that.

My final take: I am not really convinced that Bernanke is doing the things he is to save the ordinary man from turmoil. And if indeed that is his goal he is failing at that anyway. Bernanke and all the powers that be are engaged in an attempt to save the banking system with the minimum pain for those institutions and the maximum risk for the average taxpayer. This much is clear. I think Bernanke is extremely intelligent. I think he is doing exactly what he sees as the best solution to the crisis. I also think he is as wrong as can be.

Wage Deflation in the Current Environment
While readers know my longer term belief that inflation (via dollar devaluation) is on tap in the future, I have no doubt that deflation is ruling the day at present. While deflation can be good in a sense (prices drop as less money is in the system) the worst deflation is wage deflation.

David Rosenberg explains what is happening on the income side of the consumer ruined balance sheet (via Clusterstock):

As wages deflate, workers are looking for ways to supplement their shrinking income base, for example, by moonlighting. Indeed, a poll undertaken by CareerBuilder.com and cited in the USA Today found that one in every ten Americans took on an extra job over the last year; another one in five said they intend to do so in the coming year. These numbers are double for the 45 to 54 year olds who now see early retirement, once around the corner, as an elusive concept.
Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.

Faced with evaporated stock market gains, disappearing home equity, and credit that is harder to come by, the average person now will have to contend with wage cuts. I am not sure how this fits in with higher consumption going forward, but I am sure CNBC will have a special show on this topic soon.

The Show Must Go On
I think the surreal serenity of the markets over the past month have resulted in some bored market observers finally coming to grips with reality. While the VIX (a measure of volatility) is at lows not seen in some time it seems people need something to talk about.

It is when they talk that we see what is really going on.

Consider this video (seen on Market Ticker and Zero Hedge) from CNBC where a floor trader quite frankly explains that there is no "market", only a government backstopped and manipulated shell of a free market:

Still not convinced?

Consider this post from Zero Hedge which details the country of Norway entering the process the US has made popular, namely having the government buy up mortgages because nobody else will:

Long perceived as a bastion of stability due to their oil-extraction based economy, and socialist system that the US can only dream to emulate, today the Norwegian Central Bank conducted a Dutch auction in which it exchanged NOK10 billion of government securities for residential and commercial mortgage loans. And not just any loans, but including those denominated in SEK, DKK, EUR, USD, GBP and CHF (well, in retrospect, looks like pretty much any loans). Exchange swaps will cover maturities between December 2012 and 2014. But aside from the specifics, it seems that even the Vikings are starting to monetize MBS: a process demonstrated to work phenomenally well at propping up a hollow economy by the likes of economic alchemists such as Bernanke and Geithner.

I am sure Bernanke and Geithner have only the common man at heart, and by extension so must Norway.

Still think the markets are trying to "tell us something" by their rise?

Consider the now scrapped PPIP scheme which will not be used by any bank in their right mind because they cannot scam the system in Bernie Madoff style (via Clusterstock):

When Citigroup (C) heard that the government was planning on financing investors who were willing to buy toxic assets, it came up with the dastardly scheme of using taxpayer dollars to buy the assets from itself. In essence, the Citigroup wanted to recapitalize its collateralized debt obligations with taxpayer dollars. And it would have got away with it too—if not for the heroism of Sheila Bair.
The Wall Street Journal today explains how Citigroup and other banks tried to game the system by buying assets from themselves, their subsidiaries and their parent companies. It was almost the perfect scam, allowing the banks to transfer most of the remaining risk to taxpayers while keeping the upside for themselves. Losses would be socialized, profits privatized and the public befuddled by the complexity of it all.
According to the Journal it was FDIC chair Bair who saw the scam for what it was and put the kibosh on it. And the banks reacted by suddenly becoming unwilling to sell their assets into the public-private partnership program. If it wasn’t a scam, they didn’t want any part of it.

That should about do it.

The markets are not telling us anything other than as long as all assets are backstopped by the government there will be "stabilization" of those asset prices. This effect is of course not built on any foundation. If ever these crutches are removed, the patient will collapse. Those wishfully thinking about a Fed "exit strategy" should both take a break from the recreational drug use and wake up.

