Friday, June 26, 2009

Ben Bernanke: Smooth Criminal

I know this isn't a universally held opinion, but to me there is a simple reality. Between September and December we were facing a significant chance of another Great Depression. Beyond that, we were potentially looking at a financial disaster from which the United States would never recover.

Today, it looks like we are merely facing a very bad recession.

Who deserves credit? Certainly not Hank Paulson and the Bush administration. They choose philosophy over pragmatism every chance they got. They gave in to the moronic "moral hazard" bullshit argument. They stuck to their right-wing "fuck off and die" mentality toward the banking system. That worked out great didn't it? Then when they had the chance to use the TARP right, they failed miserably. Again, they gave into the moral hazard wing of the Republican party and instead of buying up bad securities, they initiated the Capital Assistance Program. No moral hazard there!

Can't credit Obama either. I'll admit that the Stress Test was a much better idea than anything Bush ever came up with, but I'd argue that by December we had already turned a corner. Obama just managed to keep the momentum going. Besides, his $800 billion stimulus program is, at best, a waste of time, and at worse, contributing to rising Treasury yields and thus retarding the recovery.

I have to give most of the credit to Ben Bernanke. He understood that while liquidity wasn't the whole problem, illiquidity could have made (and was making) the problem much much worse. He understood what really made the Great Depression a 15 year affair rather than a 2 year recession. He understood what created Japan's lost decade (and counting). He saw how dangerous debt deflation could be, and he attacked it with both guns blazing.

Some people derided the Fed's efforts as ineffective. That's because they were looking at how the stock market or housing market was reacting to Fed rate cuts. But the cuts were never meant to "solve" anything. Housing prices had to fall to more affordable levels. Nothing could (nor should have) been done to stop that. Stocks had to fall in reaction to the oncoming recession as well as the reality of a weak recovery. For that matter, unemployment was bound to rise as workers are moved from leverage-oriented jobs to someplace else. The Fed wasn't trying to solve any of these problems.

Compare this with Alan Greenspan's constant manipulation of the stock market. In today's FT, Greenspan says as much in an opinion piece. "In my experience, such episodes [rising or falling stock prices] are often not mere forecasts of future business activity, but major causes of it." (My emphasis). That sums up Greenspan's tenure at the Fed doesn't it? He's basically saying that by creating bubbles, he was able to spurn real economic activity. Look, a lot of us fell for it for a long time. He was called the Maestro for the Force's sake. But now, in hindsight, we can certainly see the folly in this philosophy.

Now the morons in congress are coming for Ben Bernanke for how he handled the Bank of America/Merrill Lynch merger. Seriously? Now, let there be no doubt. Ken Lewis was pressured by the Fed in a way that should leave a bad taste in the mouth of any free citizen. But we were in the middle of an economic war. Sometimes some bad shit happens on the battlefield and sometimes its OK if we look the other way.

If the Republicans push this, though, Obama will be left with little choice but to not reappoint him. Then we'll get Larry Summers. Great. Even if you forget all the virtues I've just bestowed on Bernanke, remember this. The key to an effective Central Bank is independence. Otherwise we have Arthur Burns. It was Burns, not oil, which caused the Great Inflation of the 1970's.

How can we seriously assume Summers will be independent of Rohm Emanuel? If Summers winds up running the Fed, mark my word, inflation will follow.


sb101 said...

disagree: this more than just a bad recession. This is a structural change in our economny that will take years to adjust too

agree: when we look back, we will realzie Bernanke was the right man at the right time.

disagree: the stimulus is more than just a waste of time. just look at today's income numbers. it's haveing its positive, albeit slowly.

Unknown said...

You lost me at 'the moronic "moral hazard" bullshit argument' line.

The Oriole Way said...

While I disagree with you assessment of stimulus (though I don't think it was exactly the most effective thing in the world), I completely agree that Bernanke has done a bang up job. And I ESPECIALLY agree that the Cogressional antagonism towards Bernanke can only end badly. Seriously, Summers had a nice big role in getting us into this. We need to keep him as far away as possible.

Salmo Trutta said...

Bernanke is a treasure. All managers make some mistakes.

If the masses understood what Volcker did, there would have been a rope around his neck.

Accrued Interest said...


I think its a structural change in our economy that will cause a bad recession during the transition. I don't think we just go back to our old ways. But I think Bernanke prevented it from being something much worse.

Accrued Interest said...


I can't understand the fanatical moral hazard crowd especially now. You've seen the consequences. You've also seen how poor management (See Group, Citi) isn't exactly being rewarded with runaway profits. Whereas good management (See Sachs, Goldman) is. What would you like?

Lockstep said...

I agree. Bernanke deserves a lot of credit.

I think Obama deserves credit like a good relief pitcher too. Could have done a lot worse.

Lockstep said...

Let me add... don't think the Depression is off the table yet.

David Merkel said...

AI -- Sorry, BB didn't prevent a crisis, he just delayed it, perhaps at the cost of deepening it. You can't get something for nothing, aside from neomercantilists buying up US debts, fools that they are.


Darth Fluffy said...

