Reappointing Bernanke Is a Mistake

The president should not have reappointed Ben Bernanke as Fed Chairman.

I start with excerpts of comments I made at the end of 2007. Bernanke blunders continued since then.

The Blunder of the Year in 2007

Bernanke keeping the funds rate at 5.25% for too long!

The Federal Reserve kept the federal funds rate at 5.25% from June 2006 to September 18, 2007, when Bernanke knew that stresses were building in the banking system.

In the fall of 2005, the Federal Reserve, Treasury and the FDIC realized that community banks were lending funds to the housing and real estate markets at a pace above what regulators thought was prudent. These regulators created suggested risk guidelines that the banks ignored, and so did the Federal Reserve in its monetary policy choices. These guidelines were formally adopted at the end of 2006 and ignored ever since then.

I was of the opinion that the Greenspan Fed should have never pushed the funds rate below 3%.

They did that after 9/11, and they pushed this rate to 1% in June 2003 on fears of deflation just as commodities were confirming technical bottoms. Ben Bernanke was a voting member of the FOMC.

Greenspan’s last meeting was January 31, 2006 and he should have passed the baton to Bernanke with the funds rate at 4.25% instead of raising the rate to 4.5%.

At Bernanke’s first meeting on March 28, 2006 the new Fed Chief pushed the federal funds rate up to 4.75%. As this was happening the pressure cookers on bank balance sheets were more than boiling.

Bernanke tried to prove that he was an inflation hawk at the expense of homeowners and the banking system by raising rates all the way up to 5.25% in June 2006, just as the FDIC quarterly banking profile was clearly deteriorating. But, Helicopter Ben knew he had the props ready to spin if need be.

The great credit crunch hit with vengeance in July and August of 2007, and all Bernanke did was cut the discount rate by 50 basis point on August 19 to 5.75%. That was the time to be more aggressive.

This move was too little too late, as were rate cuts of 50, 25 and 25 through the December 11 FOMC meeting. Cutting rates earlier and more aggressively may have helped ease the Great Credit Crunch preemptively. The blunders began in late 2001, and have continued ever since.

As Fed Chief for a second term, Bernanke will have to dismantle quantitative easing, which failed.

The credit facilities in place could have saved Lehman, which might have prevented AIG and the need for conservatorship of Fannie and Freddie.

He's a failure as Fed Chairman and someone else might be able to put Humpty-Dumpty back together again.

Any comparisons to the Great Depression are ridiculous.

During the Great Depression saw GDP decline 45.6% from the end of 1929 to the end of 1933. The second dip was a more modest 6.3% between the end of 1937 and 1938.

The only other year over year declines in GDP were 1945 / 1946 and 1948 / 1949.

Between 2007 and 2008

GDP rose 2.6% and they wrongly declared that a Recession. We may see a few modestly higher quarters of GDP between now and the end of 2011, but it will be like a bumping “L”.

In the first two quarters of 2009, GDP is down from 14.441 trillion to 14,150 trillion, a decline of 2.0%.

Disclosure: My policy is to have no position in the stocks that I cover.

Comments

[chap08:]

So you think the fact that "Any comparisons to the Great Depression are ridiculous" is an accident and nothing to do with central bank actions?

Aug 26 08:04 AM

[User 353732:]

The reappointment is not a mistake for :
1. Those who yearn for high inflation because inflation
--makes the very rich even richer since they have the asset mix and personal pricing power to profit from it
----is a potent form of debt repudiation
-----is a cruel and inescapable tax on ordinary Americans and a very effective way to transfer resources from the Productive Economy to the Government
----is a highly successful way to foster money illusion amongst the lower classes who see transfer payments rise without realizing that the purchasing power of these payments is eroding rapidly

2. Those who adore the Fiat Dollar because it
-----subverts and debases democracy and concentrates decision making power in a kleptocratic oligarchy
-----fosters serial bubbles that advance the private interests and personal agendas of the Bubble makers in Wash Dc and Wall St
----turns the US economy and polity into the private plantation of the Bosses

Aug 26 08:22 AM

[prudentinve...:]

I am no fan of "helicopter Ben", but in fairness, he was handed the messy bubbles that Greenspan made. At the time he became Fed chair, the Economist magazine cover showed a cartoon of a relay race, in which Greenspan was handing the next runner a stick of dynamite with a burning fuse. It was apt and prophetic.

I think the die was already cast when Bernanke took office, however, I believe his "bold" doubling down rather than trying to take some pain and walk away slowly was a mistake that will come back to haunt us.

I should add that I am always amused by how the media, and now the pres, describe every rate cut, by Greenspan or Bernanke, by the adjective "bold", which is more applicable to those who follow a wise but unpopular path than to those who simply follow the path of least resistance. Have the media ever described a rate hike described as "bold", or are unpopular, but necessary, rate hikes always "cowardly"?

