Bernanke Weekend Review
In a rare unprecedented action, the Federal Reserve Chairman Ben Bernanke took to the television airwaves over the weekend, in a deliberate attempt to defend the ongoing US Federal Reserve actions.
But, was Mr. Bernanke's intention this weekend sincere? Or alternatively, was this just a desperate attempt by the FED Chairman to hoodwink and calm angered Americans, to ensure the FED chairman will retain independent control over the secretive FED?
It is well known that in recent weeks Mr. Bernanke and the USA FED have come under increased scrutiny, criticism, and pressure, especially after the highly controversial additional $600 billion quantitative easing phase two (QE2) announcement. Mr. Bernanke has also suggested that his policies are raising the value of the US stock market, and that QE2 is not necessarily limited to just a $600 billion program.
The unprecedented amount of ongoing monetary stimulus created in the USA, is viewed by many critics domestic and international as unnecessary, and a dangerous gambit to decrease the USA currency further. Ultimately, critics say it is a highly inflationary move that will only ensure prolonged economic pain and even higher inflated prices into the future. Clearly, higher food and commodity prices are distinctly noticeable in recent weeks and months.
Worse and more recently, the US FED was forced by court order to reveal the fact that they had secretly given out over 21,000 loans all totaling over 3.3 trillion dollars since the sub-prime financial panic began.
The prime controversy over these loans was the very large amounts of loans given in hundreds of billions of dollars directed to foreign banks, and sources that would benefit foreign and USA competitors.Who gives such extraordinary power and discretion to a single man, or to a USA body that has been secret for decades and never audited?
My personal take on the television appearance having watched Bernanke this weekend, was essentially overall neutral. In other words, I did not substantially change any of my former views.
On one hand, Mr. Bernanke sounded sincere, and came across as an intelligent and patriotic American. Yet, he strongly hinted time and time again, that the unprecedented FED action was highly necessary, and that if the FED failed to act - it would be far more negligent and risky. Forensically, this comment of acknowledging high risk in his policies immediately acknowledges that the FED is deeply worried about the overall state of the USA economy.
Being a Keynesian intervening economist (versus Laissez Faire economics), Bernanke's central explanation seemed to be that the USA economy was borderline to a second or prolonged recession, and that the FED was compelled to act. He cited employment which up-ticked as recently as last Friday to 9.8% as a particularly troubling sign.
However, in my opinion having watched the Fed articulate their position closely for about two decades, most of the interview this weekend sounded much like the traditional perplexing and distracting FED speak that Greenspan and Bernanke are all too famous for.
From a pure economic perspective, anyone reading between the Bernanke lines this weekend would probably be alarmed about Bernanke's economic statements alluding to an economy that is potentially riding the cusp of another downturn. This could lead economically sensitive money managers whom were watching the interview, to commence selling stocks, or at minimum to lighten up portfolios.
My suggestion that Mr. Bernanke is hoodwinking America and my equal criticism of US politicians whom endorse such FED actions, is that monetary policy has been deceptively misused for decades. Why? Let me explain further.
Clearly, the FED has a primary fiduciary duty to protect the value of the monetary unit - above all else. To do otherwise, has obvious dire consequences for the entire nation. Both Mr. Greenspan and Mr. Bernanke have clearly failed this fiduciary duty to protect the US monetary unit.
Worse, the past easy money and prolonged sub-par interest rate policies of the FED have been foundational in discouraging savings, while at the same time allowing the gradual build up of excessive speculation, high inflation, and excessive systemic leverage on Wall Street and elsewhere.
Both the USA housing collapse and the Wall Street sub-prime collapse would have never happened in the first place, had the speculation and sub-par interest been checked by the FED raising interest rates and tightening monetary policy years ago.
Instead, the FED deliberately ignored monetary warnings, placed the USA monetary unit at massive risk, and deliberately acted to keep interest rates low. Therefore, Mr. Bernanke's suggestion that the two back-to-back economic crises were caused by poor USA regulation, is misleading, abdicates FED responsibility for irresponsible monetary policy, and is at least convoluted logic that deliberately distracts attention away Mr. Bernanke's and Greenspan's fiduciary duty to lead the FED in a responsible manner.
