Friday, September 27, 2013

Shooting Stars

Frederick J. 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) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

Following is a question-and-answer session between Congressman Scott Garrett from New Jersey and Federal Reserve Chairman Ben S. Bernanke before the House Committee on Financial Services, February 27, 2013.

It is puzzling why the Federal Reserve chairman is consistently unprepared to answer questions that fall directly inside the brief he has created for himself. It might be there is no need to understand questions such as those asked by Congressman Garrett, since nobody in the media seems to see through the fraud, either. In any case, this shows again Simple Ben has no idea what he is doing.

The reason for relaying this Q&A is not to explore the measureless depths of Bernanke's ignorance. Instead, the attraction is the final paragraph in which Congressman Garrett speaks. He has an exquisite grasp of how Federal Reserve policy has ruined markets. But, his time was up.

The Chair now recognizes the gentleman from New Jersey, Mr. Garrett, for 5 minutes.

Mr. GARRETT I thank the chairman and I thank Chairman Bernanke. Let me just try to run through in minutes three areas, what you talked about on remittances, what you talked about as far as some of the positive results, and if we have time, some of the effects of the somewhat current loose monetary policy on an international state. So, on remittances, I think you already said that the remittances are here, but they are potentially to go down in the future. If you look at the consolidated balance sheet of the Federal Reserve, we have capital of less than $55 billion, and assets of more than $3 trillion, so that means that all you need is about a 1 quarter of 1 percent increase in the interest rates, and you basically wipe out what you basically have right now, which is a 55 to 1 ratio, and you wipe that out. [Since that date, higher rates have wiped out the Federal Reserve's capital six times over. - FJS] So what is your prediction actually on that going forward with regard to interest rates wiping that ratio out and the effect on remittances to Congress? Can you be more specific on the numbers?

Mr. BERNANKE Certainly. So currently, as I have said, we have in the last 4 years, remitted $290 billion; we currently have more than $200 billion of unrealized capital gains on our balance sheet.  The capital issue is irrelevant. We have additional funding behind the capital. [That is, "we can print more dollars." He has. - FJS] We have $3 trillion of liabilities which are not callable liabilities, like cash, for example.

Mr. GARRETT. I guess I would just ask you if you could follow up on detail on that, because that is not the way I understand it, but I would ask you to put that in writing.

Mr. BERNANKE The main reality here is that if interest rates rise very quickly, then there may be a period where we don't pay any remittances at all to the Treasury. That is the actual outcome. That is important. Under most, and I would say virtually all scenarios, we will be sending remittances to the Treasury substantially higher than the norms established before the crisis.

Mr. GARRETT Since my time is limited, what we are looking at here is around $90 billion in remittances if-you said we could actually see that almost go down to eliminate it. Right now, we are trying to do a sequester at $85 billion. So it sort of puts us in perspective as to what the effect could be as far as your policies there. With regard to the positive indications that you have indicated, you said the stock market and the housing market have gone up because of your monetary policy, but previously you said that the Fed's monetary policy actions earlier this decade, in 2003-2005, did not contribute to the housing bubble in the United States. So which is it? Is monetary policy by the Fed not a cause of inflationary prices of housing, as you have said in the past, or is it a cause of inflating prices of housing? Can you have it both ways?


Mr. GARRETT. You can?

Mr. BERNANKE. Yeah, we can have it both ways, because they are different phenomena. The mortgage rate, um, uh, is a quantitative thing, so, house prices are going up a reasonable amount, given the strengthening of the housing market, given the strengthening of the economy, given where mortgage rates are. But the amount of movement in mortgage rates, mortgage rates in the early part of this, last decade were around 6 percent. That can't explain why house prices rose as much as they did. Maybe it was a small contribution, but it certainly can't explain the big run-up and then decline.

