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Ben Bernanke ought to write country music songs on the side. They would all have the same theme: I cheated on you honey, but take me back one more time.
His appearance on “60 Minutes” on Sunday, December 5, was clearly his attempt to deal with criticism of the Federal Reserve’s policy of purchasing up to $600 billion of Treasury debt — or more, as he admitted.
As part of his justification of his policy — and it really is his policy — he argued that the unemployment rate will not otherwise come down.
The unemployment rate is just not going down. Unemployment is just about the same as it was in mid-2009, when the economy started growing. So, that’s a major concern. And it looks that at current rates, that it may take some years before the unemployment rate is back down to more normal levels.
This is a good public relations approach. The public is legitimately concerned about unemployment. The fact that the government two days before had announced an increase from 9.6% to 9.8% made this issue the main one that the interviewer, Scott Pelley, wanted to talk about. Bernanke did, too.
He is positioning the decision to implement the stimulus as necessary to avoid years of high unemployment.
Between the peak and the end of last year, we lost eight and a half million jobs. We’ve only gotten about a million of them back so far. And that doesn’t even account the new people coming into the labor force. At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate. Somewhere in the vicinity of say five or six percent.
His sales pitch — for that was what it was, and is — rests on the assumption that, by lowering the 10-year T-bond rate from 3% to (say) 2%, the FED will provide an enormous boost for business. Businessmen will rush into the labor market and begin hiring people.
Why? Why should demand for T-bonds give confidence to businessmen and bankers that the economy is about to recover across the boards?
LOWER T-BOND RATES: SO WHAT?
Pelley is not an Austrian School economist. He was therefore not in a position to ask Bernanke the really tough questions. The toughest question of all is this one:
Why do you think that a reduction of the 10-year T-bond rate, if it even happens, will be sufficient to get banks lending again and businesses hiring again?
He had the opportunity to ask this. He got close to Bernanke’s jugular with this question:
The major banks are racking up profits in the billions. Wall Street bonuses are climbing back up to where they were. And yet, lending to small businesses actually declined in the third quarter. Why is that?
Bernanke had to admit that this has been the case. More than this: the refusal of banks to lend has been the reason why there has been neither a job recovery or mass price inflation. But Pelley did not follow up, and Bernanke skirted the issue.
A lot of small businesses are not seeking credit, because, you know, because their business is not doing well, because the economy is slow. Others are not qualifying for credit, maybe because the value of their property has gone down. But some also can’t meet the terms and conditions that banks are setting.
This is indeed the case. Then the question should have been this:
Then why will your plan work? If T-bond rates are at historic lows, yet small businesses will not or cannot get loans, what will an extra percentage point off the existing rate structure for the Treasury do for private industry?
He of course did not ask this. Instead, he asked:
Is this a case of banks that were eager to take risks that ruin the economy being now unwilling to take risks to support the recovery?
That’s not too bad a question. Better yet would have been this:
Since we know that the Big Four banks — Morgan, Citigroup, Bank of America, and Wells Fargo — have over 50% of the nation’s assets, what did they do with the FED’s bailout money, which enabled them to make record-setting profits?
That would have been impolite, even though the statistic is accurate. (http://bit.ly/BigBankAssets) So, Bernanke spun a self-serving fantasy scenario.
We want them to take risks, but not excessive risks. We want to go for a happy medium. And I think banks are back in the business of lending. But they have not yet come back to the level of confidence that, or overconfidence, that they had prior to the crisis. We want to have an appropriate balance.
Here is the goal: Goldilocks lending. Not too cold (what has been taking place so far), not too hot (not enough loans to convert monetary base inflation to M1 inflation and then price inflation), but just right!
He wants the public to believe that the FED can achieve this perfection, despite the fact that the FED’s economists did not see the recession coming.
Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that’s what we’re gonna do.
Ah, yes: the appropriate moment! At that moment, the FED will reverse its policy. He promises — cross his heart — that the FED will know when to reverse policy.
The next question that Pelley should have asked was this:
When you reverse the present policy, why won’t the economy go right back into the recession that the FED’s total of $2 trillion in asset purchases, 2008-2011, supposedly will have overcome?
On that day, the 10-year T-bond rate was 2.67%. One month later, on Friday, December 3, the weekend of the interview, the rate was 3.03%.
