Ben Bernanke Is Wrong Again 23 comments
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This video would be a good laugh if not for the fact that it centers around one of the most powerful men in the world's propensity to be wrong in case after case. I sincerely laughed at the "we've never had a nationwide drop in housing prices" line since it was one of my big beefs against the financial punditry (which I didn't realize, until I saw these clips, Ben was such a part of) - even before I started the blog.
Just because something has not happened in the past does not mean it could not happen. And speaking of "it never happened before," was anyone measuring home prices in the 1930s? Meanwhile certain bloggers were calling for dramatic price drops ... [Dec 6, 2007: Analysis - What Should Median Home Prices be Today?] Among many other dark scenarios [Dec 4, 2007: Predictions for the Coming 6 Months].
I also see Uncle Ben joined Uncle Hank Paulson (must have been drinking from the same barrel of Kool Aid) with almost identical terminology. Hank told us in April 2007 "subprime is contained" - and really, considering he was the head of Goldman Sachs (GS) when the era of CDOs (full of subprime loans) was moving from child to teenager to adult, who would know better? Apparently not the former head of Goldman Sachs. Nor the 'top regulator in the land'.
Thankfully, having a good forecasting record has nothing to do with securing the top economist job in the world.
To reiterate, my beef is not as much with Uncle Ben as the institution - one that has gone rogue and out of control and is being used as a crutch for a country which cannot face reality. Keep in mind, as Ben talks about the "confidence" he has in bank regulators, that the FED is the #1 "master regulator" of the country. Then again, our regulators are captured agencies under the thumb of our oligarchs.
Last note - I did get a kick seeing all the US index stock prices in the 2005 videos higher than they are today; of course only oil is higher today (The Fed is competent at one thing - creating inflation).
Via Mises.org: Ben Bernanke was Incredibly, Uncannily Wrong
We now have the diametrical opposite of the famous "Peter Schiff Was Right" video (a compilation of 2006 and 2007 clips in which Schiff, a financial expert who subscribes to Austrian economics, predicted the deep recession that would follow the bursting of the housing bubble).
The new, opposite video is a compilation of the 2005–2007 prognostications of Federal Reserve Chairman Ben Bernanke. In it, Bernanke is shown to have been just as embarrassingly wrong as Schiff was uncannily right. Could their differences in economic understanding have anything to do with this remarkable dichotomy?
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What we need to look at (and fight) are the professional liars on Wall Street. Yes, Henry may be doing TV these days, but his descendants are still at it, the Chinese wall notwithstanding. Shocking ! But true.
1. Bernanke is not good at making economic predictions.
2. Bernanke has done a good job responding to the crisis.
Regarding 1, no one in history has established a consistent record of making economic predictions. So, Bernanke, the Fed, and everyone else who attempts to make such predictions would be better off stopping that and spending their time on more productive pursuits (review the principles of complex adaptive systems, which the economy is, for why it is so unpredictable).
Regarding 2, Bernanke took the steps necessary to avoid much worse effects on our economy. Of course, those steps we took will also have some consequences/side effects that will likely be unpleasant, but the likely alternative to not taking those steps was probably worse.
> Look as fed chief you can't excatly be so candid
But he SHOULD be candid, considering that he controls monetary policy for the nation. Indeed, his lack of candor is what I would argue has caused the popularity of the Federal Reserve to plummet to Pres. Bush-style levels.
> Bernanke did something most appointed political people never do
>
> He acted instead of talked about saving the system
Actions that destroy the currency are even worse than allowing the system to collapse. At least with the system collapsed all the dead wood (i.e. bad debt) would be liquidated and no longer on bank balance sheets. Instead Chmn. Bernanke has printed the dollar to death, taken risky assets onto the Fed's balance sheet, and shred any degree of independence that the Fed once possessed because of the pernicious duet it has been playing with the Treasury.
I'd love to argue about these "much worse effects". The debate rings a lot like when your mom threatens that you must clean your room "or else".
How on Earth did a nation full of people default on this discussion.
1) I agree with him (did anyone check on real estate prices in the 1930's? to the contrary) that at the time, 2005, real estate prices were assumed to be "sticky downwards," i.e., the market corrected by sales and building slowing, inventory eventually coming into equilibrium with inflation-adjusted (rising) prices and then resuming normal action.
