Bend the Fed
by Bill Sardi
It would be nice to talk about the Federal Reserve bank and just stick with topical questions about money supply and interest rate strategy, without launching a personal attack against its chairman, Ben Bernanke, but this is not just a man who heads up a reserve board that makes critical decisions about the American economy, he is the Fed's sole decision maker and creator of unprecedented financial maneuvers, acting as king of the world's banking system by virtue of the dominance of the US dollar as the world's reserve currency.
While there is concern expressed over a one-world currency, the US dollar is very close to fulfilling that idea. That Mr. Bernanke is doing things far beyond what the US Constitution could imagine cannot be denounced outright because we live in a world of interlocking international commerce where a banking crisis in Greece is also a potential crisis in America. But at the same time, reckless central bankers across the globe are taking their institutions beyond prescribed limits (Basel agreements) and then essentially extort the world with demands for bailout money or they will default on their debts, causing chaos in the world's financial grid.
It is in this environment that chairman Ben Bernanke operates and he is under fire. Negative public opinion of the Federal Reserve cannot be totally ignored now that books and bumper stickers say "End The Fed!" This has prompted Mr. Bernanke to pledge to be more transparent, to come out of his ivory tower and be responsive to questions posed at press conferences for the first time. But these have turned out to be contrived events where the nation's news press serves up pre-arranged softball questions, fearing a lack of support for Mr. Bernanke could undermine America's dominant position in the world.
Villain Or Hero?
So in a propaganda piece that pretends to examine Mr. Bernanke inside and out, from his management style to his education and policy positions, financial writer Roger Lowenstein publishes a featured an article in The Atlantic about Mr. Bernanke with the Fed Chairman's photo on the cover.
Except for one pointed rebuttal by Charles Hugh Smith, Roger Lowenstein's 15-page fluff piece in The Atlantic about Ben Bernanke, his article has not been adequately refuted in the public court. (More about Smith's contrarian piece below.)
That Mona Lisa smile
Actually, the cover of The Atlantic shows Mr. Bernanke with his patented Mona Lisa-type smirk on his face displayed with the words "THE HERO" underneath. The sub-headline asks: "He Saved The World Economy. So Why Does Everybody Hate Him?" Contrarily, the actual title of the article inside is "THE VILLAIN" and goes on to let Bernanke off the hook for taking the stalled American economy to a box canyon it may never find itself out of. Yes, Mr. Bernanke saved the day but prolonged the agony.
Here is a man who created more electronic money to cover short-term vulnerabilities for panicked bankers all over the globe than any central banker could imagine. Bernanke then says, three years after the 2008 financial crisis, that bailout funds were only a few hundred billion, not the trillions some news reports claimed. But who is about to believe the Federal Reserve which is an unaudited institution. Roger Lowenstein — that is who.
Chairman Ben: and so likable
Mr. Bernanke is posed by Lowenstein as the perfect man to meet the challenge of the perfect storm. He is cool and calm under pressure. Or is he secretive and has hidden agendas? Let's just say that Bernanke is disarming. He chooses to pick no public fights.
Mr. Lowenstein extols Mr. Bernanke's humility and "willingness to hear all views." Lowenstein also portrays Bernanke "as just another guy at the table."
Lowenstein quotes Larry Summers, former Presidential economic advisor as saying: "Among Washington insiders, u2018I don't think anybody dislikes him'."
Phooey. Who cares if this guy is nice and has no enemies? That's just the point. Maybe Mr. Bernanke needs to make waves. Insiders do love him, but for their own selfish reasons. He fixed the stock market but not the plight of the average American homeowner who is out on the street or living in a home that is not worth its mortgage price. More aggravating, Mr. Bernanke pretends to be surprised that unemployment remains high.
Mr. Bernanke doesn't rate with this central banker
At least one central banker isn't at all impressed with Mr. Bernanke, and he is none other than Hervé Hannoun, Deputy General Manager for the Bank for International Settlements (the central bankers bank) in Basel, Switzerland. Oh, Mr. Hannoun doesn't take Mr. Bernanke to task by name, but he is certainly pointing a recent message at Ben, not others.
