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Thursday, March 21, 2013

Bernanke’s Policy = Reckless Endangerment

 

Reckless endangerment: A culpable disregard of foreseeable consequences to others from the act or omission involved.

 

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 bullshit. 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.

 

GetAaClu

 

 

 

Comments

  1. Don’t be too hard on Ben. He can’t help himself. He’s living out his ivory tower wetdream of re-enacting the Fed’s response to the Great Depression to prove his thesis that the depression could have been prevented by monetary activism. If his radical interventions fail, that means he was wrong and will have to flush his life’s work down the toilet. He’s incapable of recognizing that his interventions are doing more harm than good. He’s got too much invested in his thesis to ever admit he’s wrong.

  2. Ben could also recognize the fact that higher interest rates and thus higher yield could not be accomplished in this high debt society that has been created over the last 50 years. Where would the money come from to support a yield payment of 5% on the hundreds of trillions of debt that exists today. When interest rates go up it will cause a depression as you have insinuated above as there is not enough money extant to pay everyone.

    As my old calculus teacher used to say “It is trivially obvious to the most casual observer”. Ben knows he can do nothing but put more money out there to make things worse at a later date, as long as things are better now. When does the party end? What is the next CB action?

    Big deflation is coming because the debt is too large.

    • Does Joe mean a deflation in the money supply or a deflation in prices? Pray tell, how is any deflation going to happen? The only deflation with any meaning is a deflation in the size of government. Fat chance of that happening.

      Joe says, “Ben knows he can do nothing but put more money out there to make things worse at a later date, as long as things are better now.” So this is what ‘s going to happen. Big Ben is going to inflate. Doesn’t sound like deflation to me, quite the contrary.

      Joe says. “Big deflation is coming because the debt is too large.” I guess there is a limit to inflating that I missed in my schooling other than hyperinflation and outright repudiation of the currency unit. But in all fairness, maybe he mean that the big deflation will come after the hyperinflation when real currency ascends to it’s rightful place on the monetary throne..

  3. If Bernanke slows down the presses, yield curves will go sky high. So he can’t stop. It’s like that movie — Speed. We’re on a bus that will explode if we go under 50 mph. http://en.wikipedia.org/wiki/Speed_(1994_film)

  4. “Never been done before”?? Didn’t the Fed buy bonds back in the 1950’s? They managed to pull of an exit back then, right? So it has been done before.

  5. “pull of” should read “pull off”

  6. Bruce-

    He can be sure he can manage the exit because he knows there is never going to be an exit. He has a printing press & a balance sheet that can be expanded infinitely in theory. He plans on testing the theory.

    If he ever pulls out of QE, all those markets you cite as proof of a burgeoning recovery would collapse quickly, which would lead to rapid social unrest & hyperinflation (see: Greece, Cyprus.) Except American citizens have 9 guns for every 10 people.

    The Fed doesn’t give a shit about the real economy or retirees, never has. Their mandate is back stop the banking system, which through the derivatives dealers is a weapon of US national security.

    Most of the money managers in the US do not understand yet that the Bernanke will buy the entire bond market at 0% yields if he has to & will then move on to the stock market & whatever else he needs to buy to backstop the backs & therefore the Federal gov’t. That lack of understanding is why monetary velocity is collapsing.

    It won’t stay collapsed forever, b/c sooner or later, a critical mass of big money will realize what is going on, that their purchasing power of bonds is getting treated the same way as retired pensioners, & the Fed’s jawbone threats of “QE withdrawal” will cease working. Then velocity will turn on a dime & scream higher. That will only force the Fed to work harder.

    Love your posts – you are one of the best on the web.

    • CH—YOU SURE GOT THAT RIGHT! There ain’t going to be an exit. Peter Schiff’s commentaries explains it well. Of course, Homer says, “If Ben tries an exit it will be equivalent to an on going 40 car pile-up on a fogged up interstate.” Yep! The FED was created by bankers for bankers. Big Ben’s statement is that the FED’s mandate is to preserve the dollar and create full employment. Since the FEDs inception the dollar has lost 97% of it’s purchasing power and according to John Williams of Shadowstats,com, unemployment is at +20%. Hahaha—- how’d that work out for you.

  7. “The US will sell 16m cars this year. There can’t be a recession with that level of sales”

    Who’s buying all those cars??

    This has always puzzled me. Everyone I know is fearful and more layoffs are happening. Tightening budgets are a reality for most everyone. My neighbours live paycheck to paycheck.

