Ben Bernanke Just Won't Stop Making a Fool Out of Himself

Mish

Former Fed Chair Ben Bernanke is back in action doing what he does best, making a fool out of himself.

Been Bernanke's Tool Shed

Former Chairman Bernanke says Fed Has Many Tools to Deter Recession.

In a paper presented at a conference in San Diego on Saturday, Mr. Bernanke said asset purchases and public communication—tools that he largely pioneered during the financial crisis—would be effective in jolting the economy in a downturn.

Under the current economic conditions, those methods, known as “quantitative easing” and “forward guidance,” represent the equivalent of up to 3 percentage points of cuts in Fed interest rates, he said.

“The old methods won’t do,” Mr. Bernanke said. “If monetary policy is to remain relevant, policy makers will have to adopt new tools, tactics and frameworks.”

During the financial crisis, Mr. Bernanke and his colleagues lowered the Fed’s benchmark interest rate almost to zero. They also launched asset-purchase programs and relied on communication to encourage more borrowing and investment.

Critics said those programs would be difficult to unwind and would cause inflation to rise too fast. That didn’t happen, which suggests the tools are relatively safe, Mr. Bernanke said.

“It has become evident that the costs and risks attributed to the new tools, when first deployed, were overstated,” he said. “The case for adding the new tools to the standard central bank toolkit thus seems clear.”

More Tool Nonsense

Bloomberg adds these important detail regarding Fed Tools.

Bernanke said his judgment that monetary policy will be able to combat the next recession also rests on a crucial hypothesis: that the neutral level of short-term rates which neither spurs nor restricts economic growth is between 2% and 3%.

If the equilibrium rate is much below that, as some Fed research has suggested, then QE and forward guidance won’t be sufficient to fight off a downturn. “In that case, other measures to increase policy space, including raising the inflation target, might be necessary,” he said.

“Low inflation can be dangerous,” Bernanke wrote in his blog. “Consistent with their declared ‘symmetric’ inflation targets, the Federal Reserve and other central banks should defend against inflation that is too low as least as vigorously as they resist inflation that is modestly too high.”

Got That?

Bernanke says that forwards guidance won't work if the neutral rate is below 2%.

Amusingly, his solution is to raise forward guidance.

Dear Mr. Bernanke

Please do yourself a favor and stop making a fool out of yourself.

For starters, let me point out it was indeed impossible to unwind the Fed's balance sheet. How far did you get? And what is the Fed doing now?

Secondly, you would not know inflation if if jumped up and spit you in the eye. You and your group-think buddies never consider asset bubbles as inflation.

Ben Bernanke Why Are We Still Listening to This Guy?

CNBC: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

Bernanke in His Own Words

Also consider Bernanke: In His Own Words

  • February 15, 2007: Chairman Bernanke said: "Overall economic prospects for households remain good. The labor market is expected to stay healthy. And real incomes should continue to rise. The business sector remains in excellent financial condition."
  • March 28, 2007: Chairman Bernanke said: “The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
  • May 17, 2007: Chairman Bernanke said: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
  • February 27, 2008: Chairman Bernanke said: "By later this year, housing will stop being such a big drag directly on GDP … I am satisfied with the general approach that we’re currently taking."
  • February 28, 2008: Chairman Bernanke said: “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems … among the large, internationally active banks that make up a very substantial part of our banking system.”
  • June 9, 2008: Chairman Bernanke said: “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
  • July 16, 2008: Chairman Bernanke said that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” Since then, Fannie Mae and Freddie Mac have received a $200 billion bailout and have been taken over by the federal government.

Fed Misunderstands Inflation

The Fed remains on a foolish mission to achieve 2% inflation.

In reality, the Fed produced massive inflation but does not know how to measure it.

Inflation is readily see in junk bond prices, home prices, equity prices, and credit expansion.

Note that small credit contraction in 2008-2010. Recall the 'Great Recession" damage that accompanied it.

I do not expect a repeat on that scale, all at once. But I do expect a prolonged period of credit stagnation as retiring boomers start to worry about their retirement. All it will take to set the wheels in motion is a prolonged downturn in the equity markets.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Deflationary Outcome

The existing bubbles ensure another deflationary outcome.

