Bernanke's Days as Fed Chairman Are Numbered

The following commentary appeared in the July issue of the Forbes Growth Investor, which was made available to subscribers on July 1.

June was a bad month for celebrities. Ed McMahon, Farrah Fawcett, Michael Jackson, and Billy Mays all passed away. June was also a bad month for Federal Reserve Chairman Ben Bernanke; although he presumably is still in good health.

I have blamed the Fed in the past for many of the bubbles our economy experienced in recent years. Its easy monetary policy caused the technology bubble of the late 1990s, the housing bubble that peaked in 2006, and the commodities bubble that followed shortly thereafter.

Nonetheless, I would also argue that Ben Bernanke has done an admirable job of responding to the financial crisis that began shortly after he took over as Fed chairman. Under Bernanke’s leadership, the Fed responded quickly and decisively by slashing interest rates and increasing the money supply. While these actions increase the risk of inflation and threaten to erode further the value of the U.S. dollar, I believe they were necessary to restore confidence and prevent a total collapse of the financial system.

However, Bernanke now finds himself in political hot water. Congress recently grilled him amid allegations that he coerced Bank of America (BAC) CEO Ken Lewis to consummate the Merrill Lynch acquisition against his better judgment. Bernanke even stands accused of urging Lewis not to disclose the poor state of Merrill’s health to his shareholders. Democrats and Republicans attacked him with equal ferocity.

As I explain on my blog, I believe Bernanke’s days as Fed chairman are numbered. President Barack Obama appears reluctant to give him a strong endorsement. Obama recently said Bernanke is doing a “fine” job. When questioned during a press conference, he refused to say if he would reappoint Bernanke as chairman. Soon after Bernanke’s grilling in Congress, the White House issued a tepid statement saying it had “confidence” in Bernanke. As the nearby cartoon illustrates, when praise from your boss is this impassive, it’s time to shop your resume. Besides, I believe Larry Summers is hungry for Bernanke’s job and I believe Obama would like to give it to him.

As for the economy, I still see no evidence that things are getting better. At best, they are still getting worse, but at a slower pace. According to the S&P/Case-Shiller Index, housing prices fell 18% year-over-year in April. The good news, if you can call it that, is that prices are no longer falling at an accelerating rate on a nationwide basis. Unfortunately, price declines are accelerating in some key markets, which until recently had been holding up well. These include Charlotte and New York.

In addition, according to the Conference Board, after three consecutive monthly gains, the Consumer Confidence Index fell more than five points in May. Consumers became more pessimistic about their present situation. They also grew more wary about their near-term outlook for jobs and income. This is not what hard-hit retailers were hoping to hear.

Overall, I continue to believe there is a significant risk for a near-term sell-off in equities. Keep some cash on hand to take advantage of the sell-off when it occurs.

Comments

[Moon Kil Woong:]

I strongly disagree that Bernake has done a good job. Rather, I think it's best for the country to have a sharp crash and a moderate recovery with no inflation than a slop drop, no recovery and moderate inflation. Furthermore, creating mechanisms for disincentives to help bad creditors keep bad credit rather than writing them off does nothing to actually solve any problem. Realizing this, he has since decided just to absorb the losses directly onto the Fed's overblown balance sheet.

Regarding BAC, allowing too big to fail companies to merge into too bigger to fail is a grave error in logic if notrhing else.

I also would like to note that lambasting Greenspan for lowering rates too low for too long when he has lowered rates even lower is downright scummy. As a Fed chief, Bernake took the Fed to new lows keeping rates at Zirp which basically made the Fed powerless. His actions should go down in economic infamy as a hypocritical two faced liar.

Bernake's embrace of QE is also a grand failure. Any economist worth their salt could tell you the outcome of this before it started. Why? Because we know that QE shoved a much healthier Japan into a multi decade stupor. There is no easy way to claw your way out of QE. On top of that QE is raising the spectre of inflation and has now effectively prevented the US from being able to borrow more money to stimulate the economy from foreign governments.

Why should they loan $ to us when the Fed can expand the base money supply infinitely without even a bill or Congressional approval?

All in all, Bernake will go down in history with Greenspan as one of the architects of the free money monetarists that resulted in the worst downturns in history. And he certainly deserves the noteriety for it. His days as Fed chief have been numbered in the trilions of dollars of funny money givaways.

To those saying he saved the US economy.... my foot. The only thing that can save the US economy is the free market. It has been like that for centuries.

Jul 07 05:38 AM

[John Bowman:]

After all of the mistakes and resulting tragedies to Americans and their economy, these rascals can return to lucrative jobs and even write books about their escapades.

All they do is suffer a little embarrassment if the economy is tanking. That's assuming they have a conscience.

Jul 07 08:05 AM

[John Galt:]

Rather than talking about whether Ben Bernake did a good job or bad job, look at how much power he has. You could easily argue he is the 2nd most important man in the world.

Forget about whether you thought he has done good or bad, what if he was a terrible "economic dictator ... If you already think he was bad, what if he was worse...

Shouldn't we have a converstation about whether or not his position should exist in the first place?