    Where’s the money coming from? And don’t these big spenders ever worry about their jobs?
    My suspicion is that, although a very large portion of the population is flat on its back financially, the economy is driven at the margin by that 10-20% who are ternally-optimistic big spenders…the people still buying RVs, i-gadgets, vacations, popcorn in movie theaters, eating out two or three times a week, new cars…

    This “recovery” is an amazing thing…it never touches ground, yet can’t fly…

    • The average age of all cars in the US is 11 years. That’s the average. So half the cars are more than 11 years.

      There are 250 million registered cars. So there are 125m older than 11 years.

      The us “fleet” is a junker, that has to be replaced. So car sales are part of the recovery.

      • Sorry Bruce – you can’t infer that from an average. If the median age were 11 years, you could say that half the cars are older than that. The average gives you no such information. (For example, if I had 3 cars that were 5, 8 and 20 years old, the average age would be 11 but half those cars are not over 11 years old.)

        • That occurred to me also, Mary…good point.

          And…where is the MONEY coming from? Are only the already well-off buying cars?
          Or is this “buying” all on credit…? I’ll bet car loan uptake is on an increase.

          • Look at Ally bank for clues, ABS subprime spigot was turned on and you get auto credit bubble with easier repossession on default

            Credit score destruction create subprime auto paper bubble currently in progress….fica has been tweeked also to reflect the housing implosion..

            Ben punishes the prudent to award the greedy credit criminals..

    • For the first three years of the “recovery”, fiscal stimulus (deficit spending) was 10% of GDP. Supposedly last fiscal year it was a deficit of ~8% of GDP, and if you believe that whopper than you might believe next year’s 7% of GDP deficit projection… you know, excluding a lot of stuff that any kid running a lemonade stand knows to include.

      If you spend 10%, its not hard to net nominal ~3% GDP “growth” (~2% +/- after subtracting CPI yoy). I know big school PhD’s use variables and not actual numbers in their ivory towers, but I am pretty sure that if you spend 10 to get 3, that is what plebians call a really fucking big loss.

      You can hide a lot of cars, RVs, iCrap, and a couple wars inside 7% of GDP … at least until someone sobers up and points out that negative 7 is not growth. Maybe Bernanke thinks he will be gone before people sober up?

      As for the houses: ask Blackstone LP, Carlyle Group, etc. The Fed gives them essentially free money, which they use to buy foreclosed houses from banks with the intention of renting. The former mortgagees shift one house to the left from the one they were just evicted and pay rent. Then Blackstone / Carlyle / etc try to sell the houses at a profit. Of course, if you don’t have free Bernanke-Bucks — you can’t afford to buy these homes. Enter 2.5% down (or less) FHA loans. And when that isn’t enough, the politically connected members of private equity are starting to securitize their rental properties

      http://online.wsj.com/article/SB10000872396390444097904577535453115674034.html

      Let us pray that Moodys and S&P don’t point out that these things are worse than junk bonds. We don’t want the political cronies to be stuck holding the bag when the music stops

      http://online.wsj.com/article/SB10001424127887323783704578248230363035740.html

      DOH!!!

      Well, some of us (cough. Bernanke. cough) will be retiring on a fully funded Fed pension plus a tenured faculty position at Princeton with a second pension made from billions in student debt.

    • [ RESUBMITTING THIS COMMENT — TEST ]

      For the first three years of the “recovery”, fiscal stimulus (deficit spending) was 10% of GDP. Supposedly last fiscal year it was a deficit of ~8% of GDP, and if you believe that whopper than you might believe next year’s 7% of GDP deficit projection… you know, excluding a lot of stuff that any kid running a lemonade stand knows to include.

      If you spend 10%, its not hard to net nominal ~3% GDP “growth” (~2% +/- after subtracting CPI yoy). I know big school PhD’s use variables and not actual numbers in their ivory towers, but I am pretty sure that if you spend 10 to get 3, that is what plebians call a really fucking big loss.

      You can hide a lot of cars, RVs, iCrap, and a couple wars inside 7% of GDP … at least until someone sobers up and points out that negative 7 is not growth. Maybe Bernanke thinks he will be gone before people sober up?

      As for the houses: ask Blackstone LP, Carlyle Group, etc. The Fed gives them essentially free money, which they use to buy foreclosed houses from banks with the intention of renting. The former mortgagees shift one house to the left from the one they were just evicted and pay rent. Then Blackstone / Carlyle / etc try to sell the houses at a profit. Of course, if you don’t have free Bernanke-Bucks — you can’t afford to buy these homes. Enter 2.5% down (or less) FHA loans. And when that isn’t enough, the politically connected members of private equity are starting to securitize their rental properties

      http://online.wsj.com/article/SB10000872396390444097904577535453115674034.html

      Let us pray that Moodys and S&P don’t point out that these things are worse than junk bonds. We don’t want the political cronies to be stuck holding the bag when the music stops

      http://online.wsj.com/article/SB10001424127887323783704578248230363035740.html

      DOH!!!