It should be obvious for any professional economist, and for that matter even amateur investors, to realize that the low interest rates of the past, in such prolonged circumstances becomes particularly harmful to seniors living on a fixed income budget, while at the same time encouraging youth and all those with low incomes, to take up extremely bad habits of acquiring assets via borrowing and debt, versus a more realistic program of saving and hard work ethic.
Essentially, the greatest virtues of America's past success, by hard work and innovation, has been effectively swapped by the FED action of easy money, and leverage.
Moreover, if the US wants to increase their global productivity and innovation, thus leading to real wealth, they will first need to put incentive into the proper perspective, which should begin with work ethic and a proper education.
In contrast to abusing monetary policy, under the convoluted guise of a necessary action to rescue the USA economy, what ever happened to the intelligent and far more effective use of fiscal policy and tax incentives for US businesses wishing to hire and employ USA citizens?
Fiscal policy and direct employment solutions provide a high efficacy solution, versus a risky, ineffective and indirect FED action which merely condones leverage and easy money, not a lot different that a ponzy scheme of debt and leverage that implodes on termination.
In essence, US politicians too have avoided their moral duty to oversee the FED, and become famous for unethical pork-barrel politics rather than finding efficient low-cost remedies for the poor and unemployed by applying proper fiscal policy to put their own citizens back to work.
In summary, the Bernanke and political suggestion that the use of monetary policy is an efficient tool to solve unemployment issues is clearly a deliberate deception.
To date, it should be increasingly obvious that trillions of dollars in US monetary bailouts and stimulus programs have done little or nothing to solve the plight, or suffering of the poor or the unemployed in the USA. In fact, since the beginning of the sub-prime meltdown, the gap between the rich and the poor has increased.
Finally, there has been little new or increased regulation and enforcement to prevent similar USA collapses in the future, and the speculative leveraging and packaging of securities which led to the immoral Wall Street sub-prime meltdown has gone unchecked and largely unnoticed. Not a single bank executive has been indicted or arrested, suggesting the rule of law overlooks the rich and powerful.
Further, Bernanke's core argument that deflation and lower prices are dangerous to the USA , or will lead to all out depression are largely unfounded and unproven. In fact, many would argue that lower food and commodity prices are exactly what is needed in America as a first step to recovery.
Although opinions and arguments over Bernanke's economic policies are world's apart, it is my belief that more risks are created by the current FED easy-money and inflationary money-printing policies. These policies have failed to serve the USA in the past and that evidence is undeniable.
Continuing to use policies that failed in the past will only ensure future failure and more inflation, an eventual lower USA dollar, and finally a lower US standard of living.
In the end, the lower and middle class Americans will be made to suffer further, higher taxes will be inevitable, and at the same time the rich and those employed on Wall Street with their large bonuses will attempt to retain control at all cost. After all, which Wall Street investment banker would want to sell their house in the Hamptons? Who could ever think of such an idea?
Chart Truth
As for the stock market direction, I strongly suggest to our blog readers that the current risk to reward ratio largely favors being bearish. Although I believe there could easily be another 5 - 10 points of upside in the SP500 Index early this week, the equivalent downside risk is likely ten times that amount.
Although the short-term trend looks to be up after last weeks rally, according to science and natural law, prices are similar to a mathematical rubber band, and when stretched too far have a tendency to snap back into place.
I also suggest reviewing the cycle hint given in our last blog post. Serious blog readers may further wish to calculate the middle of the time window given to arrive at a more exact date for a possible CIT.
As always, the truth is only found in the technical charts, for those that can spot the forensic evidence, and in doing so - spot the correct trend.
Therefore, this may be a good week to remember the BBTL trend following rule that the current trend is always your friend - unless it is about to change direction.
The chart below is indeed clear. Study it well and it should help you decide your next move.
James Kelly Sr.,
Editor in Chief, BBTL Blog
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