Tuesday, November 9, 2010

Ben Bernanke: The Chauncey Gardiner of Central Banking

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009).

"[H]igher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes."

-Federal Reserve Chairman Ben S. Bernanke, Washington Post, November 4, 2010

In Ben Bernanke's Washington Post elucidation of Fed policy, "What the Fed Did and Why: Supporting the Recovery and Sustaining Price Stability," the Fed chairman cut-and-pasted misleading paragraphs from earlier misleading speeches. He did not discuss the two most important aspects of his money experiment. Bernanke did not address, first, the real economy or, second, the rest of the world. It will be the first of these lapses that will be discussed below.

On November 3, 2010, the Federal Open Market Committee's [FOMC] decided to buy $600 billion in bonds. The exchange works as follows: $600 billion of cash will be dispensed to the banking system by the Fed and $600 billion of U.S. Treasury bonds will be extracted. The Fed will also reinvest over $400 billion of maturing mortgage securities it bought earlier and buy Treasuries. The total purchases of over $1 trillion will satisfy, to some degree, the Federal Reserve's unstated but sine qua non obligation to fund the Treasury Department's deficit.

This package is known as QE2: quantitative easing, second round. The first round was initiated in March of 2009. On March 18, 2009, the Fed announced it would buy $750 billion of mortgage-backed bonds, $100 billion of Fannie Mae and Freddie Mac securities, and $300 billion of long-term Treasury securities.

To herald the New Era in central banking, Chairman Bernanke appeared on "60 Minutes." His March 15, 2009, TV appearance was introduced with fanfare: "You've never seen an interview with Ben Bernanke... By tradition, Federal Reserve Chairmen do not do interviews. That is, until now."

On the show, Chairman Bernanke forecast that "green shoots [will] appear in different markets."

INTERVIEWER: "Do you see green shoots?"

Chairman BERNANKE: "I do. I do see green shoots."

"Do you see green shoots?," became the question on CNBC that every guest was asked. Most saw green shoots, some were looking for them, and others thought the question was childish, and probably did not receive another invitation to this carnival.

Before embarking on QE2, one might suppose the FOMC studied the aftermath to QE1. In this regard, the central bankers were handed a treat. Bernanke's Domino Theory in the November 4, 2010, Washington Post is quoted above. The catalyst for recovery is "higher stock prices." The stock market has risen 75% since March 9, 2009. Bernanke could not have asked for a more boisterous number to plug into his equation.

The result? Incomes have fallen. Employment is hard to find. In the Washington Post, the Fed chairman justified QE2 (as he had QE1) by stating the Fed's mandate "to promote a high level of employment." The official and understated unemployment rate was 8.1% when Bernanke was interviewed in March 2009. The official rate has risen to 9.6%. The "U-6" level of unemployment has risen from 15.6% to 17.0% since March 2009. This number, calculated and released monthly by the Bureau of Labor Statistics, includes the unemployed plus those who are "discouraged" - people who have not looked for a job in the past four weeks because they think there are none - plus, those working part time because they cannot find a full-time job. The number of unemployed who have been without a job for 27 weeks or longer rose from 3.2 million in March 2009 to 6.2 million in October 2010.

Nevertheless, Bernanke's central-planning unit will fix higher stock prices: Please note, in his Domino Theory, "higher stock prices" are not conditional. Bernanke's assumption should not be taken unconditionally to the market, since Bernanke's plan will fail, but it may produce a Garden of Eden before we drown in a Valley of Tears. An example of Bernanke's checkered record in market rigging is the Fed's failure to boost the housing market. The Fed has bought over $1 trillion of mortgage securities. According to the National Association of Realtors, the average existing home sales price in March 2009 was $170,000. This rose to $183,000 in June 2010, but has now fallen to $172,000. This much can be said of the Fed's mortgage effort: without it, house prices would be much lower.

Another noteworthy feature of the Post article is Bernanke's narrow understanding of an economy. He described it as a "virtuous circle that will 'further support economic expansion.'" (Further expansion is false, but so was the entire article.) The virtuous circle will "lower mortgage rates" and "lower corporate bond rates" and prod "higher stock prices," according to Bernanke. This will "spur spending."

He did not mention that personal consumption did rise in September 2010 (by 0.1%). Alas, this was achieved the old-fashioned way: Americans spent more than they earned. The chairman shows no signs of understanding there are many paths by which "increased spending will lead to higher incomes" and that he is navigating the worst one. (For the lower 99.9% of the American people that is, not for the Federal Reserve chairman.)

