A Quartet of Fed Chairmen Body Slam Bernanke

By: Fred Sheehan | Fri, Jan 20, 2012
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"Ben Bernanke's quest to make the U.S. Federal Reserve more transparent may be nearing an end as it debates a new statement of goals and strategy that is likely to put a number on its preferred inflation rate. A formal, numerical goal for inflation could become Mr. Bernanke's most durable legacy as chairman of the Fed. It would bind his successors to stable prices; end confusion caused by Fed officials who can have slightly different goals; and by reinforcing the Fed's determination to control inflation in the long-run, it could create space for monetary easing." -- "Fed Nears Inflation Target Decision;" Robin Harding in the Financial Times, January 17, 2012

This P.R. release barely needs comment. For the purported "transparency," see "Presidential Rivals: Drop the "One Percent." Trumpet the "Negative Four Percent."" "Presidential Rivals" quoted from a strategy session at which the FOMC [Fed Open Market Committee] gathered a consensus to not tell a soul outside the temple that it would officially adopt a policy to create inflation (i.e., "Inflation Targeting"). The Federal Reserve does not command the authority for this "transparent" maneuver.

Previous Federal Reserve Chairmen were dead set against the idea of any inflation. Back in those days (Before Bernanke), "stable prices" meant no inflation. (That every Fed chairman quoted below failed, and some failed terribly, to accomplish this mandate, should be seen as a warning of what will happen now that the Fed is determined to create inflation.)

How did we arrive at this point? The central banking industry has turned what we know to be true upside down. For instance, Bernanke preens about the advances of the science of macroeconomics, yet, no previous Federal Reserve chairman even mentioned the need to give himself a two or eight or twelve percent inflation cushion to prevent economic implosion.

In what follows, former Chairman Martin explained exactly what the "99%" should know. Their beef is a direct consequence of the very policy that the Federal Reserve will now enshrine in its "goals and strategy." Former Chairman Volcker was dismissed by the current generation of central bankers when he encountered their Orwellian distortion of the term "stable prices." Former Chairman Greenspan's comments of the Fed's forecasting record ("terribly discouraging") should alert readers to sell dollars and buy things: gold, silver, land, canned goods.

Fed Chairman William McChesney Martin (1951-1970) has been quoted here before. His Senate testimony on August 13, 1957, was a particularly fine diatribe. He was fighting a losing battle against Harvard economists who told politicians we needed an inflation rate of 2% to compete with the booming Soviet economy.

Martin warned the Senate Committee on Finance that recent inflationary pressures arose from strong economic growth fostered by "'imbalances in the economy' in which 'rising costs and prices mutually interact upon each other over time with a spiral effect.'" Martin went on. The person most likely to be injured in the inflationary cycle was the "'hardworking and thrifty...little man' on fixed income who could protect neither his income nor the value of his savings." Harvard and the senators had other priorities (themselves), but this is a condensed History of the United States in the 55 Years That Followed. (The conquest of the 99 %.) Regarding the target of a 2% institutionalized inflation rate, Martin said: "[Two] percent may not seem startling [but] the price level would double every 35 years and the value of the dollar would be cut in half each generation. Losses would be inflicted on millions of people, pensioners...all who have fixed incomes.... [T]hose who would turn out to have savings in their old age would tend to be the slick and the clever...."

It can at least be said the current Federal Reserve understands who wins and loses when the Fed stimulates inflation. Current New York Federal Reserve President Dudley talked up asset inflation on October 1, 2010. In the first sentence (ahead), the former Goldman, Sachs economist describes the "spiral effect" of irresponsible money-making before the bankers were bailed out. The second sentence addresses consequences to the "little man." Sentence #1: "The surge in home prices was fueled by products and practices in the financial sector that led to a rapid and unsustainable buildup of leverage and an underpricing of risk during this period." Sentence #2: "These dynamics in turn provided the fuel that caused house prices and consumer spending to rise much faster than income."

Federal Reserve Chairman Arthur Burns (1970-1978) was a "no-percenter." Leading up to the 1960 presidential race between John Kennedy and Richard Nixon, MIT economists Paul Samuelson and Robert Solow argued in favor of "moderate levels of inflation." In his 1959 presidential address at the American Economic Association Conference, Burns chided this politically opportunistic position by declaring any inflation was untenable. The M.I.T. professors, and inflation, won. Solow was one of Ben S. Bernanke's Ph.D. thesis advisers.

