The announcement of Ben S. Bernanke’s successful nomination for a second term brings forth a curious question. Who does the Fed Chairman really and truly work for?
Before we get into today's topic, a quick comment on the state of the market here and now.
There is a bit of debate going round as to whether traders should be anticipating the demise of the epic 2009 market rally... washing their hands of the nutty action entirely... or jumping back in, jack-be-nimble style, to catch a piece of the last hurrah.
Different traders will come to different conclusions, of course. It takes all kinds to make a market. Just two quick observations and we'll move along.
First, there is a reason they call it "greater fool theory." And second, trends have life spans – just like people.
Trend mileage can vary widely, of course. But this is true of people too. Statistically speaking, a Japanese woman has far better odds of reaching 85 than a Russian man does of reaching 65.
Point being, when your humble editor looks at this market rally from a trading perspective, he does not see a bright-eyed Japanese grandmother puttering around in her garden. Instead he sees a 64-year-old Vladivostok dock worker... an ashen-faced, barrel-chested man with a heaving cough, a clogged aorta, and a mean addiction to Stolichnaya vodka and Sobranie cigarettes.
But, as Dennis Miller used to say, "That's just my opinion. I could be wrong..."
Two Cheers for Fireman Ben
In a notable bit of inside baseball this week, the Chairman of the Federal Reserve (Ben S. Bernanke) was officially locked in for a second four-year term.
Breaking the news from an elementary school gym in Martha’s Vineyard – Mr. Bernanke by his side – the vacationing Prez was effusive. "Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall," President Obama gushed.
Of course, there was no real mention of the serious Fed-induced problems that brought the financial system to the “verge of collapse” in the first place. Lest we forget, Bernanke stood shoulder to shoulder with his predecessor, Alan Greenspan, in regards to ignoring bubbles until they burst (“Bubble, what bubble?”)... injecting massive liquidity into the system post-crisis and leaving it there, reinflating new bubbles from the dregs of popped old ones... and, last but not least, in coming up with fanciful theories to blame fiscal imbalances on other nations (the infamous “global savings glut”).
For the POTUS to touch on such things would have been a breach of protocol. Instead, the regulator who almost burned the house down was lauded for knowing how to use a fire hose.
Bernanke “saved the world,” the Fed Chairman’s most enthusiastic boosters declare. Never mind that he saved it from the leverage-loving pyromaniacs (i.e. short-sighted greedy bankers) that were supposed to be under his watch in the first place.
Who Is This Man’s Boss?
In light of the Bernanke reappointment, now seems a good time to ask a curious question. Who does the Fed Chairman actually work for?
The obvious answers don’t quite jibe. The POTUS and Congress, for example, supposedly work for you and me. In theory, at least, they are held to account by the voting process and beholden to “the American people.”
But the Chairman of the Fed is not exactly elected. He is more or less anointed by way of smoky backroom horse trading, in which there is a lot of whispering and assurance-seeking before the Chief Executive reluctantly agrees to endorse.
Does the Chairman work for the President or Congress then? Not exactly... the Federal Reserve is a proud and unbending institution, fiercely protective of its cherished independence. There is definitely a kabuki dance of forged alliances, cultivated relationships, and so on. But a good Fed Chairman works the aisles up and down the Hill precisely so the Fed can maintain its vaunted independence, not give it up. Keeping Congress’ greasy mitts off the true levers of power is a top priority.
So perhaps the Fed Chairman is like a Supreme Court judge – appointed by the President and vetted by Congress, but hypothetically free of political influence thereafter. That, in turn, would make the Fed a quasi-official “fourth branch” of government, giving us the Executive... the Legislative... the Judicial... and the Financial.
The Supreme Court analogy hits uncomfortably close to home. The Fed no doubt despises any such “fourth branch” references, not because they are unflattering or inaccurate, but because such talk reveals too much. (Better not to give Congress any wild ideas, reining in the Fed’s power.)
Follow the Money
Yet there is something lacking in the Supreme Court analogy too. The black-robed nine spend their days solving thorny legal issues, handling landmark court cases gathered from across the land. To be a Supreme Court judge is clearly to be in thrall to American law, and to be in devoted service to an abstract ideal. The Fed has a far murkier agenda...
If we look not to words but deeds, the picture becomes more clear.
