Any dispassionate appraisal of Ben Bernanke’s term as Chairman of the Federal Reserve would have to conclude that it has been a colossal failure. The Fed is tasked with several areas of responsibility and the Bernanke Fed has failed at all of them. As a bank regulator, the Bernanke Fed presided over the formation and collapse of quite possibly the biggest credit bubble in the history of the world and the largest number of bank failures since the S&L crisis. At the same time they were busy ignoring the shenanigans of the banking sector, the Bernanke controlled Fed also managed to push the inflation rate to its highest year over year change in nearly two decades (+5.5% in the summer of 2008) and then also allow it to turn negative (nearly -2% in the summer of 2009) for the first time in a half century. Bernanke’s Fed also deserves at least partial credit for oil at $145 and gold at $1200 since those were a result of monetary policy as well. Finally, since the Fed’s dual mandate also includes maintaining full employment, the current unemployment rate of 10% must be included in Mr. Bernanke’s application for continued employment.
Based on that track record there is no rational reason to confirm Ben Bernanke for another term as Fed Chairman. For that matter, considering that the vast majority of the FOMC members during his term have agreed with him on monetary policy, one wonders if there is anyone at the Fed worth keeping on. There are currently two vacancies on the Federal Reserve Board and the empty chairs have a better track record than the intellectual heavyweights who occupy the other five seats.
Those who favor Mr. Bernanke’s reappointment primarily cite his performance during the crisis portion of his term as their reason for favoring his retention. Bernanke himself never wastes an opportunity to remind everyone that this crisis was the worst since the Great Depression and that he has spent a good portion of his adult life studying that awful economic period. I suppose it must be comforting to these Bernanke supporters to know that the chairman knows more than anyone about how to recover from such economic calamities, but has it not occurred to them that he apparently knows absolutely nothing about how these situations are created? He has yet to acknowledge in even the slightest way his and the Fed’s role in creating the very crisis he claims to be qualified to solve.
If anything, Mr. Bernanke’s performance since the first inkling of sub prime trouble in the summer of 2007 is the strongest case against his reappointment. The actions of the Federal Reserve since that time may have been in the best interests of the financial industry, but claiming they were in the best interests of the country as a whole is a more dubious position. Whose interests did it serve when the Fed provided funding – and assumed the risk of potential losses in the process – for JP Morgan to take over Bear Stearns? Whose interests did it serve when the Fed paid off AIG’s counterparties in full? Whose interests does it serve when the Fed purchases Fannie Mae and Freddie Mac debt in the open market? Whose interests does it serve when the Fed is the mortgage backed securities market? Is it even Constitutional for the Fed to purchase such securities if there is a potential for loss? Doesn’t that cross over into fiscal policy that should be voted on by Congress? Whose interests does it serve when the Fed purchases newly issued Treasury notes?
Bernanke – and many others – claim these actions were necessary to prevent the collapse of the entire financial system. Treasury Secretary Geithner has made similar claims and yet neither can offer anything other than their personal assurance that their actions averted disaster. One thing we do know for sure is that the biggest beneficiaries of their actions were the owners and creditors of the largest financial institutions. Why were losses dispersed among the public considered preferable to losses concentrated among this smaller group? Is this smaller group somehow more important economically than the much larger group that was forced to accept their losses? Why? How?
More important than Bernanke’s past performance is how he will perform in the future. What has he learned from this experience that will allow him to perform better in the future? Apparently not much. Every FOMC statement continues to cite the discredited output gap theory of inflation as a guideline for future policy even as gold soars to $1200 per ounce and the dollar continues to plumb new depths. Evidence of bubbly asset prices percolates not only in the US but in any country whose currency is connected to the dollar and therefore US monetary policy. Meanwhile, US banks are allowed to hide their potential losses with mark to fantasy accounting practices and the continued use of off balance sheet vehicles while the Fed maintains a steep yield curve that benefits no one so much as the banking industry bottom line. The economy is just coming off life support, but at least the financial industry will have a good bonus season. Surely our contributions to the golden calf that the financial industry has become will trickle down to the rest of us mere citizens eventually. By reconfirming Ben Bernanke as Fed Chairman we’ll at least know who to blame if it doesn’t.
If you’d like to receive this weekly commentary by email, click here.
Weekly Economic and Market Review
I’m sure that the “jobs summit” held Thursday had no effect at all on the employment figures released Friday and I’m equally sure that the Obama administration, like all administrations before them, will find a way to take credit for the continued improvement in the economic situation. Of course, it is still relative at this point since we lost 11,000 jobs in November, but that is a heck of a lot better than the 700,000 or so we were losing on a monthly basis back at the beginning of the year. The Obama team was quick to credit the stimulus plan they pushed through Congress earlier this year, but evidence to support that notion is conspicuous mostly by its absence. More likely the improvement is due to the monetary ministrations of the Fed and the natural resiliency of the economy.
A lot of the improvement may be nothing more than the increasingly long odds against the passage of health care reform. Earlier in the week Tim Geithner acknowledged that uncertainty was delaying recovery (from an interview with Liz Claman on Fox):
GEITHNER: It’s not going to be one thing. It’s going to have to take a mix of different approaches. And you’re right to say that we have limited resources. And our job, as you heard the president say, is to find ways to maximize the impact of any additional dollar we spend.
So we’re looking for things that have a high return for the taxpayer, a high return for the American economy going forward.
But what matters is trying to get businesses investing again, businesses hiring again.
CLAMAN: Businesses investing again, they need to, they want to.
But I have to tell you, I talk to a lot of CEOs. So do you. And in advance, I told them I was going to be talking to you. And they said, look, we don’t have a lot of this ability. We don’t have clarity on where interest rates are going to be, what energy costs are going to be, what the health care situation is going to be. They would love some of that visibility clarified.
GEITHNER: They want — businesses want certainty. They need certainty so they can make long-term plans today. And that’s why it’s so important that Congress gets health care behind us, that we bring financial reform in place so people know what the rules of the game are. And that’s a very important thing to do. And that’s why we’re working so hard to make sure we bring clarity quickly.
I have said all year that the chances of passing health care reform, even with control of Congress and the White House, were much lower than most people believe. The range of constituencies that have to be satisfied to get anything significant passed is just too broad to get a consensus bill that will pass. And if it doesn’t pass this year, the odds of it passing next year – an election year – drop pretty dramatically. Cap and trade was always the more potentially economically damaging anyway and I’ve been much more worried about that than a bad health care reform bill. The Obama EPA seems intent on imposing something regardless of Congressional action and while anything they do is sure to be challenged in court, that would just extend the uncertainty surrounding the issue. The Climategate email leaks may mean that the issue is derailed for a while, but cap and trade has never been about science or the environment; cap and trade is about tax revenue, power and the ability of politicians to hand out favors in exchange for campaign contributions.
The economic data released last week continued the pattern of improvement we’ve seen since mid year.
ISM Manufacturing Index: The ISM manufacturing index was a little less than expected but still above the 50 level that indicates expansion. The New Orders index moved back above the 60 level and is indicating very strong future growth. Employment fell but stayed above 50. The ISM is a very good coincident indicator for the economy and the stock market so continued readings over 50 are very positive.
Construction spending: Construction spending was flat on the month which was better than the expected decline of 0.4%. Residential spending is rising while non residential and public spending are contracting. Nothing surprising about any of that.
Pending Home Sales: Pending home sales, which are based on contract signings, rose again in October. There was probably some boost from the home buyer’s tax credit but pending sales are up 31% over the last year. The housing market is coming off the bottom, but it remains to be seen whether the market can sustain upward momentum when the tax credit expires in the spring.
Challenger Job Cuts Report: The Challenger job cuts report, which counts corporate layoff announcements, fell to 50349 for the week. That’s down from 181671 a year ago so layoffs have definitely eased. Not much in the way of hiring intentions though.
Jobless Claims: New claims fell 5000 to 457000 which continues the positive trend. I have said previously that when claims fell below 500,000 we would start to see some job growth. That may be true (see the non farm payrolls report) but to see robust job growth, claims will need to keep falling to below 350,000.
ISM Non Manufacturing Index: Not nearly as positive as the manufacturing version released earlier in the week. The overall index fell to 48.7 from 50.6 the previous month. The new orders index was positive at 55.1 but the employment index was only 41.6. A very mixed report.
Non Farm Payrolls: Payrolls fell by 11,000 jobs while the unemployment rate fell to 10% (gosh it feels odd to write “fell to 10%”). There were significant upward to revisions to the last two months data. Obviously, this report was much better than expected and indicates that my prediction concerning claims may be valid. Most economists were pointing to job growth when claims fell to 400,000 but I chose the higher number because it correlated better with previous deep recession like the 81-82 recession. When unemployment gets this high there is a lot of churn in the jobs market and growth can start with higher levels of claims. The household survey showed a gain of 227,000 employed and a drop of 325000 in unemployed. The difference is the change in the labor force which fell by 98000. Job gains were in the service and government sectors. Goods producing jobs fell. Average workweek rose to 33.2 hours while overtime rose 0.1 hours to 3.4. By the way the biggest drop in unemployment rate was among teenagers which have been hit particularly hard in this recession (probably due to the rise in the minimum wage). The rate is still extreme at 26.7% but that is a drop of 0.9 from last month.
Markets were mixed on the week with stocks and REITs up and commodities generally down. The employment report Friday may mark a turning point in the markets as the dollar rallied significantly and stocks were still able to manage a small gain. An improving US economy eventually had to have a positive impact on the dollar and we may be at the point. Of course a higher dollar is to some degree dependent on the Fed reaction to better US economic data and at this point, I don’t think the Fed is prepared to declare the era of zero rates over. Anyway, we didn’t do quite enough damage to the existing trends on Friday to declare a change – yet.
The dollar index had a big up day Friday, but the trend is still down. I suspect we are in for a period of sideways action. Trends like this don’t usually change that quickly:
The dollar rally knocked gold down, but again there is no change in trend yet:
Platinum also took a hit Friday:
Foreign bonds are back to the uptrend line. Action in the next few days may be decisive:
US REITs are a bit under the radar screen for most people but have performed very well this year. I’ve been more attracted to foreign real estate, but we always have an exposure to US REITs as well. Obviously, it should have been higher than it is:
The Japanese announced a major new quantitative easing program last week. The effect on the Yen was pretty dramatic:
And last for this week, a currency that doesn’t get a lot of attention – the Mexican Peso. After a Fitch downgrade a couple of weeks ago, the currency has now broken out to the upside: