The Bernanke Doctrine

Has Bernanke quieted his critics? That what the New York Times says in With Bold Steps, Fed Chief Quiets Some Criticism.

Over a frantic weekend in mid-March, Ben S. Bernanke rewrote the rule book as chairman of the Federal Reserve. Like a military commander applying overwhelming force, he took steps then and over the next two months that some at the central bank are now calling the Bernanke Doctrine.

Today, Mr. Bernanke appears to have quieted many critics, especially on Wall Street, who earlier said he was overly academic and slow to react to market conditions.

“It has been a really head-spinning range of unprecedented and bold actions,” said Charles W. Calomiris, professor of finance and economics at Columbia Business School, referring to the Fed’s lending activities. “That is exactly as it should be. But I’m not saying that it’s without some cost and without some risk.”

Head Spinning Analysis

Anyone professor of finance who thinks "a really head-spinning range of unprecedented and bold actions is exactly as it should be" should be fired for incompetence.

The Fed is the problem. We do not need "unprecedented and bold actions". It was "unprecedented and bold actions" that created the housing (credit) bubble in the first place!

The overflow of unwarranted "Bernanke love" in the Times article was sickening sweet, kind of like dipping a taffy apple in pure sugar to sweeten it up. Here is another quote:

They say that crisis makes the man,” said Senator Charles E. Schumer, Democrat of New York and the chairman of the Joint Economic Committee. “He’s made believers out of people who were just not sure about him before.”

He did not make a believer out of me. We need the Fed to be disbanded. I made the case in Want To Fix The Fed? Get Rid Of It and Fed Uncertainty Principle.

Bernanke Like a Military Commander Applying Overwhelming Force...

I am not the only one nauseated by the Bernanke lovefest. Inquiring minds should consider Professor Kevin Depew's post Five Things You Need to Know: The Bernanke Doctrine.

Bernanke Like a Military Commander Applying Overwhelming Force...

Look, we didn't just make that headline up. It comes directly from a quite flattering New York Times story that made the front page of that newspaper yesterday:

"Like a military commander applying overwhelming force, he took steps then and over the next two months that some at the central bank are now calling the Bernanke Doctrine."

The Bernanke Doctrine? What, exactly, is this so-called "Bernanke Doctrine"? Well, in May of last year we described the "Bernanke Doctrine," though we referred to it by the decidedly less catchy name: The Bernanke Put.

The "Bernanke Put" was based on a May 17 speech Bernanke delivered called, appropriately enough, "The Subrpime Mortgage Market."

The May 17 2007 speech is a fascinating read, especially In light of the Times article, which defines the "Bernanke Doctrine" as "the overpowering use of monetary policies and lending" to handle economic crises. Clearly, last year at this time the Fed Chairman had a much different doctrine.

"Having emerged more than two decades ago, subprime mortgage lending began to expand in earnest in the mid-1990s, the expansion spurred in large part by innovations that reduced the costs for lenders of assessing and pricing risks," Bernanke said a little more than a year ago. "In addition, lenders developed new techniques for using [credit scoring] to determine underwriting standards, set interest rates, and manage their risks," he added.

Well, it may have appeared that way to the Fed chairman a year ago, but we now know (actually, we knew then) that there wasn't exactly a whole lot of "managing risk" going on. There appears not to have been any risk manging going on.

Bernanke concluded in his speech last year that, "[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

But, in the event that belief was wrong, and it was, his secondary conclusion in the speech was this: "Markets can overshoot, but, ultimately, market forces also work to rein in excesses. For some, the self-correcting pullback may seem too late and too severe. But I believe that, in the long run, markets are better than regulators at allocating credit."

Apparently, the long run has changed. Today, we have an ongoing alphabet soup of Bernanke Fed actions specifically designed to circumvent market pricing of devalued assets. Today, we have a Fed that single-handedly engineered the JP Morgan (JPM) "takeover" of Bear Stearns (BSC). In short, today we have the exact opposite of what Bernanke publicly advocated as the right medicine for allocating credit and reining in excesses.

What may be worse is that the "Bernanke Doctrine," described in reverential terms by the Times as "bold steps," and by fellow central bankers as "alter[ing] the framework for how central banks operate in a crisis, is neither bold nor new, and hasn't actually altered anything about how central banks operate.