2) The apparent concern of the CNBC folks was the standard establishment-media take as of 2005, a time with a Republican president leading a Republican congress, as they attempted to put the worst gloss on their "the glass is half empty" morality tale just as now they put the best gloss on "the glass is half full" morality tale also known as "All is Well in the Age of Obama."
Many people now seem to believe no one saw this coming
That's just a lie and now its a defense of Uncle Ben
i.e. "no one could see it coming!"
He has more information at his fingertips than any person on Earth. And he missed it.
I am tired of the lines about "you can't blame him - no one could of seen it coming". Ask John Paulson about that.
On Jul 30 10:12 AM seasaw wrote:
> So:
> 1. Bernanke is not good at making economic predictions.
> 2. Bernanke has done a good job responding to the crisis.
>
> Regarding 1, no one in history has established a consistent record
> of making economic predictions. So, Bernanke, the Fed, and everyone
> else who attempts to make such predictions would be better off stopping
> that and spending their time on more productive pursuits (review
> the principles of complex adaptive systems, which the economy is,
> for why it is so unpredictable).
>
> Regarding 2, Bernanke took the steps necessary to avoid much worse
> effects on our economy. Of course, those steps we took will also
> have some consequences/side effects that will likely be unpleasant,
> but the likely alternative to not taking those steps was probably
> worse.
On Jul 30 08:30 AM dividendmachine1 wrote:
> Look as fed chief you can't excatly be so candid
>
> Fear feeds on itself and could destroy the entire system
>
> Bernanke did something most appointed political people never do<br/>
>
> He acted instead of talked about saving the system
And why is he wrong case after case? Because Keynesian econ is socialism. It may work in the short-term, but it is self-defeating over time. Ben and the "statists" are punch-drunk on control -- that is why they cannot see this forest for the trees. They cannot be objective because they have an existentialist need to have power. And that means a belief that they can control or fix every human problem, including the economy, by growing government.
The most poignant example for me is the AIG bailout, where they gave tens of billions of dollars that went right through — conduit payments — to the investment banks that are now solvent. We [taxpayers] didn’t get stock in those banks, they didn’t ask what was going on — this begs and cries out for hard, tough examination.
You look at the governing structure of the New York Federal Reserve, it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy.
The Fed gave13 trillion dollars to the Banks, is everyone OK with this? I have to tell you I am not.
From A Former Goldman Managing Director: How You Finance Goldman Sachs’ Profits
Submitted by Tyler Durden on 07/30/2009 17:10 -0500
Alan Grayson Bank of America Bankruptcy Banks Ben Bernanke Bonuses Cash CEO Commercial Paper Compensation Comptroller of the Currency Credit Debt Derivatives Earnings FDIC FED Federal Deposit Insurance Corporation Federal Reserve Federal Reserve System Goldman Sachs Jamie Dimon Lehman Brothers Liquidity Merrill Lynch Money Morgan Stanley New York Times Office of the Comptroller of the Currency SEC Speculation TARP Toxic assets Trade VaR
By Nomi Prins, via Mother Jones
July 28, 2009 -- This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation's biggest banks can't be trusted might not matter very much to the rest of us. But since the record bank profits we're now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed's role in Goldman's rapid return to the top of Wall Street.
To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn't have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.
Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks'. That's the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.
Goldman didn't like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what's called the Market Risk Rules that bank holding companies adhere to when computing their risk.
Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG's spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG's free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there's the $29.7 billion it's used so far out of the $35 billion it has available, backed by the FDIC's Temporary Liquidity Guarantee Program, and finally, there's the $11 billion available under the Fed's Commercial Paper Funding Facility.
Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.
On February 5, 2009, the Fed granted Goldman's request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money.
Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That's the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It's also the division that would stand to gain the most if Waxman's cap-and-trade bill passes.)
Since Goldman is trading big with our money, why not also use it to pay big bonuses? It's not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount.
