My Six Cents on Bernanke and the Fed

Since everyone else is throwing in their two cents about 1) whether Ben Bernanke should be reappointed to a second term as Federal Reserve chairman; 2) what moves the FOMC will (or should) make next; and, 3) the policymaking and regulatory role the Fed will (or should) play in future, I figured I might as well do the same.

Although I didn't quite plan it this way, below are three posts -- my six cents, you might say -- published today by Going Concern, Sense on Cents, and Wall St. Cheat Sheet, respectively [all of which have long been on my blogroll, as it happens], which should give you some sense of where I stand when it comes to Mr. Bernanke and our nation's central bank:

"Jr Deputy Accountant and Michael Panzner Discuss 2010 Part II: The Impotent Fed; An Election Year; Waiting for the Recovery" (Adrienne Gonzalez, Going Concern)

In case you missed part one of JDA’s 2010 Outlook interview with Financial Armageddon’s Michael Panzner, you can find it on Going Concern here.

For the first half of my 2010 talk with Panzner, I focused on the other shoes left to drop; commercial real estate, political backlash, and the threat of the massive bubble still being inflated in China. But even bears have their bright sides and Panzner is no different. So what do we have to look forward to this year? Oh crap, more doom and gloom; sorry, I got my interviews mixed up.

Panzner points to our leaders’ missteps throughout the crisis as a major factor that could place a damper on any hope of recovery. “Many of the problems and imbalances that helped about the crisis have gotten worse,” he says, “That means people have less in reserve than they did before, and many have not positioned themselves for a ‘new normal.’ That suggests the next leg down, economically speaking at least, could be much worse than what we’ve experienced so far.” If only we’d been prepared for the worst instead of coddled into believing everything is better, eh?

When asked to take a guess as to when the Fed would finally raise interest rates, Panzner gave an interesting answer. “In my view, the Fed is no longer in control – of the economy or its destiny. For the most part, market and other forces, not the FOMC, will determine what happens to interest rates in future.” So I guess it doesn’t matter when they’ll raise rates, markets are no longer listening. Or are they?

A big picture sort of guy, Panzner identifies sociopolitical threats as another major concern this year, and with this being an election year (hello, Scott Brown anyone?), I’m willing to go on the record as agreeing wholeheartedly with him (shock). “Wait and see what happens to the social and political mood if and when the economy rolls over,” he says ominously.

Oh, believe me, JDA is waiting. And waiting. And waiting. Still no rollover but dammit, I’ll still be here twiddling my thumbs.

Hopefully I’ll get a chance to check in with Panzner again come summer to see where we are.

"The Federal Reserve Has Failed Miserably" (Larry Doyle, Sense on Cents)

How are we to judge the Federal Reserve? The Fed by its very nature has been an opaque institution. What truly goes on behind the closed doors of the Fed? What are the relationships amongst the Fed Chair and Fed governors? How about the relationships between Fed representatives and political operatives?

While volumes have been written about the history of the Fed, to the American public the Federal Reserve remains a mystery. How can we lift the veil on this mysterious institution? Let’s “kiss” the Federal Reserve. What? Oh no, LD, where are you going with this? Let’s plant a big “kiss” on the Fed. That is, keep it simple stupid.

What are the mandates of the Federal Reserve? In the Fed’s own words, the primary mandate of the Federal Reserve from its inception in 1913 has been:

“conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices (LD’s emphasis), and moderate long-term interest rates.”

How is the Federal Reserve doing in pursuit of these stable prices? Thanks to Michael Panzner who, in my interview with him last evening on NQR’s Sense on Cents with Larry Doyle Welcomes Back Michael Panzner, pointed out that the Fed has failed miserably in its pursuit of stable prices. Panzner specifically highlighted that the dollar has lost 95% of its purchasing power since the Federal Reserve was founded in 1913.

I will admit that I found that number shocking! Major high five to a loyal Sense on Cents supporter who listened to last night’s show and then did a little homework of his own to check Panzner’s statement. He wrote to me after the show and provided an interesting link. What do we learn from The Inflation Calculator?

What cost $1000 in 1913 would cost $21520.32 in 2008.
Also, if you were to buy exactly the same products in 2008 and 1913, they would cost you $1000 and $47.10 respectively.