Jul 07 08:46 AM

[Mark54:]

The real crime isn't that BofA was forced to take Merrill rather it was that the whole mess got to that point. Benanke took decisive steps to prevent a market shattering loss of confidence and a deflationary spiral. Who was better equipped to deal with this?

Jul 07 09:06 AM

[Ferdinand E...:]

I'll answer your question Mark 54. NOBODY! The crusade against Bernanke is just another effort by people who wanted John McCain and Sarah Palin to win the election. Of course it might be true that Summers would be just as competent once the meltdown stops, but why take a chance.

Jul 07 09:14 AM

[swaps:]

Benranke is competent? In 2005 he said there was no out of control bubble and that there was no threat of a meltdown and massive job losses. Source: Peter Schiff, whose family helped found The Fed.
But of course he will keep his job. The same people who extracted money from Congress at gunpoint will keep Benranke in the job, pointing those guns again at anyone who stands in their way.

Jul 07 11:20 AM

[Mark54:]

Summers scares me.


On Jul 07 09:14 AM Ferdinand E. Banks wrote:

> I'll answer your question Mark 54. NOBODY! The crusade against Bernanke
> is just another effort by people who wanted John McCain and Sarah
> Palin to win the election. Of course it might be true that Summers
> would be just as competent once the meltdown stops, but why take
> a chance.

Jul 07 01:42 PM

[Glen L.:]

@Ferdinand E: <<The crusade against Bernanke is just another effort by people who wanted John McCain and Sarah Palin to win the election.>>

Nonsense! Those neocons, by and large, love Bernanke. On the other hand there are lots of disaffected Americans, from both major parties, who are now following the heroic lead of Ron Paul and FINALLY questioning the roles of the FED and its chairmen down through the years. There is important legislation, that the Democrat leadership is now trying hard to squash, to audit the FED and let Americans know precisely where all that bailout money went.

Bernanke will find few friends in the Obama camp, when the chips are down. And when the FED is audited, presuming a halfway honest job by the auditors, its days will be numbered too.

Jul 07 04:18 PM

[dcb:]

Your kidding right? If you really go back and look at his statements and then what has happened he has failed at every turn. Lastly, his policies amount to an unlimited subsidy of failing banks that put the dollar and the stability of our country in danger.

He clearly doesn't get that bankers are completely self serving and it appears he has been asking every goldman alum for advice in what to do. My god Wall street could not have been handed a better savior.

His liquidity efforts helped to drive down the dollar, making oil very expensive, which greatly increased the severity of the recession. The oil induced effect is what really drove the stake through the heart of the economy and market.

When did things really start to tank. take a look at last year about this time, oil at peak, no discretionary spending by consumers because each and every last dollar was going into their tank.

You may or may not believe this, but his policies are crafted to help banks, not the economy. Neg real interest rates, and inflation helps out debtors (banks). It kills the savings of each and every person on some kind of fixed income (ncluding salary). His plan is to increase lending. We need debt relief, not more lending. How can someone who can't pay their mortgage or interest on their credit card (most americans) take on more debt.

Of course you realize that increased debt increases return on equity,not return on assets (real return) which increases bankers bonus. We got into this mess because of too much cheap credit being spent on assets that did not have enough return. this allowed banks to allocate capital (which they off loaded to us suckers, secutisation) which were less than true cost of capital. Now we are stuck because if we increase the cost of capital to anywhere near what it should be none of these investments have any return and the banks all fail. Net result is at best stagflation by attempting to bail out the banks. If you doubt me just look what happens in Japan if they don't give out free money. they immediately go into recession. We'll they have been in trouble since about 1990. (20 years). That is what we are stuck with from these idiots!!!!

You should consider reading a book by John Taylor, sorry forgot the name, he is a major economist that has just written a book about how the fed has always been blowing at and makes these crisis worse over an over again. Hvae you noticed each and everytime we fix things the risk next time is greater and when it blows up the effect gets worse. that is what the fed does. they transferred the internet bubble (isolated to stock markets), to housing (creating real maco effects), and are now putting the dollar and our countries stability at risk. All to keep the stock market propped up and bankers getting their bonus.

Now you have the real story of what is going on.

I voted for Obama, and wish Bernake was put on trial for treason for the damage he has caused. He is by far the only person I kow who has failed so miserable at what he does who gets to keep his job.

Wall street loves him, and wouldn't you if someone gave you an unlimited subsidy that never ended. At the same time they took you bad debts/toxic assets that nobody wanted and bought them with taxpayer money. You as the tax payer have to borrrow at 3.5% to pay this back in the future, so the bank can now lend your own money to you at 8% (give or take). If you wonder why the consumer is strapped and doesn't have any thing to help out the economy anymore just visit the Fed and its policies and you will know why. why do you think they are all saying we need another stimulus. Because his policies are doomed to fail because hey do not address the problem of what is really wrong with the economy.

I consider myself liberal. As I recall it was Bush who picked him in the first place, so in fact you should get exactly opposite of what you are saying!!!!


