Bernanke

In Offense of Ben Bernanke, Part III: Bernanke, Blinder, and Underpants Gnomes

by Alex Schibuola on December 14, 2010

in Economy

Part I: The Fed is Competent?
Part II: The Natural Rate of Unemployment
Part III: Bernanke, Blinder, and Underpants Gnomes

Professor Blinder writes:

Here’s the first Economics 101 question: When central banks seek to stimulate their economies, how do they normally do it? If you answered, ‘by lowering short-term interest rates,’ you get half credit. For full credit, you must explain how: They create new bank reserves to purchase short-term government securities (in the U.S., that’s mostly Treasury bills). Yes, they print money. [Italics added]

But short-term rates are practically zero in the U.S. now, so the Fed wants to push down medium- and long-term interest rates instead. How? You guessed it: by creating new bank reserves to purchase medium- and long-term government securities.

I’m afraid that’s only partial credit, though. What the Federal Reserve has yet to elaborate on is why this “stimulates” the economy. You should know, Professor Blinder, that investment appears to be interest-rate inelastic. You wrote this in your journal article, “Is There a Core of Macroeconomics That We Should All Believe?”

The claim that QE2 is supposed to “stimulate the economy” bothers me. For those of you who watch the TV show, South Park, it reminds me of the underpants gnomes episode. The gnomes collect underpants and give the following explanation for why:

Underpants Gnomes:

Phase 1: Collect underpants.

Phase 2: ???

Phase 3: Profit!

Bernanke and Blinder:

Phase 1: QE2.

Phase 2: ???

Phase 3: Economic recovery!

I still want a better explanation for Phase 2… from the Fed. They say they want to be clear and explain their thinking, but I have yet to hear an explanation other than that.

If you want a more sane explanation for QE2: one could point out that many of the Fed’s current assets are maturing. This means that cash will be flowing back into the Fed and they want it out. Thus, the Fed is trying to keep its balance sheet steady rather than expand it per se.

I surmise that they intend to raise the opportunity cost of holding Treasuries, thus making private sector debt and equities relatively more enticing to hold. Then banks go back to private lending, commercial paper, corporate bonds, etc., and investment expands. So it looks like the people at the Fed have discovered a free lunch. But as ECON101 teaches us, Professor Blinder, There ain’t no such thing as a free lunch!

Enron-like Fraud by Government in Bailouts

by Hans Bader on April 24, 2009 · 1 comment

in Bailout Watch, Economy, Politics as Usual, Precaution & Risk, Stimulus to Nowhere

The federal government is perpetrating Enron-style fraud against investors in its bailouts of Merrill Lynch and Freddie Mac.

The Treasury Secretary and Chairman of the Federal Reserve forced the CEO of Bank of America to merge his bank with failing Wall Street investment bank Merrill Lynch — and pressured him to keep the resulting losses secret, violating investors’ rights under the securities laws.

“Federal Reserve Chairman Ben S. Bernanke and former Treasury secretary Henry M. Paulson Jr. threatened to remove the management and board of Bank of America if it backed out of its deal to acquire ailing investment house Merrill Lynch late last year, according to documents released yesterday by New York Attorney General Andrew M. Cuomo. Kenneth Lewis, Bank of America’s chief executive, told investigators he wanted to stop the merger because “devastating losses” at Merrill would be detrimental to his company, the documents show. But the threat from Paulson changed his mind. . .The documents highlight the lengths to which government and industry officials have gone to prop up the global financial system — even at the expense of not disclosing the severity of troubles to shareholders. In another instance, Freddie Mac resisted its federal regulator in reporting to shareholders that the government’s management of the company was undermining its profitability, according to sources.”

On Wednesday, the CFO of mortgage giant Freddie Mac committed suicide. The Obama Administration forced Freddie Mac to run up billions of dollars in losses to bail out mortgage borrowers, including irresponsible high-income households.

Ironically, although the government took over direct control of Freddie Mac in the name of reducing its risky mortgage practices, it ended up doing just the opposite. The government made Freddie run up even bigger losses buying risky loans in an effort to artificially stimulate lending. In conduct reminiscent of Enron, federal regulators tried to prevent Freddie from disclosing to the public and the SEC how Obama’s mortgage bailout was forcing it to lose even more money.