Federal Reserve Chairman Paul Volcker (1979-1987) bemoans today's central banking incumbents. At the spring 2006 Grant's Interest Rate Observer Conference, Volcker told the audience the upstarts were a puzzle to him: "A great mantra of central bankers these days is 'inflation targeting.' I don't understand that nomenclature. I didn't think central bankers were in the business of targeting inflation. I thought we were supposed to be targeting stability. We all say we are in favor of stability. You hear these speeches, Bernanke saying 'We are in favor of stability. That is why we are targeting inflation.' There is a certain semantic problem for me in that connection."

Volcker went on to say he had returned from a central bankers' synod in Frankfurt, Germany. On the topic of inflation targeting, he believes he was the only dissenter in the room: "The debate was me on one side and all of the central bankers on the other side." It was explained to Volcker "the importance of inflation targeting was to never go above that. There was an ironclad agreement to keep the inflation rate below that or below the target." This is nonsense. The professors will never be wrong. They have prepared for 2, 4, and 6% inflation. The "literature" (Bernanke loves to say that) has been peer-reviewed and published.

Volcker also told his audience: "I can remember my old professors at Harvard, in 1951 or so, saying a little inflation is a good thing. 'We don't want very much, but 2% is good.'" Chairman Martin addressed the 2% target in his August 13, 1957 testimony: "There is no validity whatsoever that any inflation, once accepted, can be confined to moderate proportions." Martin was thinking of an intelligent person or shrewd FOMC: Either was doomed. That is not the case today. Martin could not have imagined the existence of a Bernanke.

Adam Posen, one of the co-authors, along with Ben S. Bernanke, of Inflation Targeting: Lessons from the International Experience, believes inflation rates of "4, 5, or 6 percent a year, say, will [not] hurt growth. It is just not there in the data." He went on to say (in Challenge, July/August 2008) that researchers have found once "you get to an annual inflation rate of 10 percent - some would say 8 percent, some people would say 12 percent," you "begin to see significant negative effects on growth." This is all too stupid to discuss, but Posen, an American, is now serving on the Monetary Policy Committee of the Bank of England. Why? Is it only American universities that produce ideas so bad they are needed around the world to inflate paper currencies out of existence? (Another of Ben Bernanke's MIT thesis sponsors was Stanley Fischer, also an American, who has been shipped off to run the central bank of Israel. Israelis are hereby warned: gold and canned goods.)

Three years after speaking at the 2006 Grant's Conference, Paul Volcker told the New York Times the Bernanke Fed "is not really in control of the situation."

Now we turn to the Maestro: former Fed chairman Alan Greenspan (1987-2006). At the February 1-2, 2005, FOMC meeting, he opposed inflation targeting. The transcript has the ring of Paul Volcker's s'ance in Frankfurt. The younger generation of central bankers, who now monopolize the debate, had spoken. Greenspan, always the gentleman, did not say they are up after their bedtime, yet they are.

CHAIRMAN GREENSPAN: I don't see how we can define a specific number for price stability....and the reason is that inflation targeting presupposes an ability to forecast, which I don't think any of us have, or can have." [The obvious question here, oh, forget it. - FJS] "The vast majority of examples we are going to run into, if we go to inflation targeting, will be cases where suddenly price inflation is at the outer edge of the target, or indeed, has actually breached it - and other evidence on the underlying trends in inflation is not clear." Greenspan went on to say the Fed may see "contrary notions," meaning, indicators that inflation is both rising and falling.

The chairman who was never Time's Person of the Year continued: "Now, one of things we always forget, looking back, is how little we knew at the time things were occurring or about to occur. When I read the transcripts of earlier meetings, I am surprised, because I thought we were really knowledgeable about what was going to happen. Something happens and I say to myself, 'Well, we got that right; our forecasts were terrific and our insights were great.' When I go back and read the transcripts, I find that it just isn't so....Go back and read the 1979 transcripts....I found reading those transcripts terribly discouraging. My view of the extraordinary institution of which we are all part fell about 20 percent because some of the comments being uttered around this table were absolute nonsense. If you go back to October 1979 and read the transcripts from that time on, you will see how little everybody knew or thought they knew...."

