by Gary North: GoldBRICs
Reserve System is on the defensive. This has not happened before
in my lifetime.
April 28, Ben
Bernanke will hold a press conference. This has never happened
before. Journalists will be allowed to ask questions. It will be
held at 2:15 in the afternoon, Eastern Daylight Time. The Bankrate
site has set up a reminder program so that you won't miss it. It
will be broadcast on their site.
We are beginning
to see lists of questions that people would like to see asked. These
tend to be hostile questions.
I have 16 questions.
I hope at least one of them gets asked and answered.
Here is what
the session will not be. It will not be open to all journalists.
will not submit one 3x5 card with his question.
not shuffle the cards and answer them in order for the duration
of the session.
When he submits
to that sort of inquiry, I will be impressed. Not until then.
Here are my
EVER HAPPENED TO THE FED'S EXIT STRATEGY?
For two years,
Bernanke spoke about a proposed exit strategy. The monetary base
has soared. This is the FED's balance sheet. Nothing like this had
ever taken place in the era of the FED, not even in World War II.
The exit strategy is the FED's plan to reduce the monetary base.
He never said what number is the goal.
is his testimony to the House Banking Committee in February 2010.
It promised an exit strategy.
2010, the FED began a policy of reducing the monetary base. This
was a faint hint of the promised exit strategy. It was maintained
until early January 2011. Then it was abandoned with a vengeance.
issued by the Federal Reserve Bank of St. Louis reveals the extent
of the reversal.
Not only is
there no exit strategy in 2011, there has been a massive reversal.
So, what happened to the exit strategy?
DID THE FED ABANDON THE EXIT STRATEGY?
have been a reason. What was this reason? What did the staff economists
report that persuaded the Federal Open Market Committee (FOMC) to
reverse the tentative exit strategy of 2010?
DID THE FOMC SELECT $600 BILLION?
FOMC announced on November 3, 2010, that the expansion of the
FED's balance sheet would total $600 billion at a rate of $75 billion
What was the
basis of this figure? Why not $500 billion? Why not $800 billion?
THE EXPANSION END IN JUNE, AS PROMISED?
conditions might it not end?
WILL YOU TESTIFY TO RON PAUL'S SUBCOMMITTEE?
So far, no
Federal Reserve official has testified before the United States
House Financial Services Subcommittee on Domestic Monetary Policy
and Technology. Under what conditions will you agree to testify
before this subcommittee?
ARE EXCESS RESERVES SO HIGH?
banks have over $1.3 trillion in excess reserves on deposit with
the Federal Reserve System. This
money is not being lent.
What are commercial
bankers afraid of? Why are they refusing to lend money? They cannot
earn enough money at the FED slightly over zero percent
to meet operating costs with this unused capital.
WILL HAPPEN TO PRICES IF BANKS BEGIN LENDING?
reserves offset increases in the adjusted monetary base. M1 has
not doubled. The M1 money multiplier has fallen. Price inflation
has been subdued ever since 2008.
M1 will rise
when commercial banks begin reducing excess reserves and begin lending
again. Why won't this raise consumer prices?
DOES THE FEDERAL FUNDS RATE MATTER?
Funds rate is the rate at which commercial banks lend overnight
money to each other. They lend overnight money to banks that temporarily
fall below legal reserve requirements.
banks have no need to borrow overnight money, because the system
has over $1.3 trillion in excess reserves, what does it matter what
the FedFunds rate is? The FED can raise the FedFunds rate, but why
would this have any effect on commercial bank policy? If they are
not lending money to each other, why should they care what the rate
The FED shrank
the monetary base in 2010, yet the FedFunds rate did not budge.
It has inflated in 2011, but the FedFunds rate has not budged. What
can the FED do to affect monetary policy if commercial banks maintain
$1.3 trillion in excess reserves?
THE FED PUSHING ON A STRING?
"pushing on a string," refers to the inability of the Federal Reserve
System to stimulate economic growth by expanding its purchase of
Treasury debt or other forms of debt. We read on Wikipedia:
central banks can limit money creation by either limiting the amount
of base money extended, thus denying reserves and preventing commercial
banks from extending further loans, or by raising the price of base
money extended by increasing interest rates and thus making loans
less profitable for the bank (raising the hurdle rate), and while
relaxing these constraints can encourage money creation, central
banks cannot force commercial banks to extend credit monetary
policy can pull but not push.
what has taken place in the United States since 2009? Commercial
banks are piling up excess reserves with the FED rather than lending.
