Bernanke's Fed: an "academic in a china shop?"

A few thoughts and links about the Fed's rate cut today. First of all, what's happening is nothing short of stunning: the central bank has now slashed interest rates twice in eight days while the Congress argues over how best to thrust $100 billion into the hands of American consumers.

As one of my favorite Wall Street guys, Art Hogan, said recently, the good news is that the government is acting quickly to give the economy a double shot: serious fiscal and monetary stimulus; the bad news is, the economy needs it.

Will the rate-cutting and dollar-mailing help? Of course they will.  But the economy, and housing, are still on a downward trajectory.

A commenter passed this along -- economic analysis from the blog of former Labor Secretary Robert Reich: "Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing. ... Add all this together and there’s just not enough consumer demand out there to keep the American economy going."

I've also been wanting to pass along this recent Fed analysis from another favorite, mortgage broker/pundit Lou Barnes. For months Barnes had been on the fence about Bernanke, but last week, after the emergency rate cut, Lou took a stand: Bernanke is in over his head, and not learning very fast: "Last Thursday, Mr. Bernanke went to Congress to ask for a stimulus package 'quickly.' A Chairman without confidence in his own resources immediately destabilized markets all over the world ...  The Fed Chairman never, ever goes to Congress to ask for stimulus: that’s the Administration’s job. ...  He has shown political ineptitude from the first months in office (blabbing intentions to a pretty reporter at a party), and does not appear to have learned a thing. ... The consequence of random, academic-in-a-china-shop behavior: an already fragile and illiquid bond market raised rates and slowed trading."

Your thoughts? Comments? Email story tips to peter.viles@latimes.com
Photo Credit: Fed chairman Ben Bernanke by Bloomberg News.

Comments

[Tombstone Realty]

This all screams "panic" to me - to not even let the rate cuts start to work their way through the system. The fact he seems to jump whenever the market says to, unnerves me as well. Either because he's a rank amateur (which I doubt), or he knows much *much* more than he's letting on.

(Although, nothing short of the banks relieving about 30% of people's overpriced home loan will help in this case).

[sunsetbeachguy]

After Greenspan's run with globalization tailwainds and Volcker's high interest rates to coast down from, Bernanke had a choice at the beginning of his single term.

Arthur Miller or Paul Volcker.

He has obviously chosen to the Arthur Miller track of one term and retire to anonymity.

The next great central banker is as of yet unknown but will be cut from the same cloth as Volcker!

It ain't Bernanke.

[Ann]

BB's is trying all the things that he wrote about in academia where he theorized if "X had been done and then Y had been done, the Great Depression would have been stopped."

BB is running through putting all his theories into practice.

BB's problem is that his theories (which sounded so geat in scholarly articles) are NOT working.

" On virtually every topic of significance — how to prevent deflationary panics, for instance, or to gauge the effect of Fed moves on stock-market prices — Bernanke wrote one of the seminal papers. He championed ideas for improving communications between the Fed — whose previous chairman, Alan Greenspan, spoke in riddles — and the public, believing that clearer guidance about the Fed’s aims would help the economy run more smoothly. And having devoted much of his career to studying the causes of the Great Depression, Bernanke was the academic expert on how to prevent financial crises from spinning out of control and threatening the general economy. One line from his “Essays on the Great Depression” sounds especially prescient today: “To the extent that bank panics interfere with normal flows of credit, they may affect the performance of the real economy.”

Bernanke, who came to the job with a refreshing humility — a desire to be less an oracle like Greenspan than a plain-speaking technocrat —faces exactly this sort of crisis now. Ever since last summer, a meltdown in financial markets has led to daunting losses in the banking industry and throughout Wall Street. Despite having written extensively on how to deal with such episodes, Bernanke has thus far been unable to reinstill a sense of confidence. His faith in modern forecasting models notwithstanding, he failed to foresee that the sudden rise in homeowner defaults, which triggered the crisis, would have such far-reaching effects. And the monetary medicine that he has prescribed, including some of the very tools that he lovingly detailed in his research, have yet to produce a turnaround. "

http://www.nytimes.com/2008/01/20/magazine/
20Ben-Bernanke-t.html?scp=3&sq=ben+bernanke&st=
nyt

Could create a bit of stress. Stress leads to nervousness, Nervousness leads to panic........