That is the entire American economy according to the Fed chairman, the former college economist, who calls himself a macroeconomist. What "macro" means to the professor is uncertain, but the dictionary defines a macroeconomist as one who studies the economy "as a whole."

It is surprising the P.R. division at the Fed did not tell the horticultural expert he should at least mention "Main Street," or the "real economy," two terms used to distinguish the rest of America from Wall Street and Washington. (Wall Street and Washington being one in the same.) In the Post, Bernanke's only solution to economic doldrums is to manipulate asset prices. He has spent the past 18 months distorting stock, bond, commodity, and currency markets. This is from a man who never spent a day off a university campus until he went to Washington. (From the "60 Minutes" interview: "I've never been on Wall Street.")

Jobs and higher incomes are produced from profits. Bernanke never used the word "business" in his Post piece. He never mentioned "banks" or "banking" or "credit." Saving the banking system was (apparently) his crutch for pouring money into banks and regenerating their criminal culture. He is, after all, running the central bank, but his financial system, and his economy, has been reduced to stocks and bonds.

Nevertheless, taking the world as it is and not as Simple Ben would have it, business and bank loans are part of the economy and QE1 had little influence on either. In his one, glancing reference to the job-creating world, the Fed chairman asserted: "Lower corporate bond rates [courtesy of the Fed's manipulations - editor's note] will encourage investment."

Really? In its latest poll, the National Federation of Independent Business (NFIB), which represents small businesses, found that 52% of its members do not want a loan. That is a record high. Only 3% of NFIB members said getting a loan was a problem. Stephen Schwartzman, co-founder of Blackstone, the ubiquitous private-equity buyout firm, sees no point to QE2: "It's not an enormous incentive to do something different with your businesses because rates are down a few basis points. Money is already quite cheap." It is so cheap that Wall Street has leveraged itself to an estimated record $144 billion payout in 2010 bonuses, according to MSN News.

Again, taking the world as it is and not as it should be, we are stuck with Simple Ben. He has announced QE2, restating the same ambitions as when he launched QE1. Albert Einstein has been quoted by several critics in reference to QE2: "The definition of insanity is doing the same thing over and over again and expecting different results." Bernanke's inability to do anything other than what he has done before resembles a fictional character with a narrow view of the world.

Chauncey Gardiner (actually, Chance the gardener), was the mentally incapacitated gardener played by Peter Sellers in the screen version of Jerzy Kozinski's sagacious novel Being There. Chauncey, a man whose life was limited to gardening and watching TV, became, through a series of misapprehensions, the top adviser to officials in Washington, including the President:

President "Bobby": Mr. Gardener, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause]
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
President "Bobby": In the garden.
Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President "Bobby": Spring and summer.
Chance the Gardener: Yes.
President "Bobby": Then fall and winter.
Chance the Gardener: Yes.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we're upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
Benjamin Rand: Hmm!
Chance the Gardener: Hmm!
President "Bobby": Hmm. Well, Mr. Gardiner, I must admit that is one of the most refreshing and optimistic statements I've heard in a very, very long time.
[Benjamin Rand applauds]
President "Bobby": I admire your good, solid sense. That's precisely what we lack on Capitol Hill.

President Bobby adopted Chance's optimistic advice in an address before the Financial Institute of America. His speech was the talk of the town. Television, even in that distant past (Being There was written in 1970), was on the spot, with its unfailing ability to trivialize any topic.

The host of "This Evening," a fictional, national TV news show with 40 million viewers, asked Chauncey Gardiner to appear after the Vice President cancelled.

Chauncey was asked for his opinion of the President's address, in which President Bobby "compared the economy of this country to a garden and indicated that after a period of decline a time of growth would naturally follow." Chauncey replied: "I do agree with the President: everything in it will grow strong in due course. And there is still plenty of room in it for new trees and new flowers of all kinds."

At the end of Chauncey's appearance, the host embraced him center stage. The audience's "applause mounted to uproar."

After his "green shoots" prophecy, Chairman Bernanke closed his "60 Minutes" performance. He offered Americans a sunlit future: "I think we will see recession coming to an end, probably this year [2009]. We'll see recovery beginning next year, and it will pick up steam, over time."

In the wake of this rousing prediction from the Chauncey Gardiner of Central Banking, Wall Street TV performers have talked the stock market up 75%. We are seeing new vistas of instability.