Have you ever noticed that when someone doesn’t have the skills to do a job well that they ask for more control so that they can do the job better next time?
Enter Ben Bernanke into the New Year!
Speaking in Atlanta yesterday, Mr. Bernanke made the following statements about monetary policy in the first decade of this century.
“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.”
“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environments.”
So much for that!
At the annual meeting of the American Economic Association we heard that the excessively low interest rates set by the central bank during the 2002 through 2006 period, when Bernanke was a member of the Board of Governors of the Federal Reserve System and the arch-defender of Chairman Alan Greenspan and the low interest rate policy, that the level at which interest rates were set were “appropriately low.”
Imagine that, Mr. Bernanke (now), defending Mr. Bernanke (then). I am truly surprised!
I’m not buying.
Remember, too, that this was a time that large budget deficits were accruing due to the Bush tax cuts and the build up for the Bush war-plan.
Monetary policy and fiscal policy marched hand-in-hand during this period. So much for the independence of the American central bank!
And, how does Mr. Bernanke explain the reaction of the international investment community to this policy stance?
Evidence can be found in the foreign exchange market: the value of the dollar, given most measures of its value, declined by about 40% into the spring of 2008. It seems as if investors did not think that interest rates were set “appropriately low.”
And, this gets me back to my original point: my experience, both in running organizations and in studying those that run organizations, leads me to the conclusion that when people fail to perform their job they ask for more hands-on-control in the areas their job covers. They believe that with greater hands-on-control that they will be able to perform better than they have in the past.
Never, in my experience, have I seen the move to greater control work! Consequently, I don’t expect that giving the Federal Reserve more regulatory control will work at this time either.
And, Mr. Bernanke and the Federal Reserve have an altogether different problem if they “muck up” their exit strategy from the Fed’s inflated balance sheet.
Are they going to save themselves in this area by having greater regulatory control?
I think not!
It is obvious that Mr. Bernanke is going to be re-confirmed as the Chairman of the Board of Governors of the Federal Reserve System, an integral part of the Obama administration.
Investors must remember this going forward. We have huge government deficits in our future. We have a banking system where, at least in the smaller banks, there are still large balances of underwater loans. The wave of home foreclosures does not seem to be over. We have bankruptcies that are still occurring. Unemployment, and under-employment, will continue to remain low for some time into the future. And so on, and so forth.
As a consequence, given past behavior, it is a good bet that Mr. Bernanke is going to err on the side of the politicians that need to get re-elected in 2010 and in 2012.
Investors need to keep this in mind. As we have gone through a period of time when everything the Fed had was thrown against the financial crisis, it seems that the future will include a Fed that errs on the side of keeping things excessively easy. In effect, monetary policy is being conducted with little or no discipline.
Nothing new here for the Bernanke Fed!
The remedy for that, Mr. Bernanke told us yesterday, is to give the Fed greater regulatory control. The assumption is that regulatory control will make up for the lack of discipline elsewhere.
And, you know what can happen when we assume.