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Questions that need to be answered

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March 01, 2011 – Comments (12)

Excellent post by TPC. I think this is a very legitimate and reasonable set of questions that deserve honest answers.

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QUESTIONS THAT NEED TO BE ANSWERED
1 March 2011 by Cullen Roche

http://pragcap.com/questions-that-need-to-be-answered

Watching the Congressional hearings are often painful.  These lawyers in Congress are simply not prepared to match someone of Ben Bernanke’s economic intellect.  You can almost read his mind as he smirks through his beard at some of the questioning.  With that said, I think there are some very serious questions that the citizens of this nation deserve answers to.  The following is what I would ask if I were allowed to sit on the panel:

    1)  Dr. Bernanke, it is clear that your large scale asset purchases have resulted in substantial moves in many markets.  You are often quick to note that equity prices have surged as a result of your LSAP.  Can you please explain to the committee why you also ignore the continuing decline in home prices (the US consumers largest asset) while also claiming no involvement in the surge in commodity prices?  There is a clear contradiction in this commentary which needs to be addressed.

    2)  Your commentary matters a great deal to market participants.  As you know, you can move markets substantially.  Therefore, it is possible that your commentary can create quite a bit of price instability and contribute meaningfully to market volatility.  To what degree do you believe speculation has played a role in commodity prices?  While I believe you are right to say that monetary policy and foreign exchange has not substantially contributed to turmoil abroad do you agree that there is a substantial speculative element involved in the recent surge in food prices that could be directly attributed to this belief that you are “printing money” and encouraging a “wealth effect” via asset price increases?

    3)  Dr. Bernanke, it is clear that total loan growth has not expanded since the LSAP was initiated (see total loans at all commercial banks).  It is also clear that credit conditions for homeowners and households have not been alleviated as mortgage rates and interest rates in general continue to rise.  In fact, it was less expensive to obtain a mortgage before you initiated your purchase program.  Since mortgage debt represents 75% of consumer debt it would make sense that you attempt to alleviate pressures on households.  Why has this program failed to achieve this goal of helping households more broadly and reducing the strains in the housing market?

    4)  Dr. Bernanke, it is clear that the Fed’s policy tool kit works almost entirely through the banking system by encouraging the private sector to take on more debt.  At a time when household debt to disposable income remains at 115% don’t you believe you are promoting further indebtedness at the household sector – the exact same thing that caused this crisis to begin with?  If so, why should we expect such policy to result in anything other than a future debt crisis?

    5)  Dr. Bernanke, I think we can all agree that you have failed to control the long end of the yield curve via your LSAP.  Had you targeted a specific rate as opposed to a size you might have had better control of the curve, correct?  This is what you do with the short end of the curve and the Fed Funds Rate.  If you had truly desired to control the long end of the curve wouldn’t this have been a superior approach?  Instead, you have allowed the market to control long rates and it has exposed your total lack of control over the long end of the curve.  Do you not see this as a fatal flaw in the LSAP since its inception?

    6)  Dr. Bernanke, as you likely know, a rise in equity prices represent a nominal increase in wealth.  Do you believe it is wise to encourage speculation in equity prices when there is the potential that the fundamentals of the underlying assets might not be directly correlated to such price increases?  If this is the case, then aren’t we merely creating an environment that is ripe for another equity bubble as investors purchase equities under what is now known as the “Bernanke Put”.  Don’t you think this is putting the cart before the horse – that is, fundamentals should drive equity prices as opposed to hopeful and speculative purchases based on false promises directly promoted by the Central Bank?

    7)  Can you please comment on this development known as the “Bernanke Put”?  Is this a positive development for the United States economy? The “Greenspan Put” is often seen as a significant contributing factor to the turmoil of the last 20 years.  Do you agree that your resurrection of this “put” is a negative development?