After all, theories are only conceptual ideas that might work until they are put to the test. If they succeed, they are a proven mechanism or method. If they fail......oh well, just another wrong guess and it didn't work and the creator of the idea slinks back to the office to try again.

Imagine. Spend your whole career writing articles saying 'do this' and 'do that' and being feted and praised as 'the expert' only to find out very publicly that it was a load of bullhockey that doesn't work.

[Matt]

Everybody wants to blame Bernanke, but all of these bubbles had to burst at some point.

We should have had more regulation of mortgages, and less "innovation." The combination of zero down programs, "liar loans," and pay-option mortgages was ultimately a financial disaster, but along the way, it provided huge profits to the people making the deals. Without the government setting standards and smacking people who get out of line, there is too much pressure for everyone to jump on the idiot bandwagon of easy credit for speculators.

I'm a securities lawyer, and I admit it's frustrating to have to deal with all of the complex and inane regulations that the SEC has published, but this entire crisis is a reminder that the financial institutions need to be closely regulated because without limits they are like lemmings jumping over a cliff.

[Ann]

A commenter passed this along -- economic analysis from the blog of former Labor Secretary Robert Reich: "Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing. ... Add all this together and there’s just not enough consumer demand out there to keep the American economy going."

Yep....pretty much sums it up.

Don't give raises that even keep up with inflation and pretty soon Joe and Jane Sixpack can't buy anymore.

I've read this books before - actually lots of books about this story.

Wages flat or falling. Consumers can't buy because they are (a) maxed out from buying or (b) they can't keep up with inflation and get maxed out or (c) both. Retailers and manufactureres cut back because customers are not buying. Laid-off retail and manufacturing employees cut back on buying so more retailers and manufacturers cut back........ and onwards and downwards it goes.

It is called a 'deflationary spiral.'

All the interest rate cuts in the between bank lending can not fix the problem. Joe and Jane are still broke and cannot borrow money to buy because they can not pay it back.

Only known cure is to increase the incomes of consumers so they can spend. That means wage raises. That means jobs that pay enough that the worker can afford the necessities plus more. (And that ain't the lowwage service jobs that are the bulk of jobs being created, folks.)

That means that the top 1% have to kick lose of some of their after-tax 43.5% income gains and allow more to be paid in wages to the 90% who barely saw an average 3% increase in after-tax income in 2003-05. (And that 3% was way less than the rate of inflation.)

Same old problem. Excessive greed by the top 5% is bad for business.

[mark too]

My fellow Americans, I would like to take this opportunity to speak of one of the gravest situations facing our nation since the demise of the pet rock.

First let me preface my remarks by saying that you are all worthy of dignity, respect, and a brand new McMansion on the hill.

As you know, our nation is suffering from a crisis of confidence in our economy. This is nothing but hogwash. The state of our economy has never been stronger. We have bipartisan support at the highest levels of congress, the administration, and the Federal Reserve, in our belief that debt is a good thing and is the bedrock foundation of our economy and a source of our strength and standing in the world.

I have proposed a constitutional ammendment to make multi billion dollar federal budget deficits the law of the land. This ammendment will also highly encourage our hard working citizens to spend more every year than they earn.

As you know, our federal reserve just lowered interest rates for the second time in barely a week. This was done to encourage our citizens to borrow more at low rates and to also discourage them from saving money. We fully intend to keep rates at or below 3% for the savers in our society. This 3% interest rate will be completely eaten up by inflation that is running at around 4 1/2% - and no, we won't count food and energy. Furthermore the 3% that you earn will be taxed. Anyone who saves in this environment is a fool and will be treated as such.

We propose name this new constitutional ammendment the "Buy more Stuff" ammendment. As a patriotic American it is your duty to "Buy more Stuff". If you don't need more stuff - we encourage you to buy anyway. Don't need a car? Wreck the one you have! Don't need a new plasma? That what sledge hammers are for. China's making some really neat stuff - buy some of that. Do you have to much stuff already? Fill up your garage. Is the garage full of stuff? Rent a storage facilty. If that doesn't work we have land fills standing by. Just buy more stuff - it's your patriotic duty as an American.

