Logo Background RSS


Bernanke Talks His Book.

  • Written by Syndicated Publisher No Comments Comments
    February 9, 2012

    Bernanke’s testimony to the House last week and to the Senate yesterday held no surprises. Ben has promised to maintain monetary policy at DEFCON 4 levels for as far into the future as we can see.

    The prepared remarks were identical for both presentations. I reviewed Bernanke’s 10/4/2011 testimony before the Congressional Joint Economic Committee (Link). There is something missing in the 2012 reports to Congress that was included in Ben’s statement just a few months ago. Here’s what he said in October 2011 about inflation:
    Longer-term inflation expectations have remained stable according to the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently.

    So last October, Ben was touting up the TIPS/Bond spread as a confirmation that the broad expectation for inflation was very tame. In fact, when Ben made those comments in October he was right.
    The five-year TIPs/Bond spread was at 1.60%, a very low rate of expected inflation. That’s no longer true.

    In his testimony to the Senate this week, Ben did not bother to mention that the TIPS spread has blown out since October. He eliminated any reference to the TIPS spread altogether. The reason? Simple, the TIPS spread is no longer telling Bernanke what he wants to hear, so he ignores it.

    The following are some charts on the TIPS spreads. First the five-year:

    Now the Ten-year:

    At this juncture, I’m absolutely convinced that Bernanke is making a biblical mistake. Yes. it will cost Ben his job (and the Fed’s credibility) at some point. But the real consequence will be to Americans in general, and also a few billion people outside the borders.

    There is zero evidence today that the US economy is in a crisis and that emergency monetary policies are justified. But Ben tells us differently. He omits critical information that would argue against his policies. I think his omission of the inflation information contained in the TIPs data is equivalent to lying, and he knows it. His disinformation makes all of his words to legislators (and the public) very suspect.

    My conclusion is that Bernanke is prepared to manipulate data (and any other damn thing he can lie about) in an effort to make people believe he is doing the “right thing.” He’s not doing what is right for the country any longer. He’s in the process of ruining it.

    Ultimately, Bernanke will be proven wrong. The longer Bernanke’s emergency measures are sustained, the harder it will be to unwind the mess he has created. Another two years of ZIRP, Twist and QE will bring long-term economic problems to America. The history books will not look kindly on Bernanke and his speeches the past week. I expect they will say:

    “The first weeks of February 2012 were the last chance the Federal Reserve Bank had to alter its stance. As of this date, the die was cast; the Fed committed to irreversible steps. The only variable left was time. Twenty-four months later the US economy lost its footings. And when it fell, it took a decade to find a bottom.”

    Some say Bernanke is a hero, that he saved the global economy from collapse in 2009. I say that he is a goat, one that will bring us a generation’s worth of trouble. That he ignored ample evidence in 2012 that the economy had long since passed the Emergency Stage will be Ben’s undoing. He’s so pregnant with his monetary policy that he can’t see (or just chooses to ignore) that the fire is out, the emergency is over, and his monetary policy should be in the process of normalization. That failure, will cost everyone, big time.

    Images: Flickr (licence attribution)

    About The Author – Bruce Krasting

    I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.