AI - I disagree with your assessment of Bernanke. What people sometimes forget is, Bernanke studied the Great Depression under a comparative studies framework. He compared different country's economies during the GD and studied how some recovered earlier than others. Of course, when you make this kind of analysis, there will be tons of confounding variables. Bernanke just happened to attribute faster recovery to liquidity. The liquidity that he has injected into the economy serves nothing but to delay the inevitable and magnify the pain. If you remember, back in 2001, the tech bubble burst which would have led us into a recession. Greenspan decided to flood the market with liquidity, which not only delayed the day of reckoning, but spread it to other industries/asset classes. What Bernanke is doing today will ultimately destroy this country. The last asset class to be inflated is Treasury. When that blows up, all hope will be lost. No amount of liquidity, stock market manipulation and green shoot propaganda will be able to save this country.

I agree the situation we were in last Fall was dire, but what we should have done was 1) let the bad banks fail and nationalize them. Once those banks turn around, the gov't can always re-IPO them and tax payers reap full benefits, 2) support the good banks so that they can start lending again and 3) reduce rates slightly, but not as much as we did today because leverage is ultimately what got us into this mess.

Conceptually, what Bernanke is doing is rolling over one credit card debt using another credit card. America does not have the cash flow to service those debts. Countries around the world have already picked up on this game and have already indicated they will no longer play it. If you noticed yields on 30 year have increased despite Fed's effort to manipulate it. Countries around the world are now conducting transaction using other currencies or swaps to circumvent the USD.

The only reason you are defending Bernanke is you don't see the TRUE nature of his policies. How can you? Stocks and all asset classes have continued to gone up in this remarkable bear market rally. Despite the great uncertainty, Vix continue to decline, apparently there is no fear in sight. This is merely the calm before the store. Both stock market and bond markets have been manipulated (see unusual volume in futures market every time market looks like it was ready to break). Gov't has coordinated with news agency to run green shoot propaganda 24-7 to keep people's hope afloat. There is such a gap between reality that most people know and living through today and the fantasy economy that the media would like you to believe. If you really think disaster has been averted, you too may be living in a fantasy economy.

In short, Bernanke will ultimately prove to be a complete and utter failure. What he has done at the Federal Reserve is unprecedented in its criminality. Unfortunately, I do agree with you, he is the lesser evil when juxtapose to Summers. America had the opportunity, NOT to avert financial disaster, but to let markets fix itself with a little government assistance so that the inevitable depression we were heading into would not be shorter than the one we will now be heading into. Thanks to Bernanke, we failed and all of us and our children will pay dearly for it. Because of your hero Ben Bernanke, there is a possibility, the United States will not survive this economic earthquake.

Darth Fluffy said...

meant to say - "inevitable depression we were heading into would be shorter than the one we will now be heading into."

In Debt We Trust said...

Any comments? Methinks the primary dealers are stuffed to the gills w/treasuries. A bond vigilante's dream come true?

June 26 (Bloomberg) -- Dresdner Kleinwort Securities LLC dropped from the ranks of securities firms that trade Treasuries with the Federal Reserve, bringing the dealer network back to the smallest in the 49-year history of the system.

Dresdner is the second dealer this year to resign from the network of firms which was formalized by the Fed in 1960. The dealers are mandated to bid at Treasury auctions and that act as counterparties for the central bank as it conducts open-market operations. At 16 firms, the number of dealers is less than the original 18.

Kevin S said...

A good little piece. BUt what would Summer do differently than Ben that you think would be the primary cause of inflation?

Keith said...

Shouldn't the FDIC get a little credit for stepping in and trying to prevent the commercial paper market implosion from destroying business borrowing. It seemed to me at the time that it was the first attempt to really keep a specific market afloat. I think they learned a good lesson from it when the money markets started to panic. Maybe a little love note to Sheila Bair is in order?

In Debt We Trust said...

China continuing to flip flop on their position re: treasuries and the dollar.

Accrued Interest said...

Darth: Its a matter of opinion, I suppose, whether a Depression is off the table or not. But I really don't see it. One thing I will strongly disagree on is that the US doesn't have the cash flow to pay our debt. Also the debt position doesn't have anything to do with Bernanke. Its mostly Bush, some Obama.

Accrued Interest said...


Yeah Bair has done a very nice job. You'll remember she was very early on in saying that banks needed to raise capital and sell assets. I think the TLGP program, which is I think what you are refering to, was a Treasury idea though.

Accrued Interest said...


The word is that the Street was caught short going into last week's auctions and got hammered. One trader (who got the call right) said that many street traders had gotten lazy, just assuming we'd sell-off into auctions. Didn't happen and that's why there was such an outsized move last week. So no, I don't think primary dealers are "up to the gills" in Treasuries.

Accrued Interest said...


I think that if a Fed chairman cares too much about what the President thinks of him, its bad news. Burns, by some accounts, believed that the populace wouldn't accept 6% unemployment no matter regardless of inflation. Plus, again by some accounts, he wanted to see Nixon re-elected. I'm very worried Summers would be too influenced by politics.