You say you can't afford to buy anything else and your credit cards are all maxed out? Well listen up Tinkerbell, your federal government has a AAA credit rating and is set to borrow on your behalf. We've run up a debt of $9 Trillion buying stuff on your behalf. And now we've set up a HELOC with Chinese Communists and Arab Terrorists to fund a new spending spree. The check is in the mail.

And for any of you out there looking to make more than a 3% return on your money we highly encourage you to make risky and speculative inestments in such things as overpriced equitties or single family homes/condos. The former fed chairman assured me that this is the fastest and most efficient way to create wealth in our economy. Pump up assett prices with cheap and easy credit and create a wealth affect. He is a gradiut of the Ponzi school of economics as is our current chairman.

So get out there my fellow consumers and spend, spend, spend. Helicopter Ben will be dumping cash on your neighborhood soon and the printing presses are humming. Buy that crackerbox by the freeway and pump the prices up. Don't worry be happy!

[MyLessThanPrimeBeef]

Tombstone, Mr. (How High) Bin Lackey knows.

He's been to Area 51, where all the UFO's (Unidentified Financial Objects otherwise known as Level II & Level III assets) are stored. He's read the autopsy reports about how all the SIV virus infected CDO's died horribly. He knows how bad this epidemic is and it will be bad - the only job growth area the smartest economists, and they all work for the Fed, are predicting is coin-clippers, thanks to the Fed who is on a hiring binge right now.

[MyLessThanPrimeBeef]

Matt, everytime I hear 'financial innovation,' I reach for my mattress.

And when I hear the word 'technology,' I reach for my high-quality Aurignacian stone axe.

[formerlahomeowner]

Bernanke is just reacting on what was served on his plate. He can stand pat on interest rates but that would look bad since people and politicians will blame him for not doing anything. The real blame lies on the Fed chairman before him who watched the bubble run amok and did nothing. Let's not forget where the credit is due.

[MyLessThanPrimeBeef]

Mark too, you know what they say about CPI overstating inflation. By 'they,' I mean the smartest, the most edcuated people our species can come up with.

The fairytale goes like this: When beef gets too expensive, people buy chicken instead. They, again, meaning the smartest and the most educated, which apparently a lot of bloggers here, well maybe just some, aspire to, anyway, they call it 'the substitution effect,' or some mumble jumble close to that.

So, the more expensive beef component of the CPI should be taken out, or perhaps just be given less weight, sophists that they are, because, well, people don't eat it anymore. (BTW, it wouldn't be so bad.)

But being patriotic and freedom loving, I suggest we go a step further. I suggest people just eat dirt, which is free.

That way, we knock even more stuffing out of that evil CPI.

[LA-renter]

Yeah, let's just ridicule overpaid "responsible" people with titles, degrees and theories.

What's lacking is collective responsibility. No leader in our system can tell folks that our lifestyle must change. Instead, successful politicians lead us along the path of denial.

A solution would be simple, if our problem was individuals, Greenspan, Bernanke, Bush...

Underneath the bubble economics must be a fundamental problem --and when I say fundamental, I mean one that has no discernible solution.

Ironically, it seems to me that the world is faced with a serious glut of savings, too much money chasing after too little profitable investment worldwide. Thus, schemes are contrived to put the money into investments that appear profitable.

If true, bubbles are inevitable, and leaders are just coloring in the details.

[cane]

Give Bernanke time and some room to maneuver - he took a job with a legend as predesscor, at the same time that a bubble popped. Not easy, but I'm glad someone with his experience and intellect is at the helm. I know his job is much more important, but I can't help thinking about the Giants' coach Coughlign - totally ridiculed and ready to run out of town, until his leadership helped turn the season around and take them to the Super Bowl. Hopefully BB will do the same to get us thru the upcoming pain.

[Dr. JwB]

Maybe it's just one academic defending another, but isn't it possible that Ben is bailing water as fast he can, only that the ship has been set to sink for quite a while? Hey, I bet this desperate damage control is no fun for him either.

That being said, he gave absolutely the worst graduation speech I have ever heard. There's an hour of my life I'll never have back.