It seems the show must go on. We have a low volume futures based stock market rally, a government commitment to transfer any and all mortgage losses to the taxpayer, and never ending assistance for the banking sector. That is our market. Any other discussion of things economic must start at this point or the discussion is irrelevant.

I would venture that there was a time limit that the Fed/Treasury would have liked to have in place to get out of the market fixing racket. Sadly, I think the idea was that a 3-6 month support would have righted the ship. As with almost every other idea from that duo, they were way off. Government support will now have to remain a structural part of the markets for some time. If history is any guide, this mission creep of a government will never really go away. It's time we started talking about that.

Comments

[Mad Hedge F...:]

Proof that benevolent dictatorship is the best form of government. Where can we rent a king?

Jun 30 01:31 PM

[conceptwizard:]

A large part of the “super” in the American superpower is based on the modern creed of liberal democracy, which serves as the motor of free-market capitalism. And the lubricant that keeps this colossal machine humming at full speed 24/7 is the US dollar. So before we risk any conjectures on the future prospects of America’s versatile banknote, which presently serves as the ‘world’s reserve currency,’ perhaps we should know more about who controls it.

It usually comes as a shock to people – especially diehard Americans who place infinite trust in their sacred Constitution – when they discover that the US dollar is not a product of the American government. That’s right, fellow consumers, that crumpled wad of dollars in your pocket is the product of the U.S. Federal Reserve, and despite the very official title, is about as “federal” as Federal Express. The reality is that the U.S. Federal Reserve is a profit-making venture just like Wal-Mart, General Motors or McDonald’s.

Yet the US Constitution clearly states (Article 1, Section 8) that one of the many functions of government is to “coin money, regulate the value thereof.” Indeed, this task was deemed so important that the Founding Fathers mentioned it ahead of the obligation to “raise and support armies.” The Constitution says absolutely nothing about outside parties being responsible for printing money or regulating interest rates.

To quote Abraham Lincoln, the 16th president of the United States, “The privilege of creating and issuing money is… the supreme prerogative of government.”

Jun 30 04:55 PM

[conceptwizard:]

It usually comes as a shock to people – especially diehard Americans who place infinite trust in their sacred Constitution – when they discover that the US dollar is not a product of the American government. That’s right, fellow consumers, that crumpled wad of dollars in your pocket is the product of the U.S. Federal Reserve, and despite the very official title, is about as “federal” as Federal Express. The reality is that the U.S. Federal Reserve is a profit-making venture just like Wal-Mart, General Motors or McDonald’s.

Yet the US Constitution clearly states (Article 1, Section 8) that one of the many functions of government is to “coin money, regulate the value thereof.” Indeed, this task was deemed so important that the Founding Fathers mentioned it ahead of the obligation to “raise and support armies.” The Constitution says absolutely nothing about outside parties being responsible for printing money or regulating interest rates.

To quote Abraham Lincoln, the 16th president of the United States, “The privilege of creating and issuing money is… the supreme prerogative of government.”

We have lost our way, the Power and the Greed of a few circumvents the needs of the many. This is not what the American dream was intended to be.

Jun 30 04:59 PM

[31October:]

I'm available.

On Jun 30 01:31 PM Mad Hedge Fund Trader wrote:
> Proof that benevolent dictatorship is the best form of government.
> Where can we rent a king?

Jun 30 05:57 PM

[Economic Di...:]

31October,
Funny!

Jun 30 06:38 PM

[swaps:]

The CFR, the globalists, the efficiency management experts have successfully created the wage deflation to drive workers down toward the global mean.
They were the driving force for exporting jobs and importing cheap labor, for eliminating jobs and diverting former wages to buyout transaction fees (bonuses) and financiing interest charges.
Because all the power and money is on the money side, not the labor side, wage deflation cannot be easily reversed.

Jul 01 10:56 AM

[Gregman2:]

Obama must publicly support Uncle Ben, for the sake of markets. Yet Ben is no Volcker, which is what we need right now. And, Rosenberg is correct, as usual.

Jul 01 07:55 PM