In short, one month after the FED’s announcement, the 10-year rate had climbed by 13.4%. I would hardly call this a ratification by the bond market of the FED’s interest rate-cutting program.
HE MISINFORMS WITH GUSTO
Let’s review his statement again.
We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowing interest rates by buying Treasury securities.
To which Pelley might have responded:
Excuse me, professor. The 10-year T-bond rate fell from just under 4% in late 2009 to 2.7% in late 2010, yet the monetary base was stable, year to year. The FED bought nothing, net. In other words, the FED did nothing, yet the rate fell. Now you say that the FED will do something to lower rates — buy T-bonds — and will continue to do this, yet rates have started back up. How do you explain this?
This is the question that Bernanke has been trying to avoid. The explanation is here: “The money supply is not changing in any significant way.” Why is the money supply no higher? Because the banks are not lending. But if they are not lending, because of excess reserves held at the FED, then the fall of T-bond rates had nothing directly to do with the FED’s monetary policy. It had everything to do with its payment of interest, however low, to banks that increased their excess reserves at the FED. If the FED ever imposed a fee to hold both excess reserves and vault cash, the banks would start lending.
Then the man had the audacity to announce this:
We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.
To which Pelley might have asked:
Excuse me, professor. If T-bond rates fell while the Federal Reserve did nothing for a year, and are now rising after the Federal Reserve has promised to buy T-bonds, exactly what could the FED do that would raise T-bond rates in 15 minutes?
Bernanke wants the public to believe that the FED can produce miracles at no cost: digits into jobs. He says this is not inflationary.
We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way.
Technically, the FED is not printing money — currency — but that response is deliberately deceptive. The M1 money supply has not changed in any significant way. Over the last year, the monetary base also did not change. The FED says it will increase the purchase of T-bonds by $600 billion. Where will it get the money to do this? Not a printing press, but its functional equivalent: the legal right to create digits in a computer. If this is not the functional equivalent of a printing press, then where will the FED get the money to buy all that debt?
Pelley did not pursue this, because he is not an economist. Let us hope that Ron Paul is allowed to pursue this, beginning next year.
THE CONFIDENCE MAN
I especially enjoyed this exchange.
What we’re trying to do is achieve a balance. We’ve been very, very clear that we will not allow inflation to rise above two percent or less.
Pelley: Can you act quickly enough to prevent inflation from getting out of control?
Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.
Pelley: You have what degree of confidence in your ability to control this?
Bernanke: One hundred percent.
The man is so sure. He is so confident. The man was equally sure in May of 2007 that the housing market was secure. Let us enjoy this blast from the past.
The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters. Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets. All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.
THE THREAT TO THE UNEMPLOYED
Bernanke did his best to scare viewers regarding the long-term effects of unemployment on workers. The longer that an unemployed worker is out of a job, he said, the more rusty he becomes. This rustiness begins to threaten his job prospects.
The other aspect of the unemployment rate that really concerns me is that more than 40 percent of the unemployed have been unemployed for six months or more. And that’s unusually high. And people who are unemployed for such a long time, their skills erode. Their attachment to the labor force diminishes and it may be a very, very long time before they find themselves back in a normal working position.
Think about this. He is talking about six months out of the labor force. In that time, he says, the person’s skills begin to erode. This depends on the nature of the work. If it is hard physical labor, he will get out of shape. But he can get back in shape pretty fast.
In a job requiring technical skills, the technology will not pass him by. Companies do not upgrade software that often. What Bernanke did not say was this: The mindset of the unemployed worker will move from confidence to lack of confidence. That is the big threat, not dexterity with a piece of software.
The real threat is to a person’s self-image. To get back into the job market, he will have to take a pay cut. He is now competing with younger workers who will work for less. He also is facing competition from his peers, who also got laid off. His ability to persuade an employer to take him on as a replacement for someone who was let go has declined.
If he is out for two years, his technical skill sets are likely to erode. Here is the threat. No one imagined in 2008 that this could happen to him. Now it has.
Bernanke had no problem fielding Scott Pelley’s questions. He will have a lot more trouble fielding Ron Paul’s, beginning in 2011, assuming the Republican House Establishment allows him to take over as chairman of the subcommittee on monetary policy, and also forces Bernanke to testify before that subcommittee.
If it doesn’t, then we will know for sure that the Republican Establishment is no more a threat to the banking cartel than Barney Frank was.
December 8, 2010
Copyright © 2010 Gary North