March 21, 2013

Bernanke's Reckless Policy


Bernanke made an interesting comment yesterday about his future as the boss of the Fed:  
“I don’t think that I’m the only person in the world who can manage the exit”  
Bernanke could have said the same thing using different words: 
"I know that I can manage the exit, I’m pretty sure someone else could as well." 
How can Bernanke be so sure of the outcome? What knowledge does Ben have that the naysayers don’t? The answer is clear. No one, including Bernanke, has a clue what will happen when the exit door is opened. That is an indisputable fact. How can Bernanke claim that a Fed exit from QE will have no consequences? It’s never been done before. Not by the Fed. Not by any Central Bank. To think that such a daunting task can be accomplished without negative consequences is foolish.
Given that there is no road map to look at when pondering what happens when the Fed starts to off-load a few Trillion of bonds, Bernanke is either bluffing or he’s lying. Either way, Reckless Endangerment is a valid accusation.
Bernanke describes his monetary policy as “Highly Accommodative”. That’s a bs. I wish he had a better description of the realities of his policies. If there was a rating system of 1 to 10 for “accomodative” the current Fed policy would be a 9.5. A better description for Ben’s policy would be “Maximum Accommodation”; or better still “Emergency Level Accommodation”.  
Is Emergency Accommodation appropriate in March of 2013? I don’t think so.
- Stocks are at record levels.
- The credit market is in good shape – spreads are very low.
- There is no top 20 bank that is in an jeopardy today.
- The US will sell 16m cars this year. There can’t be a recession with that level of sales.
- The real estate market has more than stabilized.
A) Housing starts are up 34% YoY.
B) Permits for new construction are above the 2008 levels.
C) Currently, there is the lowest level of supply on the market since 1999.
D) Real estate prices are rising at double digit rates again. Bidding wars are back in many areas of the country.
E) Things have turned around so much that Fannie and Freddie have turned profitable and are repaying the government what was lost in 2008. 
- GDP is growing at 2.5%. Yeah, that is a bit stinko, but the reality is that this IS the new normal. The US can’t have a high growth economy and at the same time have a rapidly aging population. QE will not move the needle.
- Yes unemployment is high, but by what standard? Looking at what the economy produced in terms of jobs in 1990 is irrelevant to 2013. Bernanke is trying push a string.
- Total payrolls today are ~140m, while unemployment is 7.8%. To get to 6.5% unemployment  means that about 2m jobs are needed. While I’m sympathetic to those not employed, there is another side to Bernanke’s obsession with achieving a 6.5% rate.  
A) Social Security, the Military Retirement Fund and the Civilian Retirement fund are being bled dry with low Treasury rates. 
B) Every State and private pension fund is also being bled dry. Why are aren’t the costs of destroying savings included in the Fed’s calculations?
C) Zero interest rates  and QE makes it easy for DC to borrow to oblivion without apparent cost. Congress has sat on its ass for four years, Bernanke is facilitating that. We have idiots like Senator  Chuck Schumer (D-NY) publicly pushing Bernanke to print more as Congress and the Administration can’t agree on a thing. And Bernanke responds, “No problem Chuck! I’ll print your way our of trouble.” I find that disgusting.
D) Every private saver is getting clipped. Bernanke responds. “Just buy stocks!”  Bernanke is desperately trying to create another bubble. Why would he do that? Every bit of evidence shows that bubbles end badly.
E) The #1 lesson  of 2008 was systemic risk. Does the size of the Fed’s balance sheet constitute a systemic risk? I think so. Bernanke disagrees. Fine Mr. Bernanke, but if the current balance sheet of $3.1T (headed to $4t) is not a systemic risk, then what is? Is it $5T? 10T? Are there no bounds to this? The universe maybe boundless – monetary policy is not.
F) The #2 lesson of 2008 is TBTF. I think the Fed has already reached the point where too much risk has been concentrated. The Fed’s own economists, as well as Fed governors have pointed to the potential for large losses at the Fed. Bernanke dismisses this by pointing to the fact that the Fed can have book losses without consequence. I disagree. What happens when we get these headlines:   
Bond Market Falls Again – Dollar in Free Fall – Stocks in Global Drop
Losses on Fed’s Book Now Exceeds 1/2 Trillion
Chinese to Abandon Dollar Peg – Vows to Reduce US Holdings
S&P Lowers US Rating Again
 - Bernanke has not provided any evidence that QE 3 is doing a damn thing other than putting a temporary bid under the stock market. Hot stocks may make the millions who have a 401Ks feel a bit better, but it doesn’t change consumption by much. Meanwhile, the top 5% are getting richer by the hour. That is the consequence of Ben’s policy – More wealth transfer. Is that really what most Americans want? Is that what Congress wants? 
- Ben has failed to demonstrate that QE3 has any incremental value. He has acknowledged that the efficacy has worn off. But he persists.   
Me? I think Bernanke is telling the greatest lie ever told. He says that his successor  can unwind the mess he has created without consequence.  That’s a joke. Can you imagine Janet Yellen trying to accomplish an exit? Not a chance. She knows nothing of markets – she would fail miserably.
Mr. Bernanke – I’m accusing you of reckless endangerment. You have no right to drive “your” car at 100 MPH on a public road. The emergency of 2008 is over, emergency monetary measures are no longer appropriate. As head of the Fed, you are insulated from any legal liability arising from your choices. Lucky for you. Reckless Endangerment is a Felony rap.  
About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting(EconMatters author archive here.)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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