If you are searching for a Saturday morning hoot, I have one. It’s a doozie.
What the Moment Demands
Please consider What the Moment Demands by San Francisco Fed President Mary Daly.
In 2004, I read a speech about making monetary policy in a dynamic world. It was written by then Governor of the Federal Reserve, Ben Bernanke.
Bernanke noted, that when central bankers know about where the economy is headed or face imminent risks, they should adjust policy decisively and aggressively—what he called the “cold turkey” approach. He then noted, that in almost every other instance, more caution is warranted.
Policy for the Moment
It is somewhat surprising that Ben Bernanke’s remarks have been so durable.
But remember, his key point was that monetary policy is flexible, and it can adjust as conditions change. And that is an important lesson for today.
When we know where we are going and it’s important to get there quickly, moving aggressively makes sense. “Cold turkey” is the appropriate action.
We’ve seen this many times in history. This was the strategy during the Global Financial Crisis, when central banks quickly lowered policy rates and did multiple rounds of quantitative easing.
There are many times when gradualism is the best strategy, and there are countless examples of central banks taking this more cautious approach.
The reason it is used so often is because it applies to so many different situations. Uncertainty about the economic forecast. Uncertainty about the monetary policy transmission mechanism. And uncertainty about economic fundamentals, like the natural rate of unemployment or the neutral rate of interest.
In this moment, we are grappling with all of these situations. At the Federal Reserve, we are not certain whether inflation is on track to return to 2 percent. We are unsure about the length of policy lags and whether they are behind us or still to be fully realized. And we are uncertain about whether the dynamics we observe today are cyclical remnants of the post-pandemic recovery or indicators of structural shifts and a new normal for the national and global economy.
The truth is none of these are knowable right now. And the perils of deciding too quickly when we are not sure are real. Declaring certainty without knowing is not just a missed forecast. It’s a policy mistake. And it has the potential to leave a lasting imprint on the economy and negatively affect those we serve.
Call to Action
Uncertainty is a fact of life, but it does not leave us rudderless. We have the tools and the experience to navigate whatever comes our way.
Our challenge will be what it has always been. To respond rapidly when the situation requires, and to resist the pressure to act quickly when patience is needed. To have the will to make these choices, that is the policymakers’ job.
And we need to be collectively up to the task.
Ben Bernanke Why Are We Still Listening to this Guy
This video on the history of Ben Bernanke is still quite the classic.
Ben Bernanke One of the Worst Fed Chairs in History
I have written about Ben Bernanke many times. Here’s one from 2009: Ben Bernanke Pleads For His Job; My Response to Bernanke
Bernanke: For many Americans, the financial crisis, and the recession it spawned, have been devastating — jobs, homes, savings lost. Understandably, many people are calling for change.
Mish: Ben, the reason people are calling for a change is that you and the Fed wrecked the economy. You did not see a housing bubble, nor did you foresee a recession. I would also like to point out your selective memory loss about your role in bailouts. To refresh your memory, please refer to Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America “Turd in the Punchbowl” for details.
Bernanke: Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.
Mish: No Ben, we need a system that works differently. You have proven beyond a shadow of a doubt that you and the Fed are incompetent and cannot be trusted.
Bernanke: Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States.
Mish: What Global consensus? Other Central bankers? What about the consensus of those who saw this coming? Pray tell why should anyone listen to those who were wrong every step of the way?
Bernanke: The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.
Mish: Ben, you sound like an arsonist taking credit for helping put out a fire, before the fire is even out, after you lit the match and tossed on the gas in the first place. For all the problems you have caused, don’t you at least have the decency to show a little humility?
Bernanke: The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.
Mish: Ben, that is your self-serving assertion that you saved the world. Care to debate the subject?
Bernanke: Moreover, looking to the future, we strongly support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again.
Mish: Ben, it takes a lot of gall to say that while you are doing nothing to dismantle too big to fail enterprises such as Goldman Sachs, JPMorgan, Citigroup, etc. Moreover, given that you could not see the housing bubble come or the internet bubble coming, and given that you still believe that bubbles are best dealt with after they blow up, your words are meaningless.
Bernanke: The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.
Mish: Ben you acted the way all regulators act: Doing nothing while Rome burns, then attempting to prevent Rome from burning after it has already burnt to the ground.
Ben, in case you did not notice, the market already shut down subprime mortgages, pay option ARMS, HELOCs, and excessive credit card debt. Your feeble cries are too little, too late. At best your efforts would prevent the last problem, but not the next one. The market has already prevented the last problem privately, even as Fannie and Freddie are once again taking on excessive risk as government entities.
Preventing the Last Problem
I wish to emphasize that last paragraph: “Your feeble cries are too little, too late. At best your efforts would prevent the last problem, but not the next one.“
And so here we are after mountains of QE and fiscal stimulus, the problem is 180 degrees switched.
No one is walking away from homes. Rather, people are trapped in them because of inane QE policy first launched by none other than Ben Bernanke but then continued by every Fed Chair since, until it blew up in an inflationary mess.