    8)  Can you please comment on the ever increasing financialization of the United States?  We have become, in many ways, slaves to the too big to fail (now too BIGGER to fail thanks to your actions during the crisis) banks and their needs.  Your institution is clearly centered around maintaining a healthy banking system.  Tim Geithner recently commented that we need to be at the forefront of what is a growing global financialization.  Do you agree with his commentary?  Are you at all concerned by the increasing dependence that our economy has on the banking system?

    9)  Thank you for your attempts to stabilize the US economy during these trying times.  I worry  at times that we might be asking too much of the Central Bank.  You have a dual mandate of price stability and full employment.  It is clear from recent economic performance that you have failed to meaningfully contribute to the targeted goal of full employment.  It is my contention that Fed policy is a particularly blunt instrument at the zero bound so it is not surprising that these policies have failed to make a substantive difference with regards to employment.  Do you believe this committee asks too much of the Central Bank?  In other words, do you believe you are ill-equipped to deal with such a broad mandate?

    10)  Have we done enough to help Main Street during this crisis?  Your policies have been particularly focused on the banking system.  I think we can all agree that you have succeeded to a large degree.  Wall Street bonuses are at record highs and the banks are raking in record profits again.  Main Street, however, remains mired in a recession.  Do you agree that you misdiagnosed this household crisis as a banking crisis and that we might be in a better position today if the US government had been more focused on helping Main Street and less focused on bailing out Wall Street?

12 Comments – Post Your Own

#1) On March 01, 2011 at 2:18 PM, lquadland10 (< 20) wrote:

Question. In the 70's we had about an 18% intrest rate. 10% unemployment. Now we have 0% intrest rate and 10% unemployment. So my question is how much better is the standard of living now compared to then?

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#2) On March 01, 2011 at 2:57 PM, truthisntstupid (93.47) wrote:

My answer to comment #1 is in comment #30 here

http://caps.fool.com/Blogs/the-world-wont-end-for-real/546567

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#3) On March 01, 2011 at 3:07 PM, rfaramir (29.33) wrote:

I don't know about intellect, but in terms of economic common sense, Bernanke has less than almost anyone in the nation, except for some in Congress. His education is largely mis-education. For your choice of comparison, you found a very low bar.

I agree with a few statements from this screed: 

#4 is right on, his policies will lead, obviously and necessarily, to a debt crisis.

#6, correct, he is creating another bubble, on purpose. You're also right that "fundamentals should drive equity prices".

#7 agreed, his "put" is a negative development. Moral hazard goes here.

#9 Your bowing and scraping to him is sickening. But I agree with your final assertion that he is "ill-equipped to deal with such a broad mandate".

#10 Yes, he "misdiagnosed this household crisis". In spades! He followed the advice of former Enron advisor Krugman to create a housing bubble to replace the tech bubble. On purpose!

The Fed is not a benign institution. When, after the unhealthy boom (created by the Fed) the free market tries to correct and put capital and labor to the most efficient uses (the healing bust), the Fed steps in, creates more counterfeit currency, confiscates our wealth, reduces our purchasing power, and hinders prices from seeking their proper level.

Audit the Fed, then End It! 

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#4) On March 01, 2011 at 3:45 PM, Starfirenv (< 20) wrote:

B-Man, I don't think the good Dr. would appreciate you as much as this community does.
Usual +1 rec.

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#5) On March 01, 2011 at 3:47 PM, Starfirenv (< 20) wrote:

Or Mr. Roche of TPC either.

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#6) On March 01, 2011 at 11:15 PM, checklist34 (99.73) wrote:

totally off the topic, but whats the consensus exit plan in the gold community?

I have spent the evenings for the last copule of weeks pondering this, and... on a long term log chart, gold has not gone parabolic.  It seems, when one combines

-the extraordinary interest in it amongst the general public.  This is reasonably like the tech bubble in this way. Realtor friends, wives of friends, random aunts, all ask me about gold and silver.  While ultimately "everybody" thinking the same way becomes bearish, ... the self-fulfilling prophecy factor comes into play frequently in markets.  For example, the equity markets hit their highest recent sentiments in late Dec, I think, and then carried on for 6 more weeks before some sparks began to fly.  