Rest assured, the Fed would spin this number so hard that America would vomit from the motion sickness. The Fed’s excuses may only be rivaled by the nation’s middle school students who lost their homework to the voracious appetite of the family dog.

Regardless of how anybody spins it, a grade of 5 (we’ll round the 4.7 up) is a failure. Are greater failures approaching Zimbabwean magnitude to come?

Might the members of Congress care to question Mr. Bernanke on this? No dog excuses allowed.

Thank you Mr. Panzner for bringing this to our attention. Thank you WB for verification.

What do you think about the Fed now?

"Michael Panzner: If I were Federal Reserve Chairman I Would …" (Wall St. Cheat Sheet)

If I were Federal Reserve Chairman I would figure out why:

• The value of the dollar has declined more than 95 percent since the Federal Reserve was created in 1913, given that one of the Fed’s two mandates is to promote “long-term price stability” (the other is “full employment”);
  
• Many banks were allowed to loosen or abandon traditional lending standards, ramp up leverage, concentrate their credit exposure in risky sectors (e.g., commercial real estate), and skirt rules designed to protect the financial system, given that the Fed is charged with regulating and supervising the sector; and,
  
• Monetary policies ostensibly aimed at smoothing the peaks and troughs of the business cycle and ensuring that the U.S. economy remained on an even keel spawned numerous asset and credit bubbles and laid the groundwork for the biggest financial crisis this century.

After that, I would take Jim Rogers’ advice and call it a day.

Comments

[Mountainaires]

Did ya know? Ben Bernanke had no clue the housing bubble was about to burst; he got an ARM on his Capitol Hill house. An ARM? The Fed Chair? That's reckless finance; it's idiotic. This is from wikipedia:

Ben Bernanke met his wife Anna, a schoolteacher on a blind date. She was a student at Wellesley College, and he was in graduate school at MIT. The Bernankes have two children. They refinanced their Capitol Hill home in late 2009 because they "had an adjustable-rate mortgage and it exploded." Now they have a 30-year fixed rate mortgage at a rate of a little over 5%. Bernanke and his wife own just one car, a Ford Focus.[51]

[roger]

My 2 cents. The human body ages regardless of what
you do,it has a time limit,period,it's not just the heart,
teeth , artery's,vision or clogged arteries, its the whole enchilada
that goes,guess what?economic systems operate the same way,
Fed or no Fed, nothing but nothing can stop this process.
Nature confirms the dialectic,and if you are a Categorical
thinker, you will never get it.

[Blurtman]

Only a Sith deals in absolutes.

[Steve]

When I was younger I loved reading about conspiracies. But I outgrew that phase. I remember reading "None Dare Call it Conspiracy" an old treatise on the conspiracy behind the establishment of the Fed in 1913. Man, that was fun reading.

The problem with conspiracies is that to be successful they require near total control. As you get older you realize total control is almost impossible to reach. Instead, we have a tiger by the tail and we're all just trying to keep things moving forward and hopefully upward, without letting go. The current crisis is a perfect example. Back to the Fed, holding on to and taming the tiger.

The dollar may have lost 95% of its value since 1913 but there's no question living standards have been raised enormously over the last 90 years. The goal of employment runs counter to maintaining the purchasing power of the dollar. And it should. A little bit of inflation each year (basically stealing) is preferable to a higher unemployment rate. We're all in this together and keeping people working is better.

Those people like Rogers who say abolish the Fed are crazy. We had that system throughout the 19th century and before and it didn't work. That's why the Fed was established: to manage or control the laissez faire boom/bust system and the financial and economic crashes that resulted.

We've taken control of the money system and that's a huge advance. It may not be perfect but it's a step forward. To say otherwise is to ignore history.

As William Jennings Bryan said famously way back in 1896, "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

Why we go back to letting the "market", ie the Tiger, be in charge? This site starts to lose its luster for me when it begins to lean towards promoting these wacky Von Misean ideas of gold standards and currency debasement. Other than that, enjoying reading it each day. How about something on the recent unemployment news shock and what that means.