A Debt of Gratitude to Mary Daly
With that, I wish to thank Mary Daly for reminding us just how awful ben Bernanke is.
I especially thank Daly for reminding me of few of my 2009 comments that have come home to roost.
- “Ben, you sound like an arsonist taking credit for helping put out a fire, before the fire is even out, after you lit the match and tossed on the gas in the first place. For all the problems you have caused, don’t you at least have the decency to show a little humility?“
- “Ben you acted the way all regulators act: Doing nothing while Rome burns, then attempting to prevent Rome from burning after it has already burnt to the ground.”
- “Your feeble cries are too little, too late. At best your efforts would prevent the last problem, but not the next one. “
How the Fed Destroyed the Housing Market and Created Inflation in Pictures
In case you missed it, please check out How the Fed Destroyed the Housing Market and Created Inflation in Pictures
The Fed created another massive housing problem, but one of a totally different kind. With the help and foresight of Ben Bernanke ,we prevented the last crisis. Thank you Ben.
Fed Uncertainty Principle Again
Given that Mary Daly mentioned uncertainty several times, this is a great time to consider my all time favorite post, “The Fed Uncertainty Principle” written prior to the collapse of Lehman, what Bernanke called his biggest failure.
I covered that again, more recently on September 23, 2023 in The Fed is Uncertain About Uncertainty, So Why the Forward Guidance?
Please give it a look.
Also recall Silicon Valley Bank Blew Up On Daly’s Watch.
Finally, another word of thanks to Mary Daly for her pertinent comment “Declaring certainty without knowing is not just a missed forecast. It’s a policy mistake.“
“The Federal Reserve is a cartel- it’s a banking cartel. And like all cartels, it only has one purpose – and that is to serve the benefit of the members of the cartel, period.”
G. Edward Griffin
I am in full agreement with the above statement. Any other alleged ‘Fed mandates’ are nothing more than a smoke screen used to justify the existence of the Fed.
Contrary to Bankrupt-u-Bernanke (who taught a highly mathematical economic course at MIT), an injection of new money may be robust, neutral, or harmful.
Bernanke, pg. 287 in his Courage to Act, “Lower long-term rates also tend to raise asset prices, including house and stock prices, which, by making people feel wealthier, tends to stimulate consumer spending-the “wealth effect”.
It is higher and firmer real rates of interest that drive economy expansion, that leads to real investment, rather than financial speculation.
Ron Paul: Why do central banks own gold?
Bernanke: Tradition
Lulz
As soon as the O/N RRP facility dries up. Draining the O/N RRP facility is just like monetizing the fiscal deficits. MMMFs aren’t banks, they’re nonbanks. So, the draining is not a liability swap.
The remuneration of interbank demand deposits, IBDDs, by Bankrupt-u-Bernanke emasculated the FRB-NY’s “open market power”, the power to inject ex-nihilo, and gratis, showering free lunch money both exogenously and endogenously, into the payment’s system — by Simon Potter (Manager of SOMA as well as Executive Vice President of the New York Fed’s Markets Group’s “trading desk”).
Unlike Treasury issuance, because the belligerent bifurcation (the mis-aligned distribution of sales and purchases of debt by the FRB-NY’s trading desk and its customers/counterparties is largely unpredictable, so too now is the volume and rate of expansion in the money stock. FOMC policy has now been capriciously undermined – by turning nonearning excess reserves into bank earning assets.
This is in direct contrast to targeting: *RPDs* (reserves for private nonbank deposits), and by using non-borrowed reserves as its operating method (predating Paul Volcker’s October 6, 1979 pronouncement on the *Saturday before Columbus Day*), as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974.
This adds up to an obdurate apparatus that the Fed cannot monitor, much less control, even on a month-to-month basis.
What the net expansion of the money stock will be, as a consequence of any given addition or subtraction in Federal Reserve Bank credit, nobody can forecast until long after the fact.
And the whole process is now initiated by the member banks, via proffered bankable opportunities, not by the monetary authorities.
The idea that legal reserves are not an effective tool for controlling the money supply seems to be rooted in the experiences of the Great Depression—the period which provided the foundation of Keynesian economics. During all of the Great Depression, legal reserve management was impossible despite the fact that the Banking Act of March 9th, 1933 (Congress passed the Emergency Banking Relief Act) provided for the coordination of all Open Market Operations through the New York Reserve bank (Before the Act, one Reserve Bank could be buying securities creating new Interbank Demand Deposits and another Reserve Bank could be selling securities).
But even after bank failures were brought under control, business confidence remained so traumatized the expansion of legal reserves remained to a large extent – excess reserves. There were not enough credit-worthy borrowers in the private sector (according to the bankers); and in the public sector, there was an insufficient volume of government debt to absorb excess bank lending capacity. It was not until about 1942 that the member banks operated with no excessive amount of excess reserves.