For instance Dennis Lockhart, the head of the Atlanta Fed, admitted in a Chamber of Commerce speech this week that the real unemployment rate is actually 16% (as opposed to the official July jobless rate of 9.4%). Such a number surely implies the Fed is not all that concerned about the working joes of this country.
Yet another Fed head, James Bullard of the St. Louis branch, further admitted last week that the Fed plans to keep interest rates “exceptionally low for an extended period of time,” according to Reuters. “I don’t think markets have really digested what that means,” Bullard added. If anything it means the Fed is more concerned with pumping up paper assets than protecting consumers and businesses from nominal price hikes.
Perhaps the question can be answered with a question. Who was the Federal Reserve meant to regulate? It is a paradox of government that the law-wielding regulators often find themselves kidnapped by the regulated... brain washed in a weird case of bureaucratic Stockholm Syndrome.
From a power and money perspective, regulatory Stockholm Syndrome makes perfect sense, however, because so much of both – power and money, that is – is concentrated in the private sector. The top four banking behemoths all have deposit bases measured in the trillions, for example. Is it any wonder the Fed, Treasury and FDIC merely kowtow?
Meanwhile, top Wall Street bank execs enjoy bonus-laden paydays in the tens to hundreds of millions. In stark contrast, the Federal Reserve Chairman’s 2008 salary of $191,300 is less than half the guaranteed minimum a rookie MLB relief pitcher would get... the Goldman Sachs equivalent of a waiter’s tip.
Ladies and Gentlemen, We Have a Winner...
When one considers the possibility that the Fed Chairman actually works for the banks, all the pieces begin falling into place.
It’s only natural, after all, given that the original mandate of the Fed was to preserve banking stability. It is the Federal Reserve’s job, first and foremost, to make sure that the U.S. financial system (and by extension the executives who stride atop it) perseveres through all economic storms.
In principle, the good of the country and the good of the U.S. financial system are supposed to be one and the same thing. In practice, the two can be at odds, sometimes dramatically so.
The charade of pretending that the two considerations are one and the same, though, is a key aspect of the brilliant bait-and-switch job foisted upon us all. Whenever a Fed (or Treasury) official’s actions can be wrapped in the guise of “saving the system,” it is implied that said action was undertaken for the good of everyone. Ha!
What’s more, not all bankers are created equal... as with seating arrangements in the king’s court, it is always better to be closer to the throne. Given their combination of heft, gravitas and “too big to fail” status, the top four banking institutions probably wield more power and influence than the next 40 combined. And beyond that, no man’s land. One can trace out the priorities of the Fed and Treasury in real time by observing how the giant money center banks get attended to hand and foot. The Bumbershoot Bank of Kalamazoo Kansas, meanwhile, is left to choke on prairie dust.
Banana Republics and Dictatorships
The main trouble with arrangements like this one is the way they tend to be favored by banana republics and dictatorships. When a small, concentrated “elite” class is consistently favored at the expense of everyone else, the long-run result is rarely pretty.
A tendency to endorse “socialism for the rich, capitalism for the rest,” as James Grant and others have put it, is not the best recipe for sustaining and growing a free-market economy. Unfortunately, in granting semi-autonomous power to a “fourth branch” mainly beholden to the banks, that is pretty much what the United States has signed up for.
Simon Johnson summed up the forward-looking concerns nicely in a recent Seeking Alpha piece, “Is a Two-Track Economy Emerging from the Rubble?”
The United States has, over the past two decades, started to take on characteristics more traditionally associated with Latin America: extreme income inequality, rising poverty levels, and worsening health conditions for many. The elite live well and seem not to mind repeated cycles of economic-financial crisis. In fact, if you want to be cynical, you might start to think that the most powerful of the well-to-do actually don’t lose much from a banking sector run amok – providing the government can afford to provide repeated bailouts (paid for presumably through various impositions on people outside the uppermost elite strata).
If we as Americans still have some true fighting spirit left in us – and enough of a grasp on revolutionary history to spark it – then perhaps Fed Chairman Bernanke will get more than he bargained for in the next few years.
What do you think? Does the Fed Chairman work for the people... or the banks... or someone else entirely? Is he doing a good job, or should we listen more to the Ron Pauls of the world and take some kind of action before it’s too late? You can deliver the full force of your opinions here: email@example.com.