Former Neuberger Berman CIO Defends Bernanke

by: Robert Wagner

I've written countless articles and posts defending Ben Bernanke and his management of monetary policy. My position is and has always been that many in the financial community simply have a fundamental misunderstanding of monetary policy. Countless analysts have made baseless, erroneous, misguided, counter-productive, unfair and unjust criticisms of Ben Bernanke and his monetary policy. This video does a good job defining the misconceptions many in the financial community have about monetary policy. Because the video is placed in an article I quote them both. It looks like the editors toned down the actual quote from the video, but it highlights how unrestrained some in the media are with their criticism.

Video Quote: And no matter who it is, the congress, our viewers, people on Wall Street, most everybody believes that Ben Bernanke has led us down the road to disaster and he's done a horrible job as Fed Chairman.

Text Quote: While the debate continues over the timing of any Fed tapering, there seems to be unanimity of opinion on Wall Street, among lawmakers and the American people, that Bernanke's easy money policies have generally failed and will lead America (or at least the dollar) to ruin.

That quote appears to capture the conventional wisdom on Wall Street and Main Street, and it is completely wrong, and based upon a complete and utter misunderstanding of monetary policy. Fortunately, some people are finally standing up to defend Ben Bernanke and give credit where credit is due. In the video, former CIO of Neuberger Berman Jack Rivkin pushes back against the misconception machine and provides some great analysis and debating points. In this article I'll take Mr. Rivkin's comments and expand upon the analysis.

First the easy one. Mr. Bernanke's monetary policy has not "ruined" the US Dollar. Here is a chart of the trade weighted US Dollar and it is stronger than it was before the start of QE. Basically the Fed "printed all this money out of thin air" and the US Dollar got stronger. That is a quantifiable fact, unnecessary of debate, proven beyond any reasonable doubt, settled science and yet many continue to perpetuate the myth.

QE began in late 2008, and since that time period, the US Dollar is basically unchanged from the announcement of QE1, and has strengthened since QE2 and QE3 and the volatility has decreased. The current value of the US Dollar is 82.62, and on November 24, 2008 when QE1 was announced it traded at 86.71 and three months later on February 27, 2009 it traded higher at 88.15. That was during the peak of the crisis and a huge amount of fear premium was built into the US Dollar, so a drop from 86.71 to 82.62 should be expected as stability returned to the markets, but even so, in no way can a drop from 86.71 to 82.62 be considered "ruinous."

It is OK to be wrong, it isn't OK to stay wrong, and it is even less OK to be wrong, stay wrong and have a chart that everyone can see that proves you are wrong and you attack Ben Bernanke and the Fed monetary policy based upon erroneous theories of monetary policy. That is way wrong, and borders on financial negligence and malpractice.

The other interpretation of "ruin" the US Dollar is that "printing money out of thin air" will cause inflation and erode the value of the US Dollar. That too is based upon a misunderstanding of modern monetary policy and not supported by the data. Inflation is caused by "too many dollars chasing too few goods," not simply "printing money out of thin air." There is a change in the dynamics between supply and demand that is required to develop inflation. With elevated unemployment, slow economic growth and China eager to import any inflation that does develop in the US, inflation simply isn't likely to happen anytime soon. The chart of the year over year change in the consumer price index (CPI) demonstrates inflation has fallen since the end of 2008, not increased.

This following table demonstrates that the post-QE rate of inflation is either equal to or below previous periods. "Printing all this money out of thin air" simply did not cause inflation. That fact isn't even debatable, it is highly quantifiable, and even if you don't accept the government statistics, the markets, the only opinions that really matter when investing, aren't demonstrating that there is inflation either. Inflation simply isn't a threat to the US economy, and those that claim that it is are simply arguing with the facts, and worse yet, they are arguing with the markets, and that is a fight they are sure to lose.

The other myth that is discussed in the video is that monetary policy has "failed" and is basically the reason for the economic malaise facing the US. This claim is absurd if you think about it. How in the world can low interest rates, low inflation, printing money/providing liquidity, recapitalizing the banks, stabilizing the financial system and averting a global depression be considered a "failure," and "cause" of the economic malaise? The argument makes no sense, and isn't supported by the facts or history.

Point #1: QE started after the 2008 crisis. The cause must always lead the effect. Blaming QE and Fed policy for the economic malaise refuting from the 2008 crisis and following fiscal nightmare, is like claiming that lung cancer causes smoking. They simply have their cause and effect reversed and a backward timeline.

Point #2: Would the US and global economy be any better had the Fed allowed the banking system to collapse like it did in the 1930s? I'm pretty sure we don't need to rerun that experiment to know that would have been a huge mistake, and things would be infinitely worse today than they are. I think that is one "negative" that we can prove simply by studying the economic Armageddon of the 1930s. We should be thankful Ben Bernanke didn't listen to the critics and repeat the mistakes of the past.