      Well, some of us (cough. Bernanke. cough) will be retiring on a fully funded Fed pension plus a tenured faculty position at Princeton with a second pension made from billions in student debt.

    • [ RESUBMITTING 3rd TIME — test ]

      For the first three years of the “recovery”, fiscal stimulus (deficit spending) was 10% of GDP. Supposedly last fiscal year it was a deficit of ~8% of GDP, and if you believe that whopper than you might believe next year’s 7% of GDP deficit projection… you know, excluding a lot of stuff that any kid running a lemonade stand knows to include.

      If you spend 10%, its not hard to net nominal ~3% GDP “growth” (~2% +/- after subtracting CPI yoy). I know big school PhD’s use variables and not actual numbers in their ivory towers, but I am pretty sure that if you spend 10 to get 3, that is what plebians call a really f-ing big loss.

      You can hide a lot of cars, RVs, iStuff, and a couple wars inside 7% of GDP … at least until someone sobers up and points out that negative 7 is not growth. Maybe Bernanke thinks he will be gone before people sober up?

      As for the houses: ask Blackstone LP, Carlyle Group, etc. The Fed gives them essentially free money, which they use to buy foreclosed houses from banks with the intention of renting. The former mortgagees shift one house to the left from the one they were just evicted and pay rent. Then Blackstone / Carlyle / etc try to sell the houses at a profit. Of course, if you don’t have free Bernanke-Bucks — you can’t afford to buy these homes. Enter 2.5% down (or less) FHA loans. And when that isn’t enough, the politically connected members of private equity are starting to securitize their rental properties

      http://online.wsj.com/article/SB10000872396390444097904577535453115674034.html

      Let us pray that Moodys and S&P don’t point out that these things are worse than junk bonds. We don’t want the political cronies to be stuck holding the bag when the music stops

      http://online.wsj.com/article/SB10001424127887323783704578248230363035740.html

      DOH!!!

      Well, some of us (cough. Bernanke. cough) will be retiring on a fully funded Fed pension plus a tenured faculty position at Princeton with a second pension made from billions in student debt.

    • [ RESUBMITTING 4th TIME — test ]

      For the first three years of the “recovery”, fiscal stimulus (deficit spending) was 10% of GDP. Supposedly last fiscal year it was a deficit of ~8% of GDP, and if you believe that whopper than you might believe next year’s 7% of GDP deficit projection… you know, excluding a lot of stuff that any kid running a lemonade stand knows to include.

      If you spend 10%, its not hard to net nominal ~3% GDP “growth” (~2% +/- after subtracting CPI yoy). I know big school PhD’s use variables and not actual numbers in their ivory towers, but I am pretty sure that if you spend 10 to get 3, that is what plebians call a really f-ing big loss.

      You can hide a lot of cars, RVs, iStuff, and a couple wars inside 7% of GDP … at least until someone sobers up and points out that negative 7 is not growth. Maybe Bernanke thinks he will be gone before people sober up?

      As for the houses: ask Blackstone LP, Carlyle Group, etc. The Fed gives them essentially free money, which they use to buy foreclosed houses from banks with the intention of renting. The former mortgagees shift one house to the left from the one they were just evicted and pay rent. Then Blackstone / Carlyle / etc try to sell the houses at a profit. Of course, if you don’t have free Bernanke-Bucks — you can’t afford to buy these homes. Enter 2.5% down (or less) FHA loans. And when that isn’t enough, the politically connected members of private equity are starting to securitize their rental properties
      wsj.com/article/SB10000872396390444097904577535453115674034.html

      Let us pray that Moodys and S&P don’t point out that these things are worse than junk bonds. We don’t want the political cronies to be stuck holding the bag when the music stops

      wsj.com/article/SB10001424127887323783704578248230363035740.html

      DOH!!!

      Well, some of us (cough. Bernanke. cough) will be retiring on a fully funded Fed pension plus a tenured faculty position at Princeton with a second pension made from billions in student debt.

