The Fed's so-called mandate of "full employment and price
stability" is pure malarkey
Mike Whitney -- Information Clearing House
July 22, 2009 -- A
careful reading of Federal Reserve chairman Ben Bernanke's op-ed in
Tuesday's Wall Street Journal, shows that Bernanke thinks the economy
is in a deflationary spiral that will last for some time.
Ben Bernanke:
"The depth and breadth of the global recession has required a highly
accommodative monetary policy. Since the onset of the financial crisis
nearly two years ago, the Federal Reserve has reduced the interest-rate
target for overnight lending between banks (the federal-funds rate)
nearly to zero. We have also greatly expanded the size of the Fed’s
balance sheet through purchases of longer-term securities and through
targeted lending programs aimed at restarting the flow of credit.... My
colleagues and I believe that accommodative policies will likely be
warranted for an extended period."
No talk of recovery here; just a continuation of the same radical
policies that were adopted after the collapse of Lehman Bros. The only
sign of improvement has been in the stock market, where Bernanke's
liquidity injections have jolted equities back to life. The S&P 500
is up 40 percent since March. Conditions in the broader economy have continued
to deteriorate as unemployment rises, the states find it harder to
balance their budgets, and the real estate bubble (commercial and
residential) continues to unwind. The Fed's policies are Bernanke's way
of saying, "The states are not the country. The banks are the country."
The public seems slow to grasp this message.
Bernanke's op-ed is a public relations ploy intended to soften the
effects of his visit to Capital Hill today. Congress wants to know the
Fed chief's "exit strategy" for soaking up all the money he's created
and avoiding inflation.
Bernanke again:
"The exit strategy is closely tied to the management of the Federal
Reserve balance sheet. When the Fed makes loans or acquires securities,
the funds enter the banking system and ultimately appear in the reserve
accounts held at the Fed by banks and other depository institutions.
These reserve balances now total about $800 billion, much more than
normal. And given the current economic conditions, banks have generally
held their reserves as balances at the Fed."
This is the core issue. The Fed has built up bank reserves by accepting
(mainly) mortgage-backed garbage (MBS) that is worth only pennies on
the dollar. Bernanke assumes that investors will eventually recognize
their mistake and begin to purchase these toxic assets at a price that
won't bankrupt the banking system. It's a complete hoax and everyone
knows it. In essence, Bernanke is saying that he is right and the
market is wrong, which is why he continues to conceal the fact that he
provided full-value loans for collateral which the banks will never be
able to repay. The costs, of course, will eventually be shifted onto
the taxpayer.
Bernanke knows that the country is in a Depression and that inflation
won't be a problem for years to come. It's all politics. Bank lending
is way off and the shadow banking system -- which provided more than 40 percent of
consumer credit via securitization -- -is still on life-support. At the
same time, the savings rate has spiked to 6.9 percent -- a 15 year high -- as
consumers cut back on spending to service their debt-load, and try to
make up for the $14 trillion in lost household wealth since the crisis
began. If the banks aren't lending and consumers aren't spending,
inflation is impossible.
Bernanke's zero-percent interest rates and lending facilities have been
a total bust. The velocity of money (how fast money changes hands) has
stopped. Retail is down 9 percent year-over-year. Imports/exports down 20 percent.
Rail freight and shipping at historic lows. Travel, manufacturing,
hotels, restaurants are all in the tank. The economy is flat-lining.
Only Goldman and JPM have done well in this environment, and that's
because the White House is a Goldman-annex.
The only Bernanke policy that's worked so far has been flooding the
market with money, which has has sent equities into orbit while the
real economy continues to twist in the wind. Here's how former hedge
fund manager Andy Kessler summed it up last week in the Wall Street
Journal:
"By buying U.S. Treasuries and mortgages to increase the monetary base
by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly
into the stock market but he didn't have to. With nowhere else to go,
except maybe commodities, inflows into the stock market have been on a
tear. Stock and bond funds saw net inflows of close to $150 billion
since January. The dollars he cranked out didn't go into the hard
economy, but instead into tradable assets. In other words, Ben Bernanke
has been the market." (Andy Kessler, "The Bernanke Market" Wall Street
Journal)
Bernanke's quantitative easing (QE) has pumped up bank stocks enough so
that Geithner won't have to grovel to Congress for another TARP
bailout. The banks now have access to the capital markets and can
withstand the stormy downgrades ahead. Thus, the nagging problem of
toxic assets has been solved (temporarily) just as Bernanke had planned.
Bernanke will continue to monetize the debt (by purchasing more U.S.
Treasuries and MBS) until securitization is restored and there are
signs of life in the failed wholesale credit-system. That's the real
objective; to keep credit expansion in the hands of privately-owned
financial institutions that are beyond the reach of government
regulation. The Fed's so-called mandate of "full employment and price
stability" is pure malarkey. The Fed's job is to provide an endless
stream of cheap capital to Wall Street. By that standard, Bernanke has
performed his task admirably.
LINK