Hannoun says central banks have lost their mandate by expanding their balance sheets (taking all those bad home mortgages off the accounting books of lenders and placing them on the public’s liability ledger). He says four years after the start of the credit crisis beginning mid-2007 there is still no exit strategy from the unconventional monetary policy actions that are extolled in Lowenstein's article about Mr. Bernanke. Hannoun says: "This is a dangerous precedent if it takes hold in the minds of policymakers and of the public."
Hannoun goes on to say: "And while markets and governments are all too eager to see central banks come to the rescue, they are bound not to be pleased to see them withdraw. All this increases the risk of exiting too late and too slowly, as has been the case all too often in the past."
Hannoun forcefully says: "Fiscal policymakers (how could he not be talking about Bernanke?) should also… make clear that inflation cannot be the solution to the problem of government debt overhang… and that monetary policy should be refocused on maintaining lasting — and the key word here is "lasting" — price stability." The Federal Reserve has a miserable track record on that measure of performance.
Fixing today with yesterday's answers
Bernanke is a student of the Great Depression of the 1930s. And in reading Lowenstein's article, you get the distinct idea that Bernanke is fixing today's unprecedented worldwide financial crisis with solutions to the 1933 collapse in the stock market.
Lowenstein: "By 2008 Bernanke was confronting the very type of banking meltdown he had spent his academic life studying. No one was better suited to the job; indeed, the Fed had adopted the remedies Bernanke had outlined in his 2002 address nearly point for point."
Lowenstein quotes Stanley Fisher, Bernanke's thesis advisor at MIT and current governor of the Bank of Israel to say that Mr. Bernanke found that the failure of the 1930s was not a matter of not printing enough money. "What Bernanke discovered was that it wasn't the quantity of money, it was that the banks stopped lending."
A frozen economy: Bernanke sells icicles
But Mr. Lowenstein leaves Fisher's statement without mention that this is the very same situation that the Federal Reserve has created today. To fix the bankrupt balance sheets at America's 7400 FDIC-insured banks and provide needed liquidity, Mr. Bernanke loaned them money, but only allowed the banks to put the money on their books, not use it, so as to prevent run-away inflation as it becomes many-times more money as it travels through the fractional banking loan system. Then, inexplicably, Mr. Bernanke offered the banks interest to park "their loaned money" at the Fed (have you ever heard of a lender paying interest to a borrower?), and then having the audacity to later say the banks have paid back most of what they had borrowed!#&*!
So the money is frozen, and the economy is too! Release the money to create growth in the economy and create hyperinflation or hold it and stifle the economy. To use baseball as an example, it's like leaving a runner stranded on second base and suspending the game at that point. The banks can't lend and the economy can't grow.
Bernanke has been steadfast in saying the economists of the Great Depression era didn't pour enough money into the system for it to grow itself out of its decline. Only World War II and its money creation finally grew America out of its economic funk, a fact that stuck in the heads of politicians and central bankers alike. Some anonymous figure has said that if a country is not fighting a war about 25% of its population will be unemployed, which is a side story that deserves attention at some future time.
How can you care about unemployment when your agency caused it?
Lowenstein says over the past four and a half years Mr. Bernanke, 58, has presided over the most sustained period of crisis of any civilian official in recent history. But Lowenstein adds this to that statement…. "with the fate of millions of unemployed and underemployed Americans hanging in the balance."
Numerous times Mr. Bernanke has said he can't understand why employment figures remain so dismal. But that seems so disingenuous. The Fed has done nothing to bailout the average American worker or to spare mortgage holders from foreclosure. In fact, the Fed has apparently known all along that American banks were hiding 4 million non-performing home loans on their accounting books that they didn't foreclose on, meaning all of their asset valuations are meaningless.
A great deal of the unemployment has been generated in the real estate business with literally millions of building contractors, plumbers, electricians, building suppliers, furniture and home furnishing manufacturers, real estate agents, title insurance and mortgage agents waiting for the real estate market to return — an impossibility.
