Sucheta Dalal :Ben Bernanke: Another view
Sucheta Dalal

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Ben Bernanke: Another view  

October 29, 2005

We present a view on Ben Bernanke, the new Federal Reserve Chairman by Justice Litle. This is from a hugely respected investment e-zine called The Daily Reckoning.

 

Ben Bernanke: Another view

 

WE JUST GOT "BERNANKE'D"

By Justice Litle

 

The big news this week: President Bush disappointed the wags by refusing to appoint his personal tax accountant to the Federal Reserve. Instead he chose Ben Bernanke, the renowned Princeton man. With a cheery glint in his eye, a pleasing teddy-bear persona, and solid real-world experience under his belt, Bernanke is well-respected on both sides of the aisle. He is a John Roberts, not a Harriet Miers.  Thank goodness for that at least.

 

What shall we say of the future fed head? It is probably easiest to let Mr. Bernanke speak for himself, as he did in  this November 21st, 2002 speech:  

 

"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

 

That sums things up nicely, no? 

 

As the late-night infomercials say: "But wait, there's more!

 

In off-the-cuff email discussion of the Bernanke appointment, my colleague Chris Mayer called attention to this quote from a 2004 Bernanke speech:

 

"We believe that our findings go some way to refuting the strong hypothesis that nonstandard policy actions, including quantitative easing and targeted asset purchases, cannot be successful in a modern industrial economy."

 

In everyday language, "targeted asset purchases" translates to state-sanctioned purchase of private assets in the event of a crisis. Such action would not be unprecedented, even for a modern, democratic, free-market economy. Hong Kong, that bastion of bootstrap capitalism, did it openly and brazenly in 1998. (Type "Hong Kong market intervention" into Google and you will get some interesting hits.)

 

So. In Bernanke we have a man who is well respected in economic circles, readily accepted by the political establishment, and almost universally hailed by the cognoscenti as the next steady hand on the tiller. And yet this same man has talked openly of letting the printing presses rip, Latin-American style...and if that fails, letting the 8,000 pound gorilla of government wade into the private sector, nationalizing assets for the public good.   

 

I do not say this mockingly: God help us. 

 

It's easy to become agitated over the words of a single politician (and make no mistake, the supposedly "neutral" federal reserve is packed with political animals), but the reality is more complex. Greenspan presented the image of a powerful wizard, but he was always more of a showman. The same will be true of Fed Chairman Bernanke, only more so. The new Fed Head will wield immense rhetorical power, much as the old one did, but at the end of the day he is just a bagman.  

 

Fund Manager John Hussman makes a powerful argument in his piece entitled "Why the Federal Reserve is Irrelevant." It is worth reading, available here: 

 

http://hussmanfunds.com/html/fedirrel.htm

 

One of Hussman's key points is that the Federal Reserve essentially shifts assets around, employing an elaborate charade of smoke and mirrors in the process. US Dollars and US Treasuries are interchangeable, and it is the Federal Reserve's job to determine the ongoing ratio of one to the other in the marketplace. But because the Fed long ago ceded control of the fractional reserve lending system, it has minimal say in the creation of dollars beyond the monetary base. And because the Fed has zero influence when it comes to government expenditures, the total amount of Treasuries in circulation is out of the Chairman's hands also. Thus the fed attempts to manage and massage the supply of money and credit, but does not control it in any real way.  

 

At the same time, the Federal Reserve is clearly not irrelevant. The Chairman's rhetoric and stature have obvious psychological weight, the force of which is very real, and Fed positioning can strongly influence short-term market movements. In the past I have compared the Chairman of the Fed to a jockey riding a docile elephant. The key thing is maintaining the illusion of confidence and control; much of the game is psychological, for elephant and observers alike. Under normal situations, the jockey is genuinely capable of directing the pachyderm this way and that. But when real panic breaks loose? Forget it.  

 

When it comes to America's financial situation, Mr. Bernanke knows he will be weaponless at the extremes, tossed about on the wind and the waves like any mere mortal. Perhaps this is why his past speeches have talked openly of such extreme measures. Anointed as Chairman, Mr. Bernanke cannot turn down his shot at greatness... but he knows in his heart of hearts where the dark road may lead. 

 

I leave you with this pithy comment from Bloomberg Columnist Mark Gilbert: 

 

"The march of time and the shifting sands of history may yet diminish the Fed chairman's role. Waiting in the wings is someone with the potential to overshadow Bernanke, wielding even more influence over the global economy than Greenspan ever did. Step forward Zhou Xiaochuan, China's central bank governor."

 

[Joel's Note: Aside from offering you his adroit insights on many a macro economic conundrum, Justice Litle also spearheads one of the more successful financial newsletters out there; Outstanding Investments. He also thoroughly enjoys relieving your already strapped junior editor of a sly twenty every time we play poker. No matter. It is a small price to pay for an education as spouts off his investment strategies and philosophies. Spare yourself an embarrassing game of poker and head straight to Justice's profit machine right here:

 

http://www.agora-inc.com/reports/OST/WOSTF422

 


-- Sucheta Dalal