Point #3: Contrary to conventional wisdom, inflation is infinitely preferable to deflation. Economies can't efficiently function in a deflationary environment, just as anyone whose mortgage is underwater, or a merchant trying to sell their gold inventory that was purchased at $1,900/oz knows. No matter how many negative comments I get on this point, it won't change the fact that inflation is preferable to deflation. Once again, we should be thankful Ben Bernanke has ignored the critics.

Point #4: Monetary policy is an asymmetric policy. It is not, nor will it ever be the economic tool to push an economy out of malaise. Monetary policy is like an emergency break, not a throttle. It is far better at slowing economic growth than it is for speeding it up. In fact monetary policy is often described as "pushing on a string."

Point #5: The policy that is the "throttle" is fiscal policy, but only if the chosen fiscal policy is actually effective in generating a real rate of return that results in real jobs and growth. Pouring money down the toilet on ventures like Solyndra and other negative rate of return ventures does nothing to create jobs and growth. They actually distract from growth by generating crippling debt and denying viable ventures of badly needed capital. Constantly changing regulatory spending and tax policies also cast a freeze over the business community that is paralyzed until they can understand the rules and costs. Ben Bernanke is right for directing the market's focus onto fiscal policy, and away from this counter-productive and misguided obsession with monetary policy.

Point #6: As Ben Bernanke points out, the Fed can't compensate for fiscal "headwinds." No amount of appropriate monetary policy can compensate for failed fiscal policy, it is that simple. Monetary policy is the break, and fiscal policy is the throttle, and if fiscal policy acts as a break, therisn't a whole heck of a lot monetary policy can do to overcome that. Washington has simply distorted the historical balance between fiscal and monetary policy. Nothing Ben Bernanke can do with monetary policy will compensate for the jobs lost by blocking the Keystone Pipeline, constantly changing the rules on Obamacare, carbon/CO2 regulations, taxes, spending, extending unemployment and expanding welfare. Monetary policy is a very impotent policy for stimulating growth. Its strength is in slowing growth.

Point #7: The Fed does not spend money, nor does it create the debt. Only Congress can spend the tax payers' money and create Federal debt. The Fed is required to buy bonds on the open market, that is why the regulatory body is called the Federal Open Market Committee (FOMC). The Fed is prohibited from buying bonds directly from the US Treasury and thereby "monetizing the debt." What that means is that it buys its bonds from individuals and institutions on the exchanges at market rates. The Fed simply converts assets from illiquid to liquid. The bondholders are given a US Dollar and the Fed gets the US Bond. The wealth of the bondholder did not change, it simply got more liquid. The Nation's debt did not change, its ownership did. What did change however is that the bondholder is now more likely to go out and spend some money. That essentially is all the Fed does, it puts liquid assets in the hands of people that were previously holding illiquid assets, and hopes they spend the money. That is monetary policy in a nut shell. Ben Bernanke isn't printing money and running off and building himself a palace, or paying huge profits to shadowy and imaginary private "banksters" that "own" the Federal Reserve that use the money "printed out of thin air" to fund their diabolical plots hatched on Jekyll Island.

The Creature from Jekyll Island - one of the classic exposes of the treachery and thievery we call "The Federal Reserve" - which is curiously neither federal, nor is it a reserve...This is an issue which impacts nearly every aspect of your material life, since you probably earn and buy almost everything you have with "Federal Reserve Notes". The IRS, too, is but little more than a collection agency for the "Federal Reserve". Find out the truth and the history of this evil, which strangles our society.

Point #8: "Conventional wisdom is that QE is not working." QE is in fact working, it is the conventional wisdom that doesn't understand QE. QE was never going to revive the economy, it was to stabilize the economy and financial system. QE is like an ER Physician working on a DUI car accident victim. The ER Physician didn't buy the victim the drink, encourage the victim to drive while intoxicated or cause the accident. The ER Physician shows up after the accident to provide life support until the patient is stable enough to move to recovery. The Fed performed the roll of ER Physician wonderfully, it stabilized the US and Global banking system and economy. The problem is the Fed hasn't been able to transfer the patient to recovery because the recovery Physician (fiscal policy) is stuck in gridlock on the highway. QE was never going to result in economic recovery, and those who expected it to simply don't understand the difference between monetary and fiscal policy. The fact that each round of QE is proving to be less and less effective is also to be expected. Once the patient is stabilized, there isn't a whole heck of a lot the ER physician can do. They have done their job, and it is time for the recovery physician to do its job. Blaming the ER Physician for the failure of the patient to recover is totally un/counter-productive, misguided and can be destructive and lead to some very, very, very bad outcomes and policies.

Point #9: "Fiat" currencies are infinitely better than commodity based currencies like gold and silver. It makes no sense to have a fractional reserve banking system, where banks "print money out of thin air" by simply making loans, based upon an inelastic commodity. That is simply a recipe for disaster, and history has proven that. Anyone that claims that an inelastic gold standard is better than an elastic fiat currency simply needs to watch "It's a Wonderful Life." Having an elastic fiat currency and a Federal Reserve that acts as a lender of last resort makes bank runs a thing of the past. Under a gold standard or inelastic currency only those fortunate enough to get to the bank before the gold runs out would get their money. All the rest are thrown to the wolves, and whose only hope is for the Mr. Potters of the world to buy their deposits and life savings for pennies on the dollar. We should all be thankful that Ben Bernanke ignored the critics and printed enough money out of thin air that there wasn't a single bank run or US Dollar lost in an FDIC insure account.