Aug 26 08:26 AM

[CautiousInv...:]

Bernanke picked up where Greenspan left off, providing a seamless policy transition at the Fed. Prior to becoming chairman, Bernanke provided the intellectual cover for Greenspan by developing academic theses to justify Greenspan's policies. Steven Roach nicely summarizes these philosophical tenets:

1) Like Greenspan, Bernanke was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to responding to asset bubbles.

2) Bernanke was the intellectual champion of the “global saving glut” defense that exonerated the US from its bubble-prone tendencies; Much to the annoyance of our Asian financiers, BB blamed their savers for our rate conundrum.

3) Philosophically, Bernanke is cut from the same libertarian cloth that led the Greenspan Fed into this mess. He is “Steeped in the Greenspan credo that markets know better than regulators.” Even worse, Bernanke was part of the “prevailing Fed mindset that abrogated its regulatory authority in the era of excess.”

Aug 26 08:35 AM

[losangelesgirl:]

it's obvious you have several problems with Obama's choice, and you're not the only one. Many people are optimistic about what Bernanke can do to bring the US back to life, but others think it was a mistake: www.newsy.com/videos/b...

Aug 26 10:11 AM

[Tony Petroski:]

Your reasoning makes sense but who else did you have in mind?

Aug 26 10:32 AM

[CoverIsBetter:]

Thank you for saying some things that really need to be said.

IMHO - the collapse of the real estate bubble did not have to take the carnage it took. You bolster my stance on this, by reminding us that the FED raised rates way too high at way too fragile a time.

"raising rates all the way up to 5.25% in June 2006"

Just as this was happening, I was getting flyers from my local NAR saying "real estate in Fairfax never goes down". It was not long after that, the bank was recalling my line of credit.

Thanks again for venting this suppressed fact. They never should have suffocated the market for money when they did.

Aug 26 10:32 AM

[KSengineer:]

IMHO, the president was simply doing what he was told to do.

Aug 26 11:59 AM

[twotraps:]

Don't feel that strongly either way, but some things to keep in mind. We, in this discussion, are crossing philosophical lines willy nilly in some spots here!! Lets say Ben and Alan are cut from the same Libertarian cloth...would we rather let the govt figure everything out and over regulate? I would lean toward letting the mkt figure it out with strong regulation THAT IS ACTUALLY ENFORCED. Another issue is the 'crisis thing'. Alan was there for 911, when we truly did not know what would happen next. Would Chicago be next? There were issues of money transfers between banks without any air traffic. So, a little slack might be given. Late last year we were tempted to go get money out of the banks....stupid strategy but it was an option!! Did the govt raising the insurance rate to $250k really make you feel any better knowing full well that they would never, ever cover everyone for the original $100k????

So, it was a mess. Decisions were made behind the scenes we may never know about. Sick amounts of money were handed out to AIG counterparties but its still functioning overall. To discuss a 1/2% point here and there way back when is in the past. What do we do now. How can we make money. Will the dollar get destroyed? Can we really trust the banks when they relesase their numbers?

Aug 26 12:25 PM

[mcbowler:]

It is the system that is corrupt, not necessarily the guy put in charge of running it. The system allows the excess, and without someone to notice that the price of housing is exceeding the inflation rate, how is the system supposed to maintain stability? Truth is they don't care. Its a monopoly. They take risks at our peril. Can we get rid of the privately owned international central bankers again? I say yes. It is impossible to the intentions of Ben and Bush when they told us to keep spending although we were entering an expensive war. Was it a conspiracy? or are they that stupid.


On Aug 26 08:35 AM CautiousInvestor wrote:

> Bernanke picked up where Greenspan left off, providing a seamless
> policy transition at the Fed. Prior to becoming chairman, Bernanke
> provided the intellectual cover for Greenspan by developing academic
> theses to justify Greenspan's policies. Steven Roach nicely summarizes
> these philosophical tenets:
>
> 1) Like Greenspan, Bernanke was deeply wedded to the philosophical
> conviction that central banks should be agnostic when it comes to
> responding to asset bubbles.
>
> 2) Bernanke was the intellectual champion of the “global saving glut”
> defense that exonerated the US from its bubble-prone tendencies;
> Much to the annoyance of our Asian financiers, BB blamed their savers
> for our rate conundrum.
>
> 3) Philosophically, Bernanke is cut from the same libertarian cloth
> that led the Greenspan Fed into this mess. He is “Steeped in the
> Greenspan credo that markets know better than regulators.” Even worse,
> Bernanke was part of the “prevailing Fed mindset that abrogated its
> regulatory authority in the era of excess.”