It was on October 6, 1979, with consumer price inflation rising at a 12% rate, that Federal Reserve Chairman Paul Volcker announced the Fed would no longer peg interest rates, specifically, the fed funds rate. The FOMC would concentrate on controlling the supply of money. Looking back, Volcker's decision was correct. On October 6, 1979, the funds rate bounced within a target range of 11-1/4% to 11-3/4%. Cast loose, it rose to a monthly average of 17.6% in April 1980, fell to 9.0% by July, and traded at an average rate of over 19% in June 1981.

Greenspan continued: "I don't wish to downgrade the importance of the actions taken. They were tough and they were the right actions. But to presume there was great intellectual control over what was going on is completely undercut by reading the contemporaneous transcripts. That's just the way we are. We have a recollection of what we did which is, unfortunately, fictionalized. I've been in this business for too long!"

The Fed's genius for always being wrong is not a revelation to readers of Panderer to Power, but: Why does the Federal Reserve employ a single economist? It should stick to funds transfers.

Of course, Bernanke had never made an economic forecast in his life until he was chosen as Fed chairman, yet his economic predictions are televised and quoted and move markets.

Legendary investor Jim Rogers was interviewed on TV in May 2011. The interviewer asked Rogers something (long since forgotten) about a recent Bernanke forecast. Rogers, fuming that he (or, probably, anyone else) should be asked to analyze Bernanke's prediction, replied: "This guy Bernanke - YOU should do an expose - You should go back and just - EVERYTHING he said for eight years was wrong! It's astonishing....He's a great contrarian indicator!"

It is clear that Ben S. Bernanke has never given a moment's thought to the possibility his accommodating and manipulative policies may demand a similar decision to Paul Volcker's in October 1979. Nor could he possibly orient his mind to acknowledge that today's economy will react more violently. By the fall of 1979, interest rates had gradually risen for close to three decades. Today, floating rates would either (1) crush an economy dependent on low, low, low rates, (2) pass 19% about 10 minutes after the change in policy, or, first (2), and then (1).

A practical question: how can anyone really "invest" with government conduits around the world attempting to control every market: a mad hatter's scheme that is doomed, that has established price corridors convenient to a bureaucrat, will snap back in a vicious manner, but at an unknown time?

Chairman Bernanke was interviewed on "60 Minutes" on December 5, 2010. When asked with what degree of confidence he could prevent inflation from getting out of control, he replied: "One hundred percent." In 2008, the Chicago Tribune quoted globetrotting economist David Hale. Bernanke had told Hale: "We have lost control. We cannot stabilize the dollar. We cannot control commodity prices." In an earlier (March 2009) interview on "60 Minutes," Bernanke told America he had "never been on Wall Street." In 2006, Simple Ben enlightened Congress that Wall Street operated at a new, permanent high plateau: "The management of market risk and credit risk has become increasingly sophisticated.... [B]anking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks. The banking agencies will continue to promote supervisory approaches that complement and support banks' own efforts to enhance their risk-management capabilities." From personal knowledge, Ben believed every word in that statement.

What will they make of us in 100 years?

 


Frederick Sheehan writes a blog at www.aucontrarian.com

 


 

Fred Sheehan

Author: Fred Sheehan

Frederick J. Sheehan Jr.
aucontrarian.com

Frederick J. Sheehan

Frederick J. Sheehan Jr. is an investor, investment advisor, writer, and public speaker. He is currently working on a book about Ben Bernanke.

He is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and co-author, with William A. Fleckenstein, of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve (McGraw-Hill, 2008). He writes regularly for Marc Faber's "The Gloom, Boom & Doom Report."

Sheehan serves as an advisor to investment firms and endowments. He is the former Director of Asset Allocation Services at John Hancock Financial Services where he set investment policy and asset allocation for institutional pension plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S. Naval Academy. He is a Chartered Financial Analyst.

Copyright © 2007-2014 Frederick J. Sheehan Jr.

 

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