Point #10: "What would you have had him do? And what would be going on in the economy if he had done less than what he did? Tell me what you would have done differently." Those are the most insightful questions critics of the Fed and Ben Bernanke never seem to ask themselves, and certainly never answer. It is one thing to be a back seat driver, and a whole other thing to be the starting quarterback. To argue against the Fed's actions, one has to argue that the US and Global economies would have been better with deflation, uncontrolled bank runs and collapses, systemic financial system and economic collapse, higher real interest rates and greatly reduced access to credit. That is a recipe for economic Armageddon, not recovery. We should be thankful Ben Bernanke ignored the critics.

Point #11: "You believe in the counterfactual, you believe that you can't prove that had the Fed not acted so aggressively that we may have had another Great Depression... or worse." That may be true that you can't prove the counterfactual, but you can study history to get a pretty good idea of what would likely happen. Ben Bernanke deliberately did the opposite of what the Fed did in the 1930s, and the results have been almost 100% the opposite. I don't need a PhD in Philosophy and Logic to conclude that I don't want to accept the sophistry and debating gimmicks that would have resulted in repeating the mistakes of the Great Depression.

Point #12: "He has been the only adult in the room." That quote from the video pretty much says it all. Ben Bernanke, in my opinion and proven by just about every metric available, has done exactly the right thing, followed the text books, stood by the correct and effective principles and never strayed from doing the right thing given the information available at the time. If only Congress would demonstrate the moral character, strength of conviction, understanding of the issues and ability to identify and implement the correct policy for the given economic environment this economic crisis would be history in a heartbeat.

There are two criticism of the Federal Reserve that I do think hold some validity.

1) The Fed's easy monetary policy may be an enabler of Congress's spending. By keeping rates so low, Congress has had less pressure upon it to reform and to act. This of course assumes that the Fed controls long-term interest rates, which it does not. My guess is that if the Fed increased rates, only the short-term rates would increase, and long-term rates would actually fall as the economy slips into recession. While the Fed does have some indirect tools for influencing the long end of the curve, they are indirect, and are only effective if they complement the general view of the market. The only direct tool the Fed has to increase interest rates is the overnight discount rate, and increasing it would likely result in lower not higher long-term rates, which are determined more by inflation and growth expectations, both of which would be lowered due to the increasing of short-term rates. The problem here is that you can't prove the counterfactual, so that is why I say this theory may hold some validity, but once again, in my opinion, it isn't the Fed's responsibility to make Congress and the White House act like adults. Ben Bernanke isn't a babysitter. Do you fire the neighbor's Nanny because of your unruly children, children over which the Nanny has no control?

2) The Fed policy of low interest rates may have delayed recovery in the housing and big ticket durable items. Some arguments supporting this claim don't withstand scrutiny, but others do. The logic ironically is identical to why deflation is bad for an economy. The Fed, by signaling to the markets through its new Ron Paul inspired era of transparency, has communicated that people should not be in a rush to buy new homes. People like myself have been rewarded for simply sitting back and watching mortgage rates go lower. Deflation instills an expectation of lower prices in the future, and therefore, rewards those who postpone buying by rewarding them with lower prices. Deflation is a demand killer, and falling interest rates have acted as an inhibitor to those wishing to buy a house. That however has to be balanced by the stimulatory effect of homeowners refinancing at lower rates, and rising home prices lifting many homes out of their underwater status, so once again, I use the term "may" is my support of this critic of the Fed.

In conclusion, I welcome seeing people in the financial community finally standing up and doing what is right, that being defending Ben Bernanke and his magnificent leadership at the Fed. Economic text books will be written in the future describing what he did as nothing short of a miracle, and his critics will be used as case studies in how basing investment decisions on flawed theories and opinions of demagogues can be disastrous. Investors in gold/SPDR Gold Trust (NYSEARCA:GLD) and silver/iShares Silver Trust (NYSEARCA:SLV) and other precious metals related stocks and ETF/Ns are finding that out the hard way. The good I see from this is that it will likely force the investment community to go back and study what went wrong, why the theories didn't work and spend some time understanding how things really work versus how they want things to work.

Ben Bernanke has proven printing money doesn't cause inflation, and that myth is the foundation of almost all the criticism of the Fed. In my opinion, it is time for the financial community to start getting things right and give Ben Bernanke his due. Even congress is figuring that one out, and when Congress is showing greater insight than the financial community, the financial community has a lot of work to do. It is time to put down the pitchforks and torches, end the search for scapegoats and witch-hunts, and start picking up text books written in the last half of the century. Had the critics of the Fed done that back in 2008, they wouldn't be eating the crow they are today.

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.