The Government’s politically-motivated mismanagement of Freddie Mac shows why recent proposals to effectively nationalize the banks are a bad idea. Why should we trust the Administration to turn around failing companies, when the Congressional Budget Office says that the Administration’s $800 billion stimulus package will actually shrink the economy in the long run?

Economists Give Obama Failing Grade; New Bailouts Demanded As Obama Breaks Promises

by Hans Bader on March 12, 2009 · 2 comments

in Bailout Watch, Economy, Employment, Labor, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Stimulus to Nowhere

Obama gets a failing grade from economists. “U.S. President Barack Obama and Treasury Secretary Timothy Geithner received failing grades for their efforts to revive the economy from participants in the latest Wall Street Journal forecasting survey.”

Not content with the $8 trillion the Obama Administration has already committed for bailouts, pork, and welfare, Treasury Secretary Geithner, who was confirmed by the Senate despite cheating on his taxes, wants to spend $100 billion on IMF loans to bail out struggling nations in Eastern Europe and elsewhere — even though many European “officials doubt the wisdom of falling deeply into debt to create jobs and halt the plunge in consumer demand, as the United States is doing.”

Wal-Mart’s stock rating has been downgraded due to the possible passage of card-check legislation supported by Obama, which could lead to “diminished workforce flexibility” and pay based on “seniority” rather than merit, as a result of compulsory arbitration provisions contained in the bill. (The bill could also lead to intimidation of workers). The stock market has also fallen this year as investors have become disenchanted with the Administration.

The Federal Government may face increasing calls to bail out state governments, which have run up trillions of dollars in unfunded, and incredibly generous, pension liabilities to state employees in contracts negotiated with their unions using deliberately-deceptive accounting.

Obama broke his campaign promise to curb earmarks by signing a bloated, $410 billion appropriations bill that contained 8,500 earmarks totaling $7.7 billion. It also broke his campaign promise of a “net spending cut.”

Obama broke seven campaign promises dealing with transparency and clean government in signing the economy-shrinking, $800 billion stimulus package, much of whose contents were secret until shortly before Congress voted on it, and whose 1400 pages went unread by most Congressmen who voted on it.

Earlier, Obama repeatedly broke his promises not to sign bills without first giving the public five days to comment. “Too often bills are rushed through Congress and to the president before the public has the opportunity to review them,” Obama’s campaign Web site stated. “As president, Obama will not sign any nonemergency bill without giving the American public an opportunity to review and comment on the White House Web site for five days.”

But Obama has repeatedly signed laws without providing such notice, such as the Ledbetter Fair Pay Act, his very first law, which he signed less than 2 days after it was passed by the House, with no opportunity for comment. Moreover, in signing the Ledbetter law, Obama made false claims about both the facts of the Supreme Court case that the Ledbetter law overturned, and what the Supreme Court actually held in that case.

The Washington Post‘s David Ignatius, finally losing patience with Obama, criticizes the Administration’s focus on anything but fixing the economy’s underlying ills, calling its economic policies a “phony war” characterized by economic “mismanagement.” “Economist David Smick had it right in The Post this week when he said the administration had a three-pronged strategy: delay, delay and delay. The administration announces a rescue package but doesn’t deliver details; it promises budget discipline but saves the hard decisions for later,” while stacking the Obama “administration with politicians and former government officials,” who lack “experience managing large organizations in crisis.”

Like us, Michael Barone says that the Treasury Department and Fed Chairman Ben Bernanke, through their arbitrary, “ad hoc” approach to the financial crisis (such as their unpredictable and inconsistent decisions about which companies to bail out), have exacerbated the current financial crisis by leaving “players in the financial markets full of uncertainty and fear.”

Fed Chairman Uses Incompetent Ratings Firms for Bailout

by Hans Bader on December 18, 2008 · 1 comment

in Bailout Watch, Economy, Legal, Precaution & Risk

“Federal Reserve Chairman Ben S. Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities. The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion” based on appraisals by the bond rating agencies Moody’s, Standard & Poor’s, and Fitch.  So reports Bloomberg News.

