Speculation: Bernanke’s days are numbered

In this fun thread, on July 4, 2007, I wrote about one of Bernanke’s speeches:

This latest wind bag empty rant of his is almost laughable

The Financial Accelerator and the Credit Channel
June 15, 2007

He speaks of his model results as if they represent reality without question. It is notable that he only references papers that support his arguments without a nod to the opposing viewpoint. The more I read this guy’s stuff, the more upsetting it gets. I may have only been thinking about credit markets for the past two years, but I’ve been a researcher for a lot longer than that and I’ve developed a nose for BS and Bernanke’s articles reek of it.

Then, in response to doctorwes’ comment, I said (emphasis added in bold):

For example, he suggests that if many homeowners have little equity in their homes, and there is a decline in home prices, there might be a more negative impact on the economy than people would otherwise expect.

More than who expected? Sounds like a lame excuse to me. The proponents of the BIS view certainly saw it coming and several NBER papers are there (including Scwartz’) to prove it, which he conveniently chose to disregard. Sorry, you can’t take one side of a debate and when it turns out you’re wrong, claim to be ignorant of the other side.

In addition to my apocalyptic predictions, I also predict that Bernanke will be removed from his post in the not-so-distant future (say post Nov ‘08 ).

We’ll see if he lasts until after the elections. I doubt it.

Anna Schwartz, “The new group at the Fed is not equal to the problem that faces it”

Wow. When I first began voicing my opinion about the Fed and monetary policy in a public phorum, it didn’t take long for me to be drawn to some papers by Anna Schwartz. On July 3, 2007, when I was asked what I would have done if I was in charge of monetary policy, I said:

If I were in charge from 2000-2007, I probably would have surrounded myself by smart people like Anna Schwartz, who wrote this gem (in 2002)

Asset Price Inflation and Monetary Policy

Abstract:

It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders’ portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans.

Now, she takes both Greenspan and Bernanke to task in this scorching article at the Telegraph:

Anna Schwartz blames Fed for sub-prime crisis

The high priestess of US monetarism – a revered figure at the Fed – says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. “The new group at the Fed is not equal to the problem that faces it,” she says, daring to utter a thought that fellow critics mostly utter sotto voce.

“They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence,” she told The Sunday Telegraph. “There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,” she says.

That is a great article and although I should probably be a little more dignified that proclaiming “Bernanke sucks”, it is good to know that Anna Schwartz is also not a particularly big fan of those at the Fed right now.

Ouch!

I lack the talent much less the venom to put together such a scathing piece as the one that Alan Abelson beautifully constructed over on Barron’s (via The Big Picture)

It’s publicly available for the time being so run and take a look while you still can:

Debasing Bernanke: BEN BLINKED

Wow!

Bye bye dollar

Needless to say, after my comment on August 28

PS: I’ve been ignorantly harsh on both Greenspan and Bernanke, but I have to say that I am quite impressed with Bernanke’s recent performance maneuvering through the current credit crisis. I expect him to hold the target rate at 5.25% on September 18. If he does, I’ll gladly apologize for anything less-than-flattering I’ve ever said about him. If he lowers rates, I’ll lose respect and throw him back in the Greenspan “save my Wall Street buddies” bucket.

I wasn’t particularly excited about the surprise 50 bps cut in both target and discount rates for the general long-term prospects of the US economy, although on a selfish level it was certainly good for my career stability. As far as I’m concerned, it is open season for Bernanke bashing. Greenspan bashing has been accelerating as well. Besides, if things really get bad with the USD, we’ll just move to Hong Kong or something

One of the things that I learned from Al Wojnilower was that the US economy could certainly keep chugging along for as long as the USD was the world currency. As he liked to repeat often, having the USD as the dominant world currency is like having an “American Express card with no limit”. One of the things that keeps the USD as the world’s currency is its position in sovereign reserves as well as the fact that oil is priced in USD. As far as I can see, both of these factors are beginning a worrisome decline.

With sovereign reserves continuing to diversify away from USD and Saudi Arabia refusing to cut rates in lock step with the US marks a real turn in the outlook for the USD dollar, and consequently the ability of the US economy to continue chugging along.

Merrill Lynch: The Credit Monitor

Got this via the good guys over at Econocator:

Merrill Lynch – The Credit Monitor

“Easy money” is the root cause of current credit volatility. While mortgage finance, Hedge Funds, LBO’s, Yen-based financing, SIVs/Conduits and CDOs have all been cited as sources of structural leverage they are derivative of the 1% funds rate policy from the early part of this decade. As the Fed began the process of removing excess monetary liquidity, market participants simply manufactured it with financial leverage.

This process was seven years in the making. We doubt it will be unwound in two months time. We caution investors: beware of false recoveries.

The irony is not lost on us: last week’s apparent short-lived recovery in credit spreads was prompted by rising expectations of a 2007 Fed rate cut. Yet, it is the 1% “easy money” Fed Funds rate policy that is the origin of many of the current structural problems in the credit market. A rate cut seems like a curious solution to a problem that was incubated by liquidity. Moreover, the currency outcome could prove troubling. Should credit rally on such an action, it may serve as an opportunity to add new shorts/underweights.

Band wagon? Or people just waking up after a long period of delusions?