Every step taken by the Fed over the past nine months has a precise analog and origin in 1930s banking policy. Every one. Meanwhile, even as today's central bankers sit around patting themselves on the back for "averting the crisis," it's actually continuing. We're reminded of something we once read, a quote many years ago, in the Times actually, about the Great Depression: "Just when we thought it was over, it was really only beginning."

Challenge To The Fed

Speaking of Fed Governor Mishkin's retirement in CHALLENGE TO RICHARD FISHER Karl Denninger at Market Ticker had this to say:

Good riddance Mishkin. You go back to teaching at Columbia, where you can give "A"s to "students" who parrot your nonsense (not to mention dangerous) economic theories. Never mind that you had a two year leave of absence, those are routinely extended, and your appointment was for fourteen years.

A rat scampering off the ship as it slowly settles into the depths of the sea? Hmmm.... Oh Mr. Smith, er, Bernanke? Have you locked yourself in the wheelhouse yet?

That sentiment on Mishkin is exactly what I expressed in Infighting At The Fed.

And in reference to Fed Governor Richard Fisher's speech on inflation and government debt, Denninger commented:

Really Richard?

Readers really ought to click that link up above and read the entire treatise. Its good, and lays on the table, without BS or games, exactly what America faces if we don't cut the crap out with entitlement spending - and deficits in general.

To be blunt, he points out that we could cut all discretionary spending (including the military), increase tax revenues (not rates, revenues!) by nearly 70%, or cut benefits by a net aggregate of nearly $100 trillion dollars.

That's right, we're in the hole as Americans to the tune of one hundred trillion dollars.

Either Mr. Fisher suddenly had a "come to Jesus" moment, in which case this Ticker is an open, public challenge to him to prove it, or he's lying.

We all know the answer, and Denninger nails it. His post is too good and too long to excerpt so I suggest reading it all.

Inflation Targeting

What the hell good is inflation targeting when the Fed and the ECB both ignore it? Actually it is complete nonsense whether they ignore it or not. I have commented on that idea early and often. Inquiring minds may wish to consider the Fallacy of Inflation Targeting.

Ben Bernanke is in favor of inflation targeting at 2% a year. Considering he means prices, he sure is a long ways off, at least as measured by the CPI or PPI.

But let's assume the Fed could magically meet that target. Please consider.

Inflation Targeting at 2% a Year

It's not just the Fed hiding in action, the ECB is lock step all the way with its mandate of "price stability".

ECB Price Stability Mandate

Please consider ECB Clear on Mandate to Maintain Price Stability, Trichet Says.

"Our mandate is clear: maintain price stability in the medium term and be credible in this exercise in a way that inflation expectations are firmly anchored," he told the Sunday edition of El Pais.

The ECB defines price stability as keeping inflation just below 2 percent "over the medium term" and has struggled to meet that goal since taking charge of monetary policy in 1999. The central bank left its key rate at 4 percent on May 10 to try to curb the jump in energy and food prices. Still, the inflation rate in the 15-nation euro economy rose to 3.6 percent, the ninth month it held above the ECB's target.

Jawbone Not Working

Just like the Paulson "strong dollar policy" that is the laughing stock of the world, the ECB has no credibility either. Denninger talked about this in Mendacious Monday.

The price inflation rate is roughly double your target, you have left the overnight call rate at 4% for months, and you're "meeting your mandate."

Liar.

Just like Fisher. Say one thing, do another.

Heh guys, have you figured out that "The Jawbone" has stopped working yet?

Mandate Is Clear, Follow Through Is Lacking

The ECB like the Fed is missing in action when it comes to price stability. The reason is simple: The Fed, the ECB, and central bankers in general are simply not in control of the economy.

In a fiat world where money can be borrowed into existence at any time, by any country, and in a global economy where commodities like oil are in tight supply, it is virtually impossible for inflation targeting to work. The irony is that inflation targeting is an extremely poor idea in the first place.

Rather than admit the obvious, excuse after excuse is made as to why the CPI and other price measures are to be ignored. The entire system is fraudulent, starting with the Fed. How long this all holds together is anyone's guess. In the meantime, please remember the "Bernanke Doctrine" is nothing more than a revved up "Greenspan Put" in disguise. Bernanke is simply more desperate than Greenspan ever had to be. This lovefest won't last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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