So prepare for another round of debt deflation, possibly accompanied by a lower CPI especially if one accurately includes home prices instead of rents in the CPI calculation.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Mike "Mish" Shedlock

Comments (26)
No. 1-16
Ebowalker
Ebowalker

Only in the corporate press can someone who was wrong so horribly still be considered an expert. Look at fox news trotting our ari Fleischer last week on iran

magoomba
magoomba

Why not establish a second currency? One for the non producing investors, and one that can only be earned by work and is uninflatable.

mkestrel
mkestrel

Central banks are confidence men. No truth will be ever heard from these morons.

aqualech
aqualech

Look to the only explanation that makes sense:

  • These guys are all liars. Paid to be public liars.
  • The real goal of the Fed (private banks, keep that foremost) is to maximize indebtedness to themselves and these days also to maximize the value of equities as a bone thrown to politicians to allow the indebtedness thing to keep expanding.
  • The bubbles are somewhat collateral damage and they need to pretend not to see that or they could not justify continuing to expand the indebtedness, which is the main driver.
  • They are certain (and have been proven to be correct in this several times over) that the public will bail them out and make them whole should their assets (loans made to others) go bad, even though that loaned money was from thin air.
  • Did I mention that the Fed officials are liars?
Jackula
Jackula

Bernanke makes my blood boil...there is asset inflation everywhere one looks.

Casual_Observer
Casual_Observer

He is right that the same thing wont work to get lower interest rates. The real story line which everyone has missed is more debt requires lower interest rates.

Sechel
Sechel

The problem with all these Fed economists is the same. They think finance is like phsyics and responds to formulas. It doesn't, not always. Human psychology plays a huge role. Their is also hubris. They make it up as they go along. They call that 'new tools' like QE2,3,4,5. I have no doubt that Ben Bernanke is not highly intelligent and analytical but he failed to predict the subprime crisis as did Greenspan his own crisis,(no crime) but then they say trust us to predict the future, which they can't

Bam_Man
Bam_Man

A well-paid bankster shill.

CautiousObserver
CautiousObserver

Bernanke sure is fond of telling people the Fed's printing press in all its various guises is good for everyone and that everyone should be happy the Fed is working on even more subtle ways to steal capital from savers.

thimk
thimk

oh they got the magic formula to prevent recession. These are problems with an overly financialized levered economy . short term debt supplants long term debt . Recessions are healthy. The to big to fail consolidated banks called the feds hands and shut down their repo windows causing a mad rush for massive amounts of liquidity. Is the system that dependent on over 1/2 trillion of ad hoc funding?

Maximus_Minimus
Maximus_Minimus

In summary, the deranged professor gives himself a pat on the back for job well done. Judging by some comments, this view exists (prevails?) in the corridors of power.

In one comment, Bernanke said, the public doesn't understand the FED can create money cheaply (no need to print banknotes). Scary times.

Forward guidance: place your chips, we will print so much, you cannot lose.

truthseeker
truthseeker

I remember back then when Bernanke got QE-1 going, Marc Faber started to hammer on Bernanke relentlessly saying how can this man have this much power, he’s going to absolutely destroy the world’s financial system. Mish was not among all the so called financial experts who were saying this is going to cause inflation. So here we are now some 20 trillion dollars later waiting for the reset, a nice way to express the coming worldwide financial collapse. Back in 1982, after interest rates went up, the price of crude oil dropped down to 12 dollars long enough to bankrupt all the Texas banks. What Bernanke should have done, would be to embrace the same kind of plan put in place by Bill Seidman down here in Texas called the Resolution Trust Corporation. In a massive restructuring, all the assets were put up for sale and the banks for the most part were taken over by NCNB. Obviously to put a national restructuring plan in place for the whole country would be extremely complicated because so much of our sovereign debt was owned by other countries just to start with. It would have taken a dramatic kind of leadership from the President, the Federal Reserve, Congress and Wall Street bankers whose leveraged derivatives were most responsible for this whole damn thing to start with IMO.

Tony Bennett
Tony Bennett

Mish, you left out one item. From CNBC:

"The Federal Reserve should consider negative interest rates as a potential weapon to fight future economic downturns, former central bank Chairman Ben Bernanke said."

He joins Greenspan with green light on NIRP ... at odds with Powell's reluctance (for now) for going there.

Only a matter of time before Powell folds ... completely.

Six000mileyear
Six000mileyear

Bernanke keeps earning failing grades. If ANY tools were available, they would have prevented 10+ recessions in the 100 years of the Fed's existence. The Fed has learned nothing in 100 years about economics, but it has mastered thievery and deceit.

RonJ
RonJ

“Low inflation can be dangerous,” Bernanke wrote in his blog.

Inflation causes deflation. What is dangerous is excess. There is 250 trillion in global debt.

a2plusb2
a2plusb2

That Ben Bernanke and so many others think that the Central bank can and must prevent and stop and rectify economic downturns is foolish. It says more about the political imperatives surrounding the policy makers than about economic truth. IMHO, the Austrian economists have it right: you get a recession when mal-investments are recognized and what you've been doing has to change. Lowering interest rates (below market rate) or buying govt. debt does nothing to fix mal-investment. (If anything does it prolong the mal-investment?)


Global Economics

FEATURED
COMMUNITY