[roger]

@ Steve:Those people like Rogers who say abolish the Fed are crazy.
Where do I say that?? the way I see it, keeping or abolishing the
Fed is immaterial. My position is that nothing is final,absolute
or sacred,change is constant and unstoppable. At present time, events
are ridding humanity,destination unknown!
The Von Misses are blinded by the wealth and don't understand that
that poverty define the state of civilization.
In art it is well understood that light is a blinder ,shadow define
the form.

[Mountainaires]

Wacky Von Miseian Ideas? Austrian economists have been proven correct time and time again.

Were The FED to have actually respected their mandate, we wouldn't have had two major bubbles bursting within 10 years, or lost $20Trillion + in wealth.

You're obviously confused, Steve; a true free market inhibits reckless, risky and criminally corrupt "financial instruments" because in a true free market--without the FED's moral hazards [rescue; sometimes called "protection rackets"]--they would be toast, as well they should be.

"We've taken control of the money system," actually means this: The market is rigged; the powerful and their friends make profits, while the rest become peasants; they take from the earners and give to the speculators; the government becomes a leviathan sucking the blood out of our nation in pursuit of their own riches.

If you ask me, that's pretty much a description of "press down upon the brow of labor this crown of thorns..."

So, "it may not be perfect [you're so right!], but it's a step forward [you're so wrong].

To say otherwise [Please read some Austrian economists] is to ignore history [you clearly don't know any history].

[Steve]

Roger, I agree that nothing is immutable but abolishing the Fed? I thought it said that in the article but I confess I didn't read the whole thing. However, I will say that bringing up the idea of abolishing the Fed (i.e. having a new debate about the value of it) would bring in new thinking and ideas. It's been a 100 years - time for a re-think and re-boot on this institution? I like your idea of poverty defines the state of civilization. That is so true.

Mountainaires, your view of the world is too simplistic. Blaming the governments and elites for ordinary people making their own mistakes is an easy way out. Any person can figure out that smart investing in real estate has generally been the way to protect wealth or for poor and middle class people to build wealth. The problem is that poor people either aren't smart or have a culture that keeps them down. But they have to take responsibility for themselves.

We saw the Austrian school have a go at it in the early 30s as the inflation hawks had their day. To me, the Austrian school has always seemed to enjoy a mean streak of swift retribution and punishment. Perhaps that's their teutonic wagnerian culture coming to the forefront.

However, I'm reminded about the old argument about society being built on a lie when you have inflation. With inflation, the dollar I promise and give you is worth infintesimally less the instant after you get it. Therefore, I lied to you and all financial and social transactions in society are based on lies. It becomes a game of financial musical chairs - who's going to left with the debased dollars?

But maybe society and many people need lies (big and little) to get them through the day and their lives. How many people really want to hear the truth that hard money would provide? Probably very few.

The Federal Reserve is society's institutional response to our need for little lies to get through the day. In the long run, we're all dead so let's enjoy our lives. If you tell your wife, yes, you do have a big butt, you will have fewer days to enjoy!

On a lighter note, I'm looking to see The Invention of Lying. I hear it's a fantastic film and might shed light on peoples' needs for lies.

Oh, here comes the boss! Back to work I go.

[Rocky]

While the US$ has lost most of its purchasing power since 1913, I suspect most other paper currencies have done even worse. The German mark had its famous collapse in 1923, the Hungarian florint in 1946. During and after WWII, the French franc and the Italian lira were very poor stores of wealth. The British pound did better than most of the continental currencies but has still managed to lose about 2/3 of its value relative to the US$ since 1913. Wars and revolutions tend to make countries poorer and to debase their currencies. Since the 1960's, the US$ has way underperformed the German mark (and its successor, the Euro) and the Japanese yen. Both Germany and Japan got out of the superpower business after WWII. Instead of blaming Ben Bernanke for the country's economic problems and weak dollar, we should be blaming the politicians instead. They are the ones who keep approving those huge military budgets.

[Its just me]

could care less who's in charge of the pig pen, wana see the phkun CD rates back to 5%

[Alex@hkkkkk]

why everything must be linked to conspiracy theory? there are no such conspiracy in this case. this could be happened because of the miss-management of our government.