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In Debt We Trust said...

AI, Thanks for the insight.

I actually went long TLT calls and TBT puts earlier this month despite my fundamental misgivings about higher interest rates further down the road.

Bond auction week has turned into a kind of contrarian indicator where the long end HAS to go up or the US will "lose face" before market observers. But how long can rates keep on being depressed in the face of mounting supply?

I am eyeing the new Obama Health plan w/unease. Could socialized medicine be the catalyst that drives rates higher?

Martin Ghoul said...

AI, I kind of agree with some of the points you're making. I do believe that Bernanke has done a good 'crisis mgmt' job. Problem is, of course, that, at some point, when the crisis ends things will need to be unwound. Until Bernanke shows his mettle when that time comes (if he gets a chance), the jury's out.

To me the best way to think about the situation is to compare the US economy to a doped-up runner, with Greenspan in the role of the doctor who keeps injecting the poor guy with steroids to keep him going. The runner keeps going for 10 laps or so, but then simply collapses. Enter Dr Bernanke, who manages to successfully revive the patient and keeps him on life support.

However, for the runner to actually be able to keep going he needs to be taken off life-support, slowed down and the steroids in his bloodstream have to be dealt with. Otherwise, the bugger's gonna croak whatever the efforts. It's this post-resuscitation treatment that seems to be going rather badly for Dr. Bernanke at the moment, IMHO.

Accrued Interest said...


Good analogy and I agree that the jury is out. To carry the analogy further, there is nothing wrong with trying to slowly remove an addict from his drug.

Unknown said...

In Greek mythology, the ferryman, Charon, must be paid some coins in order to cross the river Styx to get to the underworld. If he doesn't get paid, you do not cross and must wander the earth in limbo.

At present, the ferryman is Joseph Schumpeter and he did not get paid enough coins of creative destruction, so we all must wander in economic limbo. Bear Stearns and Lehman was not enough payment. The zombie banks must be killed.

raptor said...

Bernanke and you a living in "high fantasy towers" ... the only thing you need to see the disaster that he MAGNIFIED is to have a common sense and basic math skills.


I agree with your comments completely. We have a lot of Monday morning quarterbacks who did not have to make literally "life or death" judgment calls in the middle of arguably the greatest financial crisis in at least 70 years if not more. Benanke is one of only a handful of officials that I can say has the best interests of the people of this nation at heart. We all should be extremely grateful that he was at the helm during the chaotic times.

Neither the Republicans nor the Democrats have provided the leadership they should have. The Republicans disappoint me the most. As you said, they reverted to ideology at a time when the ship was taking water and sinking fast. They lost my vote due to their in ability to grasp the situation at hand and take the courageous actions needed. It is a shame because if they had acted more responsibly, then perhaps we would have an administration in place that understood investment and what is needed to generate long term growth. Instead we have children at the helm who are funding big government spending programs and are doing little to nothing to improve the long term productive capability of our country. I blame the Republicans completely for this misstep. I can only hope that they find some wise folks to lead going forward, but I am not optimistic this will happen.

Anonymous said...

Darth Fluffy, et al:

While I agree with most of what you have to say. I especially like, the part where you say Bernanke is just prolonging the inevitable. But what I don't understand about your prescription is how nationalizing failing banks is better than just letting the market price them accordingly - so low they get bought up - or - let them go into bankruptcy. In addition, why have government support for the other banks to lend? Because of the cheap credit the FED provided, people were eager to get their hands on the basically free money (real not nominal) and frivolously spend it away, not invest it productively. Classical economists have said it time and again: productive/sustainable investments only come about through money lent from savings, not out of thin air from fractional reserve lending. You seem to have correctly pinned who the economic culprit is, the FED, but your prescription doesn't even address them. At a bare minimum, fractional reserve lending must be abolished and the interest rate setting must be taken out of the hands of the FED and given to the market to determine the price of money. At a maximum, abolish the FED. Can you believe the reason the FED was created in the first place was to privide economic/price stability? That has got to be a joke.

Anonymous said...

I say this with heartfelt compassion but the "goyim" and even fellow Jews, however righteous, however true, however patriots are being fleeced by a cabal of criminal families using their blessing to hurt, destroy, and blunder. Wake up people and see who is fleecing you! I am not a racist but all these families share one very important thing in common. Can you figure it out? Start with this quote: .Charles A. Lindbergh, Sr. 1913 "When the President signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill." Lenin is to have declared that the best way to destroy the capitalist system was to debauch the currency ... By a continuing process of inflation, governments can confiscate secretly and unobserved, an important part of the wealth of their citizens ... As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless..." * Rothschild Banks of London and Berlin
* Lazard Brothers Bank of Paris
* Israel Moses Seif Bank of Italy
* Warburg Bank of Hamburg and Amsterdam
* Lehman Brothers Bank of New York
* Kuhn, Loeb and Co. of New York
* Chase Manhattan Bank of New York
* Goldman, Sachs of New York
Because of the way the Reserve was organized, whoever controls the Federal Reserve Bank of New York controls the system, About 90 of the 100 largest banks are in this district.