[Steve]

Ti tis this simple, it is an election year and this whore and will do anything to keep the party that hired him in office. He knows the reality is GW has screwed this up os much they will get wiped out like no onter election and I am a Republican. This will be like the 70s revistied so buy RE because the printing presses are at full capacity.

[adrian]

BTW,
I have seen on TV the other day, Haitians make mud cookies to eat because the rice is too expensive. They say is rich in calcium.
What about the sand in sunny California?
Lefty, any opinion?

[mbob]

Hey Cane, it's "predecessor" not some mashup of "predator."

In the latest online New Yorker, the late Mr. Minsky's theories are neatly summarized. An excerpt:
"...There are basically five stages in Minsky’s model of the credit cycle

displacement
boom
euphoria
profit taking
panic.

A displacement occurs when investors get excited about something—an invention, such as the Internet, or a war, or an abrupt change of economic policy."

Guess where we are right now? Oh -- the football analogy is lamer than when Reagan used to invoke them. What's next, a re-issue of "WIN" buttons (for the age-challenged, those were "whip inflation now" buttons)?

Or, go a web-surfing to find out how the "US Bank" failure was a major trigger for the little unpleasantness from 1929-1942. Bear in mind that both consumers and banks were in far, far better shape to withstand a downturn back then.

"There ain't no con like a neo-con."

[marina]

mark too,

incisive and tragically accurate analysis

[CD]

It has to be an economy that invest in the country's infrastructure,roads, rails,schools,health care, where people spend less and save and reinvest in their community. It can no longer be an economy that screws the middle class and favors the rich only. Are we alive in order to feed China.They own us, they have got us by the balls, spend or die...
Can we turn this ship around? The French revolution in 1789 was mainly a middle class Bourgeois revolt against the very rich who lived in Versailles and taxed them to death. You cannot tax the poor ,so the middle class always carried the burden. A la Bastille !!!!!Lets take down the malls.

[AJ the oil man]

Cane wrote:

... I can't help thinking about the Giants' coach Coughlign - totally ridiculed and ready to run out of town, until his leadership helped turn the season around and take them to the Super Bowl. Hopefully BB will do the same to get us thru the upcoming pain.

The only problem with your analogy is that after the second game of the season, you couldn't tell the difference between the Giants and the Dolphins. After the latest rate cut and proposed money giveaway by congress, will we end up in the economic superbowl or getting the first draft pick as a 1-15 loser?

AJ

[JohnnyB]

mark too,

A most excellent state of the union speech!

These are concepts I as an American have and will continue to support 100%.

Well, considering inflation that support drops to 80%... after the Asian/Arab bites are applied I’m afraid it drops to 60%... forecasting the dollar's declining value it shrinks to 40%... after the continued losses in equity, 10%... uh oh… after declining incomes -20%... more outsourcing overseas -0%... oh my… picturing Bush's face -50%... jesus h… picturing Bush, Palson and Bernanke together -100%... accounting for the impact on our future well being -150%... and our children’s burden -200%...

I just cannot support… but wait…

I get a cheap flat screen? Back up to -175%... lot’s of other cheap crap from Wall Mart and China? -100%... you’ll prop up overvalued homes? -50%... I get to participate in the next bubble? +10%... wall street’s given free reign for the next 100 years? +50%... no financial or mortgage industry regulations? +100%!!!... lobbyists representing the top 1% continue to rule the roost? +200%!!!... our news media pledge to only promote those interests and spread the appropriate level of fear and consumerism? +300%!!!... oil and war remain our shining beacons of light? +400%... third world countries continue to be demonized for profit in a carousel of the arbitrary? +500%... the middle class get continually peed on but are somehow convinced it’s rocky mountain rain? +600%!!!... Americans get to be better than everyone else? +1000%...

Considering the “derivatives” of all the above +10,000%!!!

I just cannot support you enough!

[Kathy]

I was listening to NPR recently, and they were interviewing an economist from MIT (can't remember his name but he comments on there frequently). They were discussing the then upcoming rate cuts, and the MIT guy said that these guys always know more than they're letting on, they know the bad news ahead of time and if they do a rate cut out of cycle or prematurely, it's means the situation is worse than is being said publicly.