Mr. GARRETT. But, so now it is. [This was Garrett's dismissal of a man who had no idea what he was saying. - FJS]

So the other area you indicated why we should say your policies are working in a cost-benefit analysis is the stock market. I am sure you are familiar with Milton Friedman's work that says that people only really consume off of their permanent income, which basically means that you don't consume increased consumption because your stocks have gone up in the marketplace. And to that point, I know Mrs. Capito [Congresswoman Shelley Moore Capito, West Virginia, see below for Q&A - FJS] asked the question as to what seniors should do in this situation, and you said, take it out of some fixed assets and put it into the stock market. Heaven forbid that my 90-year-old mother would take her money out of fixed markets and put it in the stock market. I think that is probably the worst advice that is out there. And when you consider that a 1 percent increase in the stock market only has infinitesimal, maybe a 100 percent increase in GDP [sic], I really don't understand: a, how you can give that advice; b, how you can suggest that an increase in the stock market is a positive indicator of your work in a cost-benefit analysis to the rest of the economy.

Mr. BERNANKE. I was, I was not giving financial advice. I apologize if I gave that impression. I was just saying-

Mr. GARRETT. But she was asking you-

Mr. BERNANKE. -that generally-

Mr. GARRETT. She was asking you the question, what should you be doing to benefit the seniors, what should we say to the seniors. And your comments were-

Mr. BERNANKE. What I was saying was that the economy will get stronger because of good policies and that in turn will cause rates to rise in a sustainable way. If we were to raise rates prematurely, we would kill the recovery and rates would come down and we would have a long-term situation with very low rates.

Mr. GARRETT. But wouldn't you have provided for the certainty in the marketplace so you could have more price transparency? Earlier, you said that some risk-taking in the market is appropriate. That was one of your opening comments. Sure, risk-taking is appropriate, but it is appropriate when there is actual price discovery. When you have a market that is distorted, as it is right now by the Fed's monetary policy, you really don't have true price discovery. And so when you do risk-taking now, it is based upon I not really knowing what the appropriate value is of land prices, equity markets prices, so risk-taking now is worse than risk-taking is when the Fed's actions do not distort the marketplace. If you would say-

Chairman HENSARLING. The time of the gentleman has expired.


MRS. CAPITO: Many of us are in that sandwich generation trying to help our parents, and our parents are doing a pretty good job trying to help themselves, but they're relying on their good planning and investments if they have been lucky enough to invest. And the dividend and interest availabilities to them are crushing our seniors as they see their healthcare costs go up. And some of the policies that you put forward I think, and that the Fed has, has caused concern for those of us who are concerned about seniors who don't have the ability to get another job, that's played out for them. What, what can I tell my seniors back home that is going to give them some optimism that they're going to be able to rely on that good planning that they had to carry them through the senior years?

HIM: Well I would say first that savers have many hats. They may own fixed income instruments like bonds, but they may also own stocks or a house or a business. All those other assets benefit when the economy strengthens and those values have gone up. The stock market is roughly doubled as you know in the past few years.

This was quite specific advice to Mrs. Capito. Besides crawling into Lucifer's den before answering Congressman Garrett, why is this nincompoop telling old people to buy stocks AFTER the stock market has doubled? We might give him the benefit of the doubt that, since Bernanke has banished "actual price discovery" in all markets, and thinks he can do so forever, he will double Mrs. Capito's money over the next few years.

Of course Chairman Bernanke is not the only lifetime bureaucrat to offer carpe diem financial advice.

Following is the good word of David Stockman, author of the masterpiece,  The Great Deformation: The Corruption of Capitalism in America . He was interviewed by Market Watch on April 3, 2013. Eric Rosengren is the President of the Boston Fed.

DAVID STOCKMAN: If you have your money in a 401(k) but you get it out of the stock market or ETFs or bond funds that have duration exposure, and you stay very liquid even if you're making almost no return, thanks to Ben Bernanke, who's crucifying the savers of America on a cross of ZIRP, at least you're safe. In the world ahead, there is such a huge collapse coming in the financial markets, the third one since 2000, it's better to preserve your capital, stay liquid, keep your head down, don't borrow money unless you absolutely have to. That is very discouraging because people would like to earn a return on their savings.

When we have this character Rosengren up in Boston saying, it's a good thing, we are trying to induce people to go into risk assets. Who in the hell is Rosengren to tell old ladies of America they have to buy junk bonds because the Fed tells them to!!!!! If the old ladies feel safer in a CD, they ought to be able to earn something besides dog food money on it. There is going to be a revolt against these arrogant mandarins running the Fed, they will rue the day they arrogated to themselves such massive power. [Italics are my irrational exuberance - FJS]

Knitting. Still Knitting.