IS THE FED BUYING MEDIUM-TERM BONDS?
Since the FED
can no longer affect commercial banking's lending policies by increasing
the monetary base or by decreasing it, what is its present tool
for directing the business cycle?
Is its purchase
of T-bonds in 2011 an attempt to get around the recent impotence
of the FED's only previous tool of business cycle manipulation?
WHY HAVE T-BOND RATES RISEN?
official goal of the new policy is this:
a stronger pace of economic recovery and to help ensure that inflation,
over time, is at levels consistent with its mandate, the Committee
decided today to expand its holdings of securities. The Committee
will maintain its existing policy of reinvesting principal payments
from its securities holdings. In addition, the Committee intends
to purchase a further $600 billion of longer-term Treasury securities
by the end of the second quarter of 2011, a pace of about $75 billion
per month. The Committee will regularly review the pace of its securities
purchases and the overall size of the asset-purchase program in
light of incoming information and will adjust the program as needed
to best foster maximum employment and price stability.
actual result of this policy has been to push up medium-term T-bond
rates and mortgage rates.
In what ways
do rising rates on medium-term Treasury debt "promote a stronger
pace of economic recovery"? How do they "help ensure that inflation,
over time, is at levels consistent with its mandate"?
At what rate
for the 10-year T-bond will the present policy on monetary expansion
HOW CAN THE FED AVOID ANOTHER 2008 IF IT DEFLATES?
If the FOMC
adopts a policy of "no further purchases," in order to keep T-bond
rates from rising, how will this not produce a replay of 2008?
If the monetary
base is stable, won't short-term T-bill rates rise and long-term
rates fall, as people seek to lock in high rates in T-bonds? Doesn't
that move the yield curve closer to an inverted yield curve? If
this takes place, won't this foster the return of recession?
In other words,
if the present expansionary policy is necessary to keep the economy
from faltering, how can the economy grow after the FOMC stabilizes
the monetary base?
How can the
FOMC ever reduce the monetary base back to the mid-2008 level? Won't
this produce a major recession?
IN A RECESSION, WON'T THE DOLLAR RISE?
of payments deficit is in the $500 billion a year range. If exports
rise and imports fall, this will move America closer to balance.
How will a rising dollar increase exports? Exports will be more
expensive. How will a rising dollar reduce imports? Imports will
So, how can
the FOMC stabilize the monetary base without dramatically increasing
the payments deficit?
IS A RECESSION BAD FOR INCUMBENT PRESIDENTS?
be a presidential election in 2012. In the year preceding election
years, Federal Reserve policies are usually expansionary.
If the new
policy ends in June, as announced in November 2010, what will be
the likely result for the economy in November 2012?
HOW WILL RISING MORTGAGE RATES AFFECT HOUSING?
rates have risen in 2011. Housing prices continue to decline. If
the present policy is extended beyond June, how will this affect
On the other
hand, if the FOMC stabilizes the monetary base by ceasing to buy
any more Treasury debt, will this cause a return of 2008? If not,
If banks refuse
to lend, how can housing recover? How can commercial real estate
If there is
a recession in 2012, how can real estate recover?
In short, how
can real estate recover?
WHY DID THE FED LEND BILLIONS TO FOREIGN BANKS?
to documents that the FED refused to release to the government
or the public until the U.S. Supreme Court said it had to, about
70% of the money lent by the FED through the discount window went
to foreign banks.
Federal Reserve is being dragged into public scrutiny. It has fought
this every step of the way. It is now doing its best to present
the illusion of transparency. This is like watching a dancing bear.
It is not ready for "Dancing with the Stars."
do more of these. I think the experience will do him no good, but
it will do the public a great deal of good.
The days of
wine and roses are over for Gentle Ben. He has no props to deflect
scrutiny. He has neither a pipe, as Arthur Burns had nor cigars,
as Paul Volcker had. He has no gift of gobbledegook, which sustained
Greenspan. All he has is his beard. It may have protected him at
Princeton. It will not protect him from YouTube.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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