Before the financial crisis, we repeatedly warned in vain that these ratings agencies were failing in their job, and that regulations that prevented independent companies from competing with them should be eliminated.  But the Fed continues to rely only on these firms, and shield them from competition, bowing to their special status as the  “major nationally recognized statistical ratings organizations,” rather than relying on independent ratings firms, such as those accountable to investors.

“Policy makers should take the opportunity to spearhead a change in the system by elevating the independents, said Alex Pollock, a resident fellow at the American Enterprise Institute in Washington.  Unlike the top three, they are paid by investors who subscribe to their services, rather than by businesses whose products they rate. That makes them less likely to grade securities favorably, Pollock said.  ‘Why would you limit this to the dominant ratings agencies that helped get us into this situation?‘ he said.”

“It is foolhardy” to rely on the major rating agencies, said Keith Allman, chief executive officer of Enstruct Corp., which trains investors. The major raters issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis.  “They’re outsourcing the credit assessment to a group of people whose recent performance has been unbelievably bad,” said Allman. “If their goal is to not take a loss on these assets, they should be hiring independent analysts.”

Fed Chairman Ben Bernanke should be removed from office.  He is destroying the value of the dollar and discouraging investment in the U.S. through his reckless printing of money and buying up of risky and worthless securities at taxpayer expense.  He has impoverished savers and punished thrift through his irresponsible interest rate-cuts and giveaways to banks.  He has promoted irresponsible bailouts for deadbeat mortgage borrowers.  And he has ignored statutory limits on Federal Reserve authority through a succession of failed bailouts that are both radical and unauthorized, legally justifying his removal from office.

The Value of a Dollar

by Hans Bader on December 18, 2008 · 3 comments

in Bailout Watch, Economy, Legal, Precaution & Risk

“The dollar yesterday staged one of its biggest one-day drops against the euro and fell to a 13-year low against the Japanese yen as near-zero interest rates and the Federal Reserve’s plan to print vast sums of cash dilute the value of the greenback,” reports the Washington Post today.

“On Monday, the Fed cut . . . the federal funds rate, at which banks lend to each other, from 1 percent to a target range of 0 percent to 0.25 percent, and effectively vowed to print as much money as it needs to try and pull the United States from a worsening recession.”

“In response, investors are dumping the dollar and buying up other currencies.  If the dollar’s fall is unchecked, it could jeopardize the long-term faith of foreign investors in the value of American currency and could cause foreign investors to dump U.S. stocks and other assets,” and cut investment in the U.S.

Foreign investors in the U.S., like Switzerland’s Julius Baer family of mutual funds, have long criticized the Fed’s easy-money policies, which helped spawn the mortgage bubble and financial crisis, and now are destroying the value of the dollar in a vain effort to push back the day of reckoning for years of excessive borrowing that occurred in what Julius Baer calls “The Age of Decadence.”  The Fed’s absurdly low interest rates are impoverishing savers and punishing thrift and responsibility.

The Fed’s frantic efforts to bail out the economy by printing money and attempting to inflate the money supply have been colossal failures to date, and some of its bailout measures have exceeded its legal authority.  Undaunted, the Bush Administration is now pushing a unilateral automaker bailout that lacks Congressional authorization and construes the financial bailout statute in an unconstitutional manner.

Thanks to his reckless bailout policies, which have exposed taxpayers to hundreds of billions of dollars in losses, and exploded the national debt, Fed Chairman Ben Bernanke will go down in history as the worst Fed Chairman in generations.  His record is far worse than even infamous predecessors like Arthur Burns, the spineless Fed Chairman who gave in to Richard Nixon’s pressure to run the printing presses to temporarily prop up the economy to get Nixon re-elected in 1972, resulting in the severe recession of 1973-75 and the “stagflation” of the 1970s.

Bailouts Unconstitutional Failures

by Hans Bader on December 17, 2008 · 9 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk

Jacob Sullum’s recent column argues that Bush’s auto bailout plan is an unconstitutional violation of separation of powers.  We earlier argued that it was either illegal or unconstitutional. 

Meanwhile, the Federal Reserve, with little public awareness, is attempting a financial system bailout far bigger than Congress ever authorized, resulting in one failure after another, as economics professor Jeffrey Rogers Hummel explains in a recent editorial.  “All the emergency initiatives of both the Fed and the Treasury since the subprime problem first emerged have not merely proved stellar and consistent failures. As Anna Schwartz . . . and other economists have suggested, the thrashing about of Fed and Treasury policy has undoubtedly made the financial situation worse.”