  8. This is one of those posts I like to file away and read again in a year or so to see how it plays out.

    BTW Thanks

  9. “Who’s buying all those cars??”

    channel stuffing.

    saw an article the other day about german auto companies that are collecting channel stuffings that never sell and partsing/destroying them. video is out floating around showing their secret faciliities that destroy never sold cars to fool the rubes about high sales numbers.

    would government motors stoop to that level? i dunno, but they have been caught channel stuffing on a massive basis.

    nb: i drive a 13 year old truck. it’s in great shape and i bet i get another 13 years out of it. screw the welfare queens of detroit.

  10. Bruce — you started moderating comments?

  11. Low interest rates and slack credit is selling cars.I watch the used car MKT for 40 years.In the last 2 years used car prices have DOUBLED.Thanks Ben.Its what i drive.Talk about inflation,its already here.Someone figure that inflation rate out.

  12. Bruce,
    Your assessment assumes the government numbers are correct. As Orwell said, ‘The news says that productivity is up, but the shelves are bare’ (paraphrased). Of course, the ‘numbers’ are all we have to go on. It just seems that the person on the street doesn’t feel any better about those improving numbers. The Feds may see some dark clouds ahead that we don’t (Cyprus/Russia maybe). Also this current business cycle is slowing.
    QE is a run away super-tanker at this point. It is going to take a long time to slow it down and put it into reverse – longer than anyone wants to accept. Think about it. You can’t destroy the average person’s largest asset (their home value) and expect things to improve in a time frame shorter than a generation. It just doesn’t compute.

  13. @Clark, re used car prices doubling — don’t forget the Cash for Clunkers program, which got rid of most of used cars. Hope my kid’s bike lasts him through college . . .

  14. The Fed doesn’t make monetary policy, the citizens do, every time they go to the gas station and fill up their cars.

    The market is pricing bonds higher and tighter, take away the Fed and the result would be the same. There is less demand for credit, only the government and tycoons borrow. The rest cannot afford it, they cannot gain the low rates as do the others or they cannot hope to repay, they don’t have remunerative jobs.

    Because monetary policy is made at gas stations, that is where problems will arise not at the Fed. Fuel supplies are depleting and the price of fuel relative to other goods is increasing. Meanwhile, global demands on the fuel supply are increasing. The economy of ‘other goods’ is under pressure. One of those ‘other goods’ is petroleum extraction. At some point the cost to extract new fuel will be greater than what the customers can borrow to pay.

    We should enjoy the good times now … they won’t last.

  15. Liquid Motion says:

    Reckless endangerment or “I just dont give a f @$k anymore” ?
    Coincidence that his comments are conveniently placed around the antics of the IMF and Cyprus.
    He knows damn well that there is no solution..NO EXIT….all there ever was was hope…and a pathetic strain of it at best.
    Its all going to crash eventually, perhaps sooner than he anticipated because some washington paid/controlled bankers thought they were smart enough to outmanouvre a sovereign nation.
    The Benmeister has no tricks left in his bag. None that will control powers working against him.
    Confidence is a very fragile beast. Once misplaced it will take a very long time to heal and return.

  16. Interesting how there can be so much debt, when there is no money!! Federal reserve notes are worth
    about 3 cents, no matter what the denomination and it’s all debt money. I didn’t borrow it, the con men
    and women in congress did. Let those thieves pay it back! It’s not my families debt. It’s the banks,
    Israel and all those foreign countries who owe the Fed. Those foreign agents in Washington, who are
    almost all communist attorneys ,who produce nothing,but through thier crooked attornment proceedings,
    steal the wealth of hard working honest people of America.
    The legal system is totally corrupt. The congress and state legislators pass statutes that only have color of law. God’s law and common law are real and we need to return to both for the survival of mankind
    All the corrupt judges, attorneys, polititians, clergy, doctors, police and anyone who harms the people should be locked up. They should be stripped of all wealth and face trial by the prople!
    Enough rambling, I’m done for now. Do a little honest research on what I’ve said and you may be surprised at your ignorance.
    Fisherman,

  17. Your last paragraph gave an excellent summation to an outstanding post.

    Sadly, the person most responsible for the destruction in this land is exempt from punishment for his culpability in said destruction.

    The best thing that can happen out of this is if all policy-makers (including the elected boobs) would be personally responsible into perpetuity for the havoc they wreak upon the citizenry.

    This would have a two-fold benefit:
    1. The federal government would find a way to meddle less in the nation’s business;
    2. The real criminals would be punished more often for their stupid misdeeds.

    Does anyone think that such miscreants as Barney Frank would perpetrate their insane ideas upon the nation if his family would have to suffer into perpetuity for his behavior?

    Sorry…that was probably not the best example. But to the point: Since these fools get a lifetime government-protected pension, shouldn’t they bear the burden for their bad policies more than any of them do?