But capital is still key. Capital is the lifeblood that pumps through a financial organization. You can't trade without it. As of June 26, 2009, Goldman's total capital was $254 billion, but that included $191 billion in unsecured long-term borrowing (meaning money it had borrowed without putting up any collateral for it). On November 28, 2008 (4Q 2008), it had only $168 billion in unsecured long-term borrowing. Thus, its long-term unsecured debt jumped 14 percent. Though Goldman doesn't disclose exactly where all this debt comes from, given the $23 billion jump, we can only wonder whether some of it has come from government subsidies or the Fed's secret facilities.
Not only that, by virtue of how it's set up, most of Goldman's unsecured funding comes in through its parent company, Group Inc. (Think the top point of an umbrella with each spoke being a subsidiary.) This parent parcels that money out to Goldman's subsidiaries, some of which are regulated, some of which aren't. This means that even though Goldman is supposed to be regulated by the Fed and other agencies, it has unregulated elements receiving unsecured funding—just like before the crisis, but with more of our money involved.
As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase's results got from Wall Street. Betting is betting.
Let's pause for some reflection: The bank "stars" made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he's concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn't add up to a really healthy scenario. It's more like bad déjà vu.
As a recent New York Times article (and many other publications in different words) said, "For the most part, the worst of the financial crisis seems to be over." Sure, the crisis may appear to be over because the major banks of Wall Street are speculating well with government subsidies. But that's a dangerous conclusion. It doesn't mean that finance firms could thrive without the artificial, public-funded assistance. And it certainly doesn't mean that consumers are any better off than they were before the crisis emerged. It's just that they didn't get the same generous subsidies.
Additional research by Clark Merrefield.
Article From Mother Jones, h/t amsterdamtrader
On Jul 30 10:12 AM seasaw wrote:
> So:
> 1. Bernanke is not good at making economic predictions.
> 2. Bernanke has done a good job responding to the crisis.
>
> Regarding 1, no one in history has established a consistent record
> of making economic predictions. So, Bernanke, the Fed, and everyone
> else who attempts to make such predictions would be better off stopping
> that and spending their time on more productive pursuits (review
> the principles of complex adaptive systems, which the economy is,
> for why it is so unpredictable).
>
> Regarding 2, Bernanke took the steps necessary to avoid much worse
> effects on our economy. Of course, those steps we took will also
> have some consequences/side effects that will likely be unpleasant,
> but the likely alternative to not taking those steps was probably
> worse.
Bernake + Paulson was a disaster prone to arrogance, self delusion and panic attacks.
Bernake + Geithner looks as if it's doing the job.
That's the best argument for giving the Fed less rather than more power
> I hate to say it but, quit whining about politics and make money
> - quite a few other people are doing it.
I hate to break it to you, but what the Federal Reserve, Congress, and the President do affects the VALUE of the money that you and "other people" are making. In the long run, if the Fed keeps printing and Congress keeps borrowing, the effect on the U.S. dollar will be disastrous. You may reply that you will not be here when the dollar collapses, but those of us with young children don't necessarily want them re-living a Weimar Republic style currency collapse.
1. Noone has a good record consistently making economic predictions accurately and timely. Several responses indicated that "people saw it coming". Of course, I agree that people clearly saw the housing bubble (see my other posts) and that it was not sustainable. But how long would it go on? How much would it crash? Precisely when and how long would it affect the rest of the economy? Again, many of us knew that there was an unsustainable housing bubble that would likely have very adverse affects on the economy when it bursts, but no one knew precisely when it would burst, how much it would burst, and how much it would affect the rest of the economy.
2. There would have been worse affects if Bernanke had not acted promptly to provide a variety of liquidity to various markets. Some argue that there would not have been worse affects. There would have been a spiraling downward worse than we can imagine, thousands of banks would have went bust and thousands of business who depend on credit to continue to operate would have went bust resulting in an overwhelming loss of money and jobs for people that would have caused a severe contraction well beyond what we have seen.
On Jul 31 11:10 AM Carlos Lam wrote:
I hate to break it to you, but what the Federal Reserve, Congress, and the President do affects the VALUE of the money that you and "other people" are making. In the long run, if the Fed keeps printing and Congress keeps borrowing, the effect on the U.S. dollar will be disastrous. You may reply that you will not be here when the dollar collapses, but those of us with young children don't necessarily want them re-living a Weimar Republic style currency collapse.
> On Jul 30 12:40 PM BigJake wrote: