Wall Street’s Love Affair with Ben Bernanke

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% 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.”

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 over 40% of consumer credit via securitization–is still on life-support. At the same time, the savings rate has spiked to 6.9%–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% year-over-year. Imports/exports down 20%. 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.1

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 US 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.

  1. Andy Kessler, “The Bernanke Market,” Wall Street Journal. []

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com. Read other articles by Mike.

6 comments on this article so far ...

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  1. Don Hawkins said on July 23rd, 2009 at 2:27am #

    The President of the greatest nation on Earth gave a speech last night and color me crazy I think he is asking for help. In the first part of his speech on health care that he did kind of forget H1N1 that could bring a whole new meaning to health care he talked about how Wall Street got a tad bit greedy and wherever you go there you are. He did say they were told without the banks down the drain, right. Told by who? Before his speech on Fox Glenn Beck was telling people weird shit like the fact that he cares a gun and he went to the movies the other night with his gun and didn’t take anybody out. Well that’s nice Glenn. Then he said the government is going to control your heat and air in your house and they are in control of on star. Then Bill O’reily after the President’s speech was kind of red in the face and I think I saw hate in living color. I wonder what will happen today in clown town USA? The problems we face are big real big and so far not just from the talking heads but the heads we keep seeing hate pure unadulterated crap and third grade level thinking. That third grade level thinking is what people want and I guess keeps the system going and will bring us back to normal. With what we know now the system is anything but normal. It never ceases to amaze me the things people are told they should do to be a real person by I guess the real people and then the real people tell us how bad we are when trying to be real people and it doesn’t seem to work out to well and how can it when Goldman and the banks have all the money the people’s money sort of and will lend us our money for a small fee. Did I go to far there no but it looks like a few are far far away. Then of course to be a real person you have to be like the real people oh boy you don’t even have to look that close at the so called real people to understand that is probably not the way to go. Walk like me think like me be like me thank’s but no thank’s. Anyway the President I still think is asking for help first I guess on health care then the big one climate change bill. The bill is a joke on the human race and as we all know it’s the best they can do. Sorry not good enough not even close. All they need to do is use reason and work together to face the biggest problems the human race has ever faced that’s all. Does the President know this? I think he does and two million to start calm at peace sorry Glenn we are trying to take the high road not the low low road you seem to be on one voice loud and clear. There is still time and fame and fortune as a way of thinking to be a real person the story ends and not well. Oh and think of this as kind of a war. Calm at peace. Remember these so called real people are in control of an out of control system very easy to see using only 27% of our brain. I read that somewhere. The time is now I don’t think we get a second chance on this. “No matter where you go, there you are.” Old Chinese secret.

  2. Don Hawkins said on July 23rd, 2009 at 2:59am #

    That’s two million to start Capital calm at peace one voice then walk to New York for another get together first in front of Wall Street then Goldman then Fox New’s. Yes I said walk what could they do stop us outside New York city with say tank’s. Hit them with the water gas gas them. Calm at peace and think of this as kind of a war.

  3. Don Hawkins said on July 23rd, 2009 at 3:06am #

    This is not a game people although it looks like so called leaders think of it as a game. Without action working together reason knowledge this game that some seem to like to play ends and the score will be zero to zero nice game of checkers?

  4. Don Hawkins said on July 23rd, 2009 at 3:35am #

    http://news.bbc.co.uk/2/hi/health/8159488.stm

    The government’s preferred measure for inflation, the Consumer Prices Index (CPI) could dip below zero to -1% throughout 2010-2012 – postponing hope of an economic recovery for a couple of years.

    The last time I checked this is now Worldwide. postponing hope of an economic recovery for a couple of years. We might want to postpone an economic recovery and start using reason and the knowledge. Easy I think not.

  5. Don Hawkins said on July 23rd, 2009 at 3:37am #

    KNOWING

  6. mary said on July 23rd, 2009 at 7:25am #

    I have just been watching Max Keiser say that Goldman Sachs are ‘scum’ on this video (part 1 of 2). Excoriating stuff.

    http://www.youtube.com/watch?v=VSwWy4E6I04