Tuesday, November 9, 2010

Bernake As Greenspan

What is Mr. Bernanke doing with QE2 (quantitative easing part two)?  By his own admission, he is unleashing a flood of money into the system in order to forestall deflation.  And how is more (fiat) money going to help the so-called "real economy"?  Again by his own admission, by pumping up asset prices (i.e. stocks),  creating a wealth effect and thus giving birth to a virtuous cycle of confidence, consumption and investment.  

Here's an excerpt from  the link above, an op-ed Mr. Bernanke wrote for the Washington Post a few days ago.

"And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." 

That's an astonishing statement of intent, coming as it does from the Federal Reserve, but let's accept it at face value (but, really, could you ever imagine that a head of the nation's central bank would act as a stock jobber for the S&P 500?).

Still, is Mr. Bernanke's asset-bubble strategy any different from what Mr. Greenspan did following the dotcom whump-and-dump of 2000-02?  Oh, not really - except that Uncle Alan chose housing and crappy mortgages, while Brother Ben's choices are shares and Treasurys.  I guess the former was burned by his correct but ill-timed Irrational Exuberance comment (and in markets timing is, after all, everything), whilst the latter has no such inhibitions.  Yet.

What can I say...? Does it matter what you drink, if you end up face down in the gutter in an incoherent alcoholic stupor?

One more time: what we need, and what needs to be seriously targeted by all concerned, is higher earned income (wages and salaries), not more debt-inflated asset prices.  



  1. What is interesting is the willingness of several Fed governors to throw BB under the bus--the latest being Kevin Warsh. I think the Fed as an institution is becoming wary of shouldering the burden of producing a recovery (and placing themselves squarely in the path of blame when it doesn't work), and Mr. Bernancke's theories about how to prevent the Great Depression are about to meet political reality. The elected government has absolved itself of all responsibility for Recovery--given the nature of the new Congress it is almost impossible to see anything stimulative coming on the fiscal front--so now the Fed finds itself in the frontlines of battle with a poor choice of weapons and sniping from behind. The Fed as an institution must realize this and have different priorities than BB, who will after all be headed back to Princeton in a few years. Those fault lines are starting to show.

    Success has a thousand fathers, but Failure is an orphan.

  2. I couldn't agree more. The "real economy" is the way to go. Unless people earn real money by producing real wealth we won't get out of this quagmire.

  3. What if any "intervention" is there to produce higher wages and salaries, how is it sustained and can you provide me real world examples of this.


  4. Bernanke: "Increased spending will lead to higher incomes..." What is he talking about? Rather, increased spending will lead to higher debt levels!

  5. In March 09 Bernanke was on 60 minutes and he said what he intended to do. And he did it, even more than announced.
    Now he is writing op-eds in the Washington Post. Any wonder the markets get loopsided ?
    And the willingness of other Governors to throw him under the bus is not proven so far. It is safer to assume that they will go on with this and they will signal in spring 2011 early on that they will not stop in June 2011.
    Who wants to short anything? BB told us to go long stocks. If markets correct, he might even increase his program. 2011 promises to be another crazy year.

  6. @Hubert

    I guess I'll take the other side of that trade. QE will not be renewed, IMHO. BB is running out of friends in Washington. . .

  7. Here's the problem: the only sustainable prosperity is attained through production of real and desirable products that others buy. The manufacturing base in the US has been eroding for decades. Even some of our agricultural leadership has given way to foreign producers.

    Until we get back into production not much is going to change. An economy based on consumption is doomed to failure. It must be based on production.

  8. That is what will be interesting this coming year. Will anyone in Washington point to the man behind the curtain?

    I doubt it. The problem is the first person to crack down on "crazy Bennie" will be blamed for the temporary destruction of the markets. The necessary medicine of default before we begin to get better.

    QE3 anyone? Let's try $6-9 trillion to re-float the real estate market. 3% 30 year mortgages and buy all the garbage assets of Freddie and Fannie. That should get the "consumers" buying again.

    "His prices are insane"

  9. camabron said...
    Bernanke: "Increased spending will lead to higher incomes..." What is he talking about? Rather, increased spending will lead to higher debt levels!

    I agree! That's good only for the businessmen and entrepreneurs but what about us?

  10. @ But What do I Know?
    .. QE will not be renewed, IMHO. BB is running out of friends in Washington. . .
    I hope you are right and I do not have the QE trade on for lack of fundamental conviction. But my reading of Wall Street and Washington is different from yours. My reasons are the typical cynical ones you can read everywhere.
    I find your comments in many places and they are well thought out. Furthermore I would like to change my opinion here. Have you any other leads but a few Fed Speeches and Ron Paul as subcomittee chief - or is it more intuitive ?

  11. @Hubert--Thanks for your kind words. I have nothing to go on other than my past experience with the workings of institutional infighting. I'm not sure that anyone in Washington gives a shit about Ron Paul (this is not an assessment of the veracity of his claims, BTW), but if the Fed can be made the scapegoat for economic problems then they surely will be.

    Of course, I've been wrong before--and many times at that. But since everyone seems to assume that the Fed can perform QE ad infinitum in the face of considerable political reasons to the contrary, leaning against the consensus could shake out some profits down the road.

  12. Their methods are only helping the stick market. I am an investor in the market yet my stocks are still in the toilet. People needs jobs before they are able to spend money. They also need a break on their interest rates on their credit cards. So they can feasably start paying off their debts and see a light at the end of the tunnel.

  13. For your consideration from the SLV prospectus:

    "Upon at least ten days’ prior notice, during our regular banking hours, any such officer or properly designated representative… will be entitled to examine on our premises the Silver held by us on our premises pursuant to this Agreement and our records regarding the Silver held hereunder at a Sub-Custodian…Unless we have received at least ten days’ prior notice and reasonable assurances (in our sole discretion) that any costs and expenses incurred in connection therewith will be indemnified to us, we shall not be required to move to our premises any Silver held at a Sub-Custodian for purposes of making it available for inspection as provided herein.”

    Care to guess how much of their silver is held by the unauditable 'Sub-Custodians'?