Lowenstein quotes Allan Meltzer, economist and historian of the Fed, to say: "we are past the point where further rate cuts will stimulate hiring."
Just how would these people train to enter another job market that doesn't exist, Mr. Bernanke? Don't anticipate the real estate market gaining any semblance of its former self in the next decade. Lowenstein does quote a former Fed governor who says "We have been trying to fake a housing recovery for four and a half years."
In addition to this shadow inventory of foreclosed home loans, according to the numbers provided by Lowenstein, the Fed has taken $2.9 trillion of these bad loans off the bank ledgers and placed them onto the Federal Reserve's assets.
Lowenstein: "Bernanke hopes such purchases will lower mortgage rates, revive housing, and create jobs in construction." What drivel.
Mr. Bernanke now says 4 million additional bad home loans are due to be dumped onto the Fed's doorstep, 1 million per year over the next 4 years and that they are planned to be auctioned off at a discount via a new entity called a land bank, possibly at 20-30% of their original value. These properties are destined to become rental properties, according to Mr. Bernanke in a report published at CBS' MarketWatch.com.
Banker of last resort or master counterfeiter?
When the Federal Reserve does something under the name of rescuing the economy, specifically by creating money out of thin air or taking bad loans off bankers books, by virtue of its position as the bank of last resort, it escapes being branded as a counterfeiter or "cooker of the accounting books." Anybody else would be in jail for doing what the Federal Reserve has done.
What the Fed ends up doing here is becoming a conduit for irresponsible bankers to keep their profitable loans and dump their losses onto the public — what is called privatized profits and socialized losses. The more the Fed underwrites the reckless practices of lenders, the more lenders are going to press the Fed into a corner or threaten to bring down the whole financial system just as it did in 2008. This could be called extortion. The 7400 FDIC-insured banks hold about $8.5 trillion of interest-bearing accounts that could be lost should (heaven forbid) the entire banking system collapse and this saved money would vanish into money heaven.
In the short term, Mr. Bernanke has saved the bankers at the expense of the people. But can we expect anything different from a central banker? It would be imprudent to frighten savers and create a run on the banks, but that happened any way when it became known that Washington Mutual lacked liquidity. Maybe more transparency in the banking system would create stronger banks that would have to demonstrate they actually do retain adequate reserves and aren't imprudent in their lending practices.
Imagine a bank advertising they have 12% reserves backing behind their loan portfolio, a third more than the 8% reserves suggested by the Basel Accords? You would end up with banks competing to be safer, not riskier. But don't think any central banker wants that to occur any time soon.
Inflation numbers askew
Lowenstein quotes Mr. Bernanke as saying in a December 2010 interview, that he was "100 percent certain of his ability to control it (inflation)."
Lowenstein sings praise to the Fed for a Consumer Price Index (CPI) that has averaged 2.4%, which Lowenstein says is lower than that under any other Fed chief since the Vietnam War. But does anyone buying groceries at the supermarket or gasoline at the filling station believe that inflation is just 2.4%?
Lowenstein against quotes Bernanke saying in February, before Congress, that "our nation's tax and spending policies should increase incentives to work and save."
John Williams, an economist writing at ShadowStats.com shows that the government altered its way of tabulating the CPI back in 1980 and 1990 and if those measures are used, the real rate of inflation is more like 7-10%. So the Fed is lying about inflation and a lot of other things. But the Fed Chairman must remain smug and put on appearances of normalcy.
But Bernanke has his blinders on. "He sees no evidence of inflation, but he does see economic distress," says Lowenstein. Either Bernanke needs reality therapy or the remainder of the population is just imagining the high price of oil and food.
That hidden high rate of inflation is punishing savers. But what does the Federal Reserve do about that? It elects to allow large banks to resume paying stockholders dividends, at the expense of their depositors mind you!
How much did you say?
According to Lowenstein the Fed flooded banks with $1.5 trillion of excess reserves (electronic money made up out of thin air, not debt-based money that is normally borrowed from foreign-sources in exchange for Treasury bills that pay back principal plus interest). That's like having a banker remove your debts and laying them off on his other depositors.