On Jul 07 09:14 AM Ferdinand E. Banks wrote:

> I'll answer your question Mark 54. NOBODY! The crusade against Bernanke
> is just another effort by people who wanted John McCain and Sarah
> Palin to win the election. Of course it might be true that Summers
> would be just as competent once the meltdown stops, but why take
> a chance.

Jul 07 05:32 PM

[Mr. Ed, Jr.:]

How in the world do McCain and Palin get dragged into this discussion ?

And, by the way, the "crusade" against Bernanke was started by the Obama White House leaking the MER-BAC memo. Obama wants Bernanke out.

McCain and Palin ?????


On Jul 07 09:14 AM Ferdinand E. Banks wrote:

> I'll answer your question Mark 54. NOBODY! The crusade against Bernanke
> is just another effort by people who wanted John McCain and Sarah
> Palin to win the election. Of course it might be true that Summers
> would be just as competent once the meltdown stops, but why take
> a chance.

Jul 07 09:21 PM

[Mark54:]

Lets not confuse what the Federal Reserve is in control of and what the Treasury and Executive branch is in control of. Treason? on what basis? taking rates to the floor so that the carry trade can recapitalize banks rather than the Treasury? Or is simply promoting functioning credit markets? Or is he guilty of actually allowing the fed to be lender of last resort? Or was it saving the money fund industry through the asset backed CP money market facility.

What did the fed do wrong? It only has lent money to AIG and has loss sharing agreements with BofA and Citi. Maiden Lane is not right. I dont see any of these in the Fed mission statement. The biggest issue I see is they botched financial institution regulation of the largest institutions but that is not Bernanke's fault.

The bottom line is the great depression happened due to a lack of action. TARP is the Treasury and Stimulus 1.0 (soon to be 2.0) is Obama and a scared congress. Bernanke shown that he is willing to step out and do something. If there was a better way then someone please lay it out for me.


On Jul 07 05:32 PM dcb wrote:

> Your kidding right? If you really go back and look at his statements
> and then what has happened he has failed at every turn. Lastly, his
> policies amount to an unlimited subsidy of failing banks that put
> the dollar and the stability of our country in danger.
>
> He clearly doesn't get that bankers are completely self serving and
> it appears he has been asking every goldman alum for advice in what
> to do. My god Wall street could not have been handed a better savior.
>
>
> His liquidity efforts helped to drive down the dollar, making oil
> very expensive, which greatly increased the severity of the recession.
> The oil induced effect is what really drove the stake through the
> heart of the economy and market.
>
> When did things really start to tank. take a look at last year about
> this time, oil at peak, no discretionary spending by consumers because
> each and every last dollar was going into their tank.
>
> You may or may not believe this, but his policies are crafted to
> help banks, not the economy. Neg real interest rates, and inflation
> helps out debtors (banks). It kills the savings of each and every
> person on some kind of fixed income (ncluding salary). His plan is
> to increase lending. We need debt relief, not more lending. How can
> someone who can't pay their mortgage or interest on their credit
> card (most americans) take on more debt.
>
> Of course you realize that increased debt increases return on equity,not
> return on assets (real return) which increases bankers bonus. We
> got into this mess because of too much cheap credit being spent on
> assets that did not have enough return. this allowed banks to allocate
> capital (which they off loaded to us suckers, secutisation) which
> were less than true cost of capital. Now we are stuck because if
> we increase the cost of capital to anywhere near what it should be
> none of these investments have any return and the banks all fail.
> Net result is at best stagflation by attempting to bail out the banks.
> If you doubt me just look what happens in Japan if they don't give
> out free money. they immediately go into recession. We'll they have
> been in trouble since about 1990. (20 years). That is what we are
> stuck with from these idiots!!!!
>
> You should consider reading a book by John Taylor, sorry forgot the
> name, he is a major economist that has just written a book about
> how the fed has always been blowing at and makes these crisis worse
> over an over again. Hvae you noticed each and everytime we fix things
> the risk next time is greater and when it blows up the effect gets
> worse. that is what the fed does. they transferred the internet bubble
> (isolated to stock markets), to housing (creating real maco effects),
> and are now putting the dollar and our countries stability at risk.
> All to keep the stock market propped up and bankers getting their
> bonus.
>
> Now you have the real story of what is going on.
>
> I voted for Obama, and wish Bernake was put on trial for treason
> for the damage he has caused. He is by far the only person I kow
> who has failed so miserable at what he does who gets to keep his
> job.
>
> Wall street loves him, and wouldn't you if someone gave you an unlimited
> subsidy that never ended. At the same time they took you bad debts/toxic
> assets that nobody wanted and bought them with taxpayer money. You
> as the tax payer have to borrrow at 3.5% to pay this back in the
> future, so the bank can now lend your own money to you at 8% (give
> or take). If you wonder why the consumer is strapped and doesn't
> have any thing to help out the economy anymore just visit the Fed
> and its policies and you will know why. why do you think they are
> all saying we need another stimulus. Because his policies are doomed
> to fail because hey do not address the problem of what is really
> wrong with the economy.
>
> I consider myself liberal. As I recall it was Bush who picked him
> in the first place, so in fact you should get exactly opposite of
> what you are saying!!!!

Jul 07 11:34 PM