Professor Hummel describes how an unhinged Federal Reserve has “opened the monetary floodgates,” to the point where “Federal Reserve Bank credit [has] doubled to around $1.8 trillion.”  That massive  “increase of the monetary base . . . heralds future inflation.”  And the Fed is using money from the Treasury to buy up risky securities, putting the taxpayers at great risk:  

“Essentially, the Treasury is now issuing extra securities to borrow money from the economy, then loaning the money to the Fed in these special deposits so that Bernanke can re-inject it to make his bailout purchases of various securities, all without increasing the monetary base. In other words, what the infamous bailout act permitted the Treasury to do directly is something it had already started doing indirectly through the Fed to the tune of half a trillion. All in the name of easing a tight Treasury market.

This means that the total bailout is not the $700 billion that Congress appropriated, but at least $1.2 trillion. And that figure doesn’t include the Fed’s mid-October promise of $540 billion to bail out money market funds, which if not covered by the Fed’s sale of other assets, will require either further monetary increases or further Treasury borrowing. Thus we now have the worst of both worlds: a massive bailout financed both by Treasury borrowing (in order to avoid inflation) and a Federal Reserve increase of the monetary base (which heralds future inflation anyway).

Of the $1.2 trillion increase in federal government borrowing, at least half took place within the space of a month. This sudden 25 percent increase in the outstanding national debt qualifies as the most dramatic peacetime experiment in fiscal stimulus the U.S. government has ever implemented. If Keynesian theory were correct, the economy should have been well beyond the reach of any potential recession by the end of October. But how many economists are going to acknowledge this striking empirical refutation of the fiscal policy they hold dear?

This enormous increase in government debt may at least partly explain the sudden stock market collapse after the bailout passed.”

The Fed’s increasingly radical bailout measures have been described by sympathetic journalists as “creative.”  That polite euphemism disguises the fact that many of the Fed’s bailout measures have been illegal and lacking in any statutory authorization.  Federal Reserve Chairman Ben Bernanke should be removed from office for usurping powers not granted to the Fed by any federal law. 

Even recent Fed actions that are perfectly legal — like its unprecedented cut in the federal funds rate to virtually zero – are likely to be completely ineffective in reviving the economy, even as they discourage responsibility and thrift.

The Treasury Department, meanwhile, is using financial system bailout money for purposes Congress never intended, like buying up ownership shares in banks, leading even some former supporters of the bailout to protest that they were deceived by the Bush Administration.

The Least Objectionable Legislator Award

by Wayne Crews on November 19, 2008 · 2 comments

in Bailout Watch, Economy, Energy, Mobility, Personal Liberty

My occasional “Least Objectionable Legislator Award” today goes to Michele Bachmann (R-MN) for a solid statement at today’s hearings on the Bailout on Wheels, otherwise known as the House Financial Services Committee Hearing on “Stabilizing the Financial Condition of the American Automobile Industry.” From the statement:

It’s only appropriate that we again total the taxpayers’ current bailout tab: $29 billion for Bear Stearns, $200 billion for Fannie and Freddie, $300 billion to expand the Federal Housing Administration (FHA), $150 billion for AIG, and $700 billion for the Paulson Plan — plus $110 billion in sweeteners to pass that plan.

Secretary Paulson and Chairman Bernanke chose to start this bailout mania over eight months ago. Since then, the American people have been told over and over that the woes in our financial markets will subside. Yet after bailing out bad decision-makers time and again to the tune of over a trillion dollars, our financial markets remain in turmoil.

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BREAKING NEWS: Bailout Vote Fails in House

by Richard Morrison on September 29, 2008

in Bailout Watch, Economy, Precaution & Risk

The House of Representatives just voted down the $700 billion corporate finance bailout, despite earlier urging from President Bush to push the measure through. Look for in depth analysis from our very own John Berlau and the rest of the policy team as the day progresses. Read CEI’s roundup of the continuing finance crisis (and sign up for email updates) here.

NEW: John Berlau responds (and speaks!) in reaction to today’s vote. Updated post and audio clip here.