It was later, beginning in November of 2010, that the Fed purchased $600 billion of its long-term Treasury bonds in a second round of that has been called "quantitative easing." This is kind of renegotiating your own interest rate on your credit card debt to buy you some more time by repurchasing T-bills does nothing to fix the fundamental flaws in the world money system. The ship of state is sinking via overspending and Bernanke just delays the inevitable. For that he is a hero, at least in Lowenstein's mind. And The Atlantic makes a political friend out of Bernanke and the current administration that re-appointed him.
Trust me…… blindly?
Mr. Lowenstein had direct access to interview Mr. Bernanke, numerous times. Mr. Bernanke said to Lowenstein on one occasion: "I would argue that everything we have done has been in the interest of the American public and, broadly, of the global community. A lot of people get that." But certainly not the masses mired in a sour economy. The Fed had better get some bumper stickers printed that counter the End The Fed campaign that has become so popular. Maybe the Federal Reserve ought to issue bumper stickers that say "Ben Saves. — Federal Reserve Act 1913."
Lowenstein keeps citing Mr. Bernanke's perception of what the Fed's primary mission is — which is to "furnish elastic currency" working under the authority of the Federal Reserve Act of 1913. But what happens when the currency becomes stretched to the point of becoming a covert tax increase? The government overspends and fears the unpopular prospect of raising taxes, so the Federal Reserve cooperates and erodes the value of money via inflation so the government pays back its debts in inflated dollars. The Federal Reserve Act of 1913 established a mandate that the Federal Reserve stabilize the value of the dollar rather than stretch it so far that it only has a value of 3-cents in 1913 dollars today.
When a prophet fails
Lowenstein says Mr. Bernanke "was dubious that anyone could identify, in real time, when markets were off course." But isn't that the very job of the Fed, to prognosticate? When the Fed fails miserably, as it has, then somebody should be asking for Mr. Bernanke's resignation.
When no one goes to jail, when there are no forced resignations or dismissals from office, one gets to thinking this whole crisis was pre-planned. In fact some thinkers have privately shared with me their thought that former Fed chairman Greenspan, who identified himself as a libertarian at one point, might have thought the best way to reform the system would be to crash it.
Lowenstein concedes Mr. Bernanke "did not anticipate the looming crash in home prices." But that downfall seems forgivable to Lowenstein. Alan Greenspan, Mr. Bernanke's predecessor also says he could not foresee the consequences of a cheap money policy allowing more affordable housing to be sold but which also created a stage where a lot of financially marginal buyers were permitted to become mortgage holders. And the Fed had no idea that lenders were offering teaser interest rates and writing up "liar's loans" where the creditworthiness of borrowers was relaxed to the point of meaninglessness?
What, Mr. Bernanke couldn't see that his central bank was fueling false demand for home buying with cheap interest rates? If leaders at the Fed can't see that, what are they there for? Without prognostication, without navigation skills, one might as well "End The Fed" and let a laissez faire policy proceed.
Lowenstein then follows this by saying that Bernanke in a 2005 speech "cogently explained how capital from china and other countries was flowing into the US mortgage market and spurring higher prices in residential real estate." Lowenstein says Bernanke "did not express concern." The following year the housing bubble reached its peak, says Lowenstein.
So Mr. Bernanke did know. Newly wealthy Chinese were stealthily bringing money to the US and buying real estate, peaking demand that would surely burst at some point in the future when China would predictably reign in the exit of its money to the US. We are talking trillions of dollars here.
Boom-bust business cycles no more, and other fantasies
Lowenstein says the Fed "had tamed the extremes of the economic cycle." He is referring to the boom-bust business cycles that have plagued the modern world. But the causes of these cycles are known. The US borrows money into existence in a debt-based money system. The money is borrowed from trading partners like Japan and China who sell us their goods and end up with a cache of US dollars. We offer these countries IOUs in the form of Treasury Bills plus interest. The borrowed money then becomes US dollars, but the interest is never created into existence. Every so many years the US economy nears default because it can't pay interest on this debt and the Federal Reserve becomes the conduit to foist these losses off on the masses. The Federal Reserve knows this. No warnings of these crashes in the economy are issued to the public, just the insiders who govern the Federal Reserve system.