-the impressively zealous nature of precious metal proponents leads me to believe they won't be easily shaken out.  Gold last summer was rapidly adopted as a "good for deflation" investment when the chatter turned from inflation to deflation.

-the impressively negative mood everywhere.  For all of the talk of complacency and uber bullishness at times over the last 2 years, its hard to find.  Uncertainty doth thoroughly permeate the investment landscape.

It seems likely that a parabolic ending is probably in the cards at some point or other.  Maybe this is 1997 if we were comparing to the Nas bubble.  Maybe 1998, whatever.  

I probably lack the experience needed to really understand the formation of a bubble, but precious metals today remind me a great deal of tech/internet stock chatter among the not-investor public.  Probably at least weekly I get a call or email from some family or friend, who probably hasn't spent 20 minutes paying attentio to the stock market in their lives about gold.  "so gold is going to keep going up right?"  always their queries are predisposed to gold bullishness.  It is an impressive wall of marketing backing the stuff right now.  Stands in the local shopping mall dealing in it, new store opened in my other town with a giant sign saying they sell gold...

In 1987 there were 3 or 4 dedicated baseball card shops in the town nearest to me... there hasn't been one for 15 years... and it was probably around 88 or 89 that the damn broke on that bubble.  But my point is, I think you'll be proven right and some kind of parabolic move will be seen.   Kind of like the plunge from mid-february to early march in financial stocks... it had been years of talk about their impending doom, and a long, slow fall, then the crash after lehman, but it was really just a month, tops, right at the bottom when they went "inverse parabolic" and everybody just gave up on them.  

It would be quite a feat to ride a bubble up... and down.  I bet it was done by many in the nas bubble/pop.  

Anyway, what I'm getting at is that I have no idea how to spot a top in a bubble.  I had quit paying attention to the nasdaq and its epic move by the time it ended, and I had forgot baseball cards existed by the time all those shops closed.  

 

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#7) On March 01, 2011 at 11:17 PM, checklist34 (99.73) wrote:

It must have been 98 or, at the absolute latest early 99, when my boss at a small high-end restaurant got wind of me saving money to start a biz...

he recommended putting it into IPOs on their first day "easy way to double your money".  

I wonder if he's buying gold?  But, then, he always had all of his cash in gold trinkets.  Vases and plates and stuff, so he wouldn't count.

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#8) On March 02, 2011 at 9:06 AM, silverminer (30.49) wrote:

checklist34

Because of the predicament we're in, gold will indeed find strength in both inflationary and deflationary environments. You'll find detailed explanations of this dynamic in the archives, but in a word, the Fed's explicit policy response and record of interventions to date make that a foregone conclusion. It was not a hypothesis adopted for convenience as the mood turned more deflationary, but rather a reiteration of the initial investment thesis that brought folks like me to gold in the first place. It's QE to infinity, and it's Jim Sinclair's "Formula" as posted in 2006, all rolled into one.

Volcker had to raise interest rates above 18% to break the back of inflation in 1980, and he had the benefit of an economy that was otherwise relatively strong on multiple metrics and was able to endure that rise. You want a simple and safe exit strategy? Pick a far lower interest rate, like say 10%, and when the Fed gets there maybe you can think about reducing gold exposure. You'll be in for a long wait, because with unemployment where it is credit availability strapped at 0% effective rate, It's difficult to even conceive of a rise of that magnitude. 

Please note: I AM NOT ADVOCATING THE ABOVE AS A REAL-LIFE EXIT STRATEGY FOR GOLD. This discussion is purely for entertainment purposes only. :) A more sophisticated exit strategy will be formulated in greater detail once additional pieces of the macroeconomic puzzle are in place.

