Bernanke’s remarks today did little to soothe this ruffled observer. His remarks struck me as practically dishonest in their inability to speak directly to our actual problems.
Bernanke says Fed still has arrows in quiver
WASHINGTON (MarketWatch) – The Federal Reserve has lowered interest rates just about as far as they can go, but the U.S. central bank still has plenty of available firepower it could deploy to restore financial markets to normal, Fed Chairman Ben Bernanke said Monday.
I wish that we could just get some straight talk about our actual condition, instead of this weird insistence on "restoring our financial markets to normal." This ignores the fact that they were completely abnormal. Why would we want to return there? I guess it’s this strange insistence on continually repeating the mantra that things can be "restored to normal" that’s got me unsettled.
The way I see it, there’s no "normal" to return to. Things were hopelessly out of whack before, and now they will settle into some new, different level of activity.
George Soros refers to this same process in his Theory of Reflexivity, arguing that the mainstream economic insistence that there is some sort of magic equilibrium is utterly without merit. Instead, markets reflect the interplay between human perceptions and reality. So there’s no such thing as "equilibrium." Everything is constantly in flux.
Hence, any efforts to "restore normality" are destined to fail, because there’s really nothing to return to. "Normal" doesn’t exist. If you subscribe to this theory, as I do, then Bernanke’s efforts are destined to be not only fruitless but also horribly expensive errors that are compounding the prior mistakes.
The Fed could buy Treasury notes and bonds or agency bonds in a bid to drive yields lower and "spur aggregate demand," Bernanke said. Many analysts refer to such a policy as "quantitative easing," because the Fed would target a specific amount of money to flood into the economy.
"Could?" The Fed balance sheet is already loaded with both agency and Treasury debt, and they just announced a $600 billion program for more agency debt last week. So I guess what they meant to say here was that the Fed could buy more government debt than usual.
The U.S. economy is under "considerable stress," Bernanke said, and is likely to remain weak for some time. The economy "downshifted further" after the financial crisis of September, he said.
The economy won’t be able to fully recover unless and until financial markets resume normal functioning, he said. The economic outlook is unusually uncertain, he said, because it’s difficult to know when financial markets will be healthy again. He noted some tentative signs of improvement, but other signs were worsening.
Again, this economic talk is so far off the mark that it makes me feel like I am being talked down to, as though I were a small child. This is not "considerable stress." 9/11 was "considerable stress." This is the worst economic crisis ever in our history, if the record-breaking and record-setting across-the-board declines are any indication.
I advocate a bit of honesty and truth. We can handle it. In fact, it might even be refreshing, and in an odd sort of way allow some people to conclude that we’ve turned a critical corner. As long as we continue to sugar-coat every bit of language in an attempt to "soothe the markets," I think we will find a real bottom to be perpetually elusive.
Bernanke spoke at the Greater Austin Chamber of Commerce in the Texas capital, just hours after the private National Bureau of Economic Affairs announced that the economy had entered a recession nearly a year ago.
Thanks NBER! Right on top of things, as usual. That’s a very helpful service you’ve got there, telling us we started a recession a year ago. Perhaps GM can use that information in their planning process.
Further rate cuts are "certainly feasible," but the ability of traditional monetary policy to further stimulate the economy is limited, the Fed chairman said.
Additional rate cuts? To what? Three month T-bills are currently yielding 0.00%. Hard to imagine going much lower than that. The Fed has a long history of following the market on rates, and the market is already at 0.00%.
The Fed could also expand its efforts to supply liquidity directly to markets and investors, bypassing banks and other reluctant institutions, he said.
Uh, oh. This is a very ominous statement. Let’s imagine what mechanisms he might be envisioning to "supply liquidity directly to markets and investors." All I can think of is a wire transfer or check directly from the Fed to these "markets and investors." In the case of "markets," I suspect Bernanke is talking about buying stocks. The Fed granted itself the right to perform this function about 3 months ago, and I guess Bernanke is reminding us that they may yet directly buy equities in an effort to support stock prices.
But directly to investors? All I can say there is that if you receive a check from the Fed, spend it as fast as you possibly can, as that will mark a turning point for our currency. If you don’t believe me, then we should take a road trip to Zimbabwe together, because that is exactly what their Central Bank did early on in their current inflationary crisis.