Dr. Richard G. Anderson, world’s leading guru on bank reserves:
Sent: Thu 11/16/06 9:55 AM
“Spencer, this is an interesting idea. Since no one in the Fed tracks reserves…”
Bernanke contracted legal reserves for 29 contiguous months which directly caused the GFC, turning otherwise safe assets into impaired assets.
Monetarism has never been tried. Monetarism involves controlling total reserves, not non-borrowed reserves as Paul Volcker found out. Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when total reserves were (@$44.88b).
By mid-1995 (a deliberate and misguided policy change by Alan Greenspan in order to jump start the economy after the July 1990 –Mar 1991 recession), legal, fractional, reserves (not prudential), ceased to be binding – as increasing levels of vault cash/larger ATM networks, retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating “low-reserve tranche” & “reservable liabilities exemption amounts” c. 1982) & lower reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.
This was the direct cause of the GFC, the boom in real-estate (as predicted in May 1980 by Dr. Leland J. Pritchard, Ph.D. Economics, Chicago 1933, M.S. Statistics, Syracuse).
Ahhh yes… The good old days of King Benny. Well, the fedspeak word salad may have changed a little bit, but the game is still the same. The ‘printing’ still continues, more than ever, faster too, re disguised, with much less if any fanfare, funneled to the ever changing, but still the same feudal lords and cronies.
I was hoping to learn something from your post, Mish. What I saw was little more than bile. I actually don’t disagree with the denunciations, but still: What’s the point? If you want to do anything other than rant, you’d be a lot more disciplined. You would examine past errors and come up with what you think should be done now and in the future.
Jake, I think that NOTHING can be done by ANYONE and that is the point of the Rants. Fed Policy simply ruins what could be a FREE capitalistic system. Don’t ask me what that would look like, though, because a Free Capitalistic Market has never been tried historically, but do not quote me.
Nor has a pure communist society been tried. Which isn’t even remotely to say that I want it to be tried. The impure variety is terrible enough. In any case, we will never have a “Free Capitalistic Market” or a “pure communist society.” So there.
LOL.
1) We are going to do what we want, then
2) Inform our friends so they can frontrun and
3) Make sure all our close friends have preferred interest rates, and
4) If it really comes down to it, buy or cover their asse(t or s) when they make bad bets on duration.
It’s a new type of monetary policy called:
Flexible Morals Monetary Policy.
FMM.
Lol! Spot on! Here is another name for you: Crony monetization.
“And so here we are after mountains of QE and fiscal stimulus, the problem is 180 degrees switched.”
Yin and yang compliment each other, to complete a whole.
Ben was horrible, dropped rates too low, too long and really was a mutt.
To me, the problem was that the intervention wasn’t sterilized. The reason was that the economy wasn’t very strong underneath the monetary stimulus. Then there came the covid helicopter dump, which was much worse than the reaction to the Panic of ’08. In both cases, these things disguised the weakening economy’s vulnerability on a variety of fronts.
My criticism of Mish is his lack of ideas going forward.
Ben’s arrogance and hubris and utter lack of humility is absolutely galling.
The amazing thing is how long they were able to kick this can down the road ( i.e., debt and a zombie companies). But as Adam Smith said, “There is a lot of ruin in a nation.” Certainly having the reserve currency has helped us extend and pretend way beyond what would otherwise been possible.
Ben Bernanke is one of many sociopaths. Many of them are victims of self inflicted ridicule, contempt or penalty. Bill Gates, Bernie Ebbers, Samuel Bankman Fried, Robert Milken, Jeffrey Epstein, Robert Noyce, Robert Maxwell, Ben Bernanke, Benjamin Netanyahu….
You forgot Bernie Madoff and Larry Silverstein Two of the top sociopaths of all time
The Fed’s handling of the GFC in 2008 shattered the integrity of the financial system. It may not have been such a bad thing if the Fed would have stepped in as the lender of last resort and provided enough loans to keep Lehman from going under. That is debatable.
The disaster happened when they decided to create trillions of new money to purchase financial assets. It started out as an excuse to stabilize the financial system and then quickly morphed into an epic money grab and wealth-redistribution scheme. This destroyed the trustworthiness of the traditional debt-based system in which loans are created based on collateral, credit ratings or a business plan.
The Fed bypassed the lending approach in order to buy existing bonds to provide direct windfall gains that went to the wealthiest. One of the problems with this approach (besides creating a wealth divide in the country that would embarrass a banana republic dictator and making housing unaffordable) is that it removes all discipline from the system which inevitably leads to inflationary fiscal policies.
Since the free market for setting interest rates has been subverted, the only thing constraining government spending is the self-restraint of politicians and the Fed’s willingness to act on a very flawed inflation statistic. Obviously, this approach isn’t going to work very well.
Unfortunately, the Fed still seems to believe in the concept of QE even though they admit they may have done a little too much. It’s not that the printing went too far but it should have never happened in the first place. They should be the lender (not printer) of last resort.
Good summary.
General Motors went bankrupt and the UAW claims were honored before GM Bonds. Why buy a bond when the thieves who bankrupted the company have a prior claim in bankruptcy court?