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#9) On March 02, 2011 at 9:52 AM, binve (< 20) wrote:

rfaramir,

I agree with your points #6 and #7 especially

Starfirenv,

Thanks man!

checklist34 ,

Hey man

>>totally off the topic, but whats the consensus exit plan in the gold community?

lol! You question is (perhaps unintentionally) condescending, as if all Gold investors thought exactly the same. I might turn around and ask 'what's the exit plan for the stock community?' and you would tell me 'it depends', 'investor timeframes are different depending on goal', etc.

I can't speak for anyone else, I can only speak for me.

>>I have spent the evenings for the last copule of weeks pondering this, and... on a long term log chart, gold has not gone parabolic.  It seems, when one combines

No it hasn't, that is one of the signs I am watching for. 

>>-the impressively zealous nature of precious metal proponents leads me to believe they won't be easily shaken out.  Gold last summer was rapidly adopted as a "good for deflation" investment when the chatter turned from inflation to deflation.

That is the problem with a lot of gold commentary and gold critics. As if it is only a hedge against one or the other, and then answer (when I think about it) is neither. I wrote this on another post of mine:

The problem is in the way the question is phrased. Many people assume that either inflation or deflation affects precious metals, and that's not it at all.

Consider in the 1980s, we had massive inflation. But Gold had already begun a major decline. Why? Because Volcker's policies had brought stability to the markets. Monetary policy was in a bad place, but he was starting to get things under control again (at least in comparison to the previous 10 years). Gold can fall in inflationary environments. It can also rise in inflationary environments. It can both rise and fall in deflationary environments as well.

I have rejected the 'Gold is an inflation hedge' argument for some time and that is reflected in my writings.

The reason why Gold will continue to do well is because of uncertainty. We see states calling for austerity because they are insolvent, we see policy makers in Washington clueless with how to deal with the situation, we see that when Washington does take action it is usually to affect Wall Streets best interests, etc.

I have demonstrated that QE is not inflationary. There are many things that people call inflationary that aren't. And many people are also discounting the deflatioary tendencies of consumers being in a balance sheet recession. There are a lot of deflationary headwinds. But, QE and other monetary polices of that nature causes instability. Not through money expansion, but by changing asset compositions and placing a psychological backstop: 'the Bernanke Put'. This is causing much more risk taking. This is highly unstable.

And so if Gold is a hedge against anything, it is against instability and against government decisions that are not in the interest of a smoothly functioning marketplace (policies that promote instability), regardless if the overall effect is inflationary or deflationary.

I am unconvinced that things have 'returned to normal', in either absolute or even relative terms. So I tend to think Gold will be in a bull market for some time. This doesn't mean the stock market will or has to crash either. I have shown through my long term Gold / SPX correlation charts that although Gold and Equities are mostly negatively correlated, there are signficant periods of positive correlation.This is also why looking at Gold ratio charts is so informative..

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#10) On March 02, 2011 at 1:28 PM, jesusfreakinco (29.02) wrote:

Most of us won't sell G or S until a new currency is formed or the USD has gone through some sort of revaluation.  G/S is insurance.

If you are talking paper G/S or miners, then that is another topic altogether and worth having...  However, we are a long ways off from that point IMO.

 JFC

 

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#11) On March 03, 2011 at 9:38 AM, outoffocus (23.49) wrote:

*Thunderous applause to Binve's answer to Checklist*

Well said dude. I read The Daily Pfennig (which I highly recommend if you want to gain insight on the currencies market) and Chuck Butler says the same thing about gold, that it is an "uncertainty hedge".  

That response should be copied and pasted to every gold bear or gold skeptic's commentary. 

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#12) On March 03, 2011 at 10:02 AM, binve (< 20) wrote:

outoffocus ,

Thanks! I appreciate that!

I read so much stuff, somehow I missed the Daily Pfenning. I will check it out. Thanks!..

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