Remember when you fail, blame it on your schooling
Lowenstein lets Mr. Bernanke off the hook time and again. Lowenstein does concede Bernanke didn't scrutinize the banks closely enough… "He overlooked the fact that dicey mortgage-backed securities made up a sizable portion of the assets of the big banks." But Lowenstein explained this failing away by saying "Bernanke's training failed him." Ah, we understand now, Mr. Bernanke wasn't accountable, maybe his schooling was.
Oh, but he reluctantly gave away money
Lowenstein hands Mr. Bernanke a parachute once again. He writes: "Bernanke defended the bank bailouts as necessary, but he expressed supreme distaste for them." Ah, forced by the circumstances. We certainly understand, don't we?
Recognize when Mr. Bernanke schedules one of his now infamous press conferences and he should he make any pronouncement that is not the status quo, that the Fed has chosen to raise interest rates and rescue savers or print more money to fan the flames of inflation, the stock market teeters and gold prices soar. So at this point in time, Mr. Bernanke can say nothing meaningful. Mr. Bernanke has backed himself into a corner. How does he plan to unwind this mess is the big question.
Lowenstein says Mr. Bernanke has been thinking about how to exit from quantitative easing "almost from the day he began it." Lowenstein says Mr. Bernanke will: "in plain English… reward the banks for keeping some of their money inert, which will give some time to unwind the balance sheet gradually. No one knows whether this gamble will work."
Lowenstein's big rationalization for the Fed's dereliction is that the Fed is authorized to make loans under "unusual and exigent circumstances as long as loans are secured to the satisfaction of the Federal Reserve banks, meaning as long as the Fed does not expect to suffer any losses." Lowenstein concedes that, "in the depths of the crisis some of the Fed's emergency loans violated this dictum."
Good God Mr. Lowenstein, the Fed doesn't sustain losses, it palms them off on the public. Just how is the Fed going to deal with the write-down in the value of its real estate assets? Wouldn't that be the biggest loss in the history of the Fed? The Fed doesn't pay, the people who lost their homes already did.
Lowenstein ends his Fed-favorable essay by saying the Fed's "dual mandate" is to promote "maximum employment" and "stable prices."
According to Lowenstein, "bankruptcies and foreclosures play a restorative role — returning assets to the market newly unleveraged and reasonably priced." So why didn't Bernanke let the worst players in the banking field implode so as to quickly right the system?
Gold standard? That's archaic
Lowenstein glowingly refers to Bernanke as "innovative" and "imaginative," but also "close to having exhausted his options." Regarding those who call for gold-backed money Lowenstein stops short of calling archaic and refers to them as "originalists," not the modernizer Mr. Bernanke is.
That one lone rebuttal of Lowenstein's portrayal of Bernanke
That one lone rebuttal of Lowenstein's gravure of Mr. Bernanke, written by a near-obscure blogger, serves to say the news media is part and parcel of the problem — covering for the sins of government and semi-government agencies. The Fourth Estate as they are called is remiss in fulfilling its mandate to make government accountable to the people.
That lone blogger, Charles Hugh Smith, says "I have long thought that America Is Just Going Through the Motions — of caring about the deficit, of financial u2018reform,' and everything else. Let’s be honest, shall we? There never was any fire for real reform of the financial sector. It was all rote, a foul, stupid play-act, a passionless pantomime of u2018caring' and fake-u2018progressiveness' displayed for propaganda purposes. I now think we’re just going through the motions because we have no other choice than to u2018extend and pretend' the Status Quo."
Smith goes on to say: "We all know what Ben u2018saved,' and it wasn’t the economy — it was the fraud-based crony-capitalist financial sector… Ben is no genius nor is he a hero. He is simply doing what he has to because he has no other choice."