Aug 26 06:52 PM

[dracula99:]

why dont you all accept that we are pawns, and only during times of desperation, do pawns take revenge on the masters. Free market just means freedom for a few greedy bastards, to take advantage of the many. Unless we start killing heads of corporations, politicians and right wing hawks, then nothing will change. I for one have made a quarter million dollar by taking a loan of 25 k from my 401 K. I will never ever contribute again, and i will play this game of capitalism to my advantage. the stock market is a joke, and now it has been proven once and for all.

Aug 26 07:13 PM

[whidbey:]

Ben sold out a long time ago when he teamed up with Paulson, he was a terrible choice then and he is worse now. A man with a past at the Fed who was complicitious with Greenspan in two large mistakes.

No one can reduce the liquidity without dumping housing. That is the door to depression. He has a deal with the White House and we will know when he inflates the hell out of things in2010 and 2011.

Aug 26 10:03 PM

[Sober Realist:]

Reappointing Bernanke was no surprise. Not reappointing him would be an admission that the Wallstreet Bailout was the wrong thing to do. You wouldn't expect the Whitehouse to commit that faux pas, would you?

Aug 26 10:21 PM

[Michael Clark:]

The system is corrupt. But that doesn't mean that everyone in the system MUST be corrupt and easily manipulated and blind.

"without
> someone to notice that the price of housing is exceeding the inflation
> rate, how is the system supposed to maintain stability?"

Isn't that the job description of the Fed chairman? He IS supposed to notice those things. What else is he doing with his time -- being knighted by the queen?

Alan and Ben like being popular with the Rich and Famous. They are not going to risk their status in the power sector by turning off the water during their party. Alan-Ben (Siamese twins, cloned by Ayn Rand) are somewhat like our friend Madoff: they are running a gigantic ponzy scheme for the benefit of the Ruling Class (their first beneficiaries)...they take future money from unborn Americans and give it to their friends, the super-rich...and to hell with the future, when the bill comes due, when Mr. Ponzi rises from hell and asks them for their soul.


On Aug 26 06:52 PM mcbowler wrote:

> It is the system that is corrupt, not necessarily the guy put in
> charge of running it. The system allows the excess, and without
> someone to notice that the price of housing is exceeding the inflation
> rate, how is the system supposed to maintain stability? Truth is
> they don't care. Its a monopoly. They take risks at our peril.
> Can we get rid of the privately owned international central bankers
> again? I say yes. It is impossible to the intentions of Ben and
> Bush when they told us to keep spending although we were entering
> an expensive war. Was it a conspiracy? or are they that stupid.
>

Aug 27 03:01 AM

[Michael Clark:]

Obama is still trying to preserve the bubble reality. He thinks it is possible. He should be shown in political cartoons as carrying bicycle tire patches trying to patch the blown dirigible losing altitude and collapsing on Wall Street.

I voted for Obama so that he would be a leader, not a follower. But he is NOT being a leader. His appointment of Bernanke is anotehr indication that he is trying to not rock the boat -- and doesn't realize the boat is already under water.


On Aug 26 10:21 PM Sober Realist wrote:

> Reappointing Bernanke was no surprise. Not reappointing him would
> be an admission that the Wallstreet Bailout was the wrong thing to
> do. You wouldn't expect the Whitehouse to commit that faux pas, would
> you?

Aug 27 03:09 AM

[Sober Realist:]

The foundation of Rome cracks and crumbles as the oblivious emperors partake in orgies.

Aug 27 12:26 PM

[Michael Clark:]

Isn't Ben Alan's illegitimate son by way of Liza Minelli?


On Aug 26 08:35 AM CautiousInvestor wrote:

> Bernanke picked up where Greenspan left off, providing a seamless
> policy transition at the Fed. Prior to becoming chairman, Bernanke
> provided the intellectual cover for Greenspan by developing academic
> theses to justify Greenspan's policies. Steven Roach nicely summarizes
> these philosophical tenets:
>
> 1) Like Greenspan, Bernanke was deeply wedded to the philosophical
> conviction that central banks should be agnostic when it comes to
> responding to asset bubbles.
>
> 2) Bernanke was the intellectual champion of the “global saving glut”
> defense that exonerated the US from its bubble-prone tendencies;
> Much to the annoyance of our Asian financiers, BB blamed their savers
> for our rate conundrum.
>
> 3) Philosophically, Bernanke is cut from the same libertarian cloth
> that led the Greenspan Fed into this mess. He is “Steeped in the
> Greenspan credo that markets know better than regulators.” Even worse,
> Bernanke was part of the “prevailing Fed mindset that abrogated its
> regulatory authority in the era of excess.”

Aug 27 12:52 PM