One of the glaring trends over the course of the last 18 months has been the market’s unrelenting love affair with Ben Bernanke. Just about every time Ben opens his mouth stocks roar higher as they praise his mantras of “low rates for an extended period” and “accommodactive Fed policy”. The funny thing, however, is that Ben doesn’t get it. Bernanke entirely misdiagnosed our current problems and he continues to apply the wrong solution.
Bernanke couldn’t have missed the credit crisis by a wider mark if he had tried. He continued to deny a housing bubble until it blew up in his face. In 2005 he called house price declines a “pretty unlikely scenario”. He was also “confident that the bank regulators will pay close attention to the types of loans that are being made and ensure that underwriting will be done right”. In late 2007 Bernanke said the housing crisis was “contained”, that economic growth was returning and that the sub-prime problems were also “contained”. In July 2007 he said employment “is likely to accelerate” in the coming years. Of course, it’s absurd to expect him to be able to predict these massive long-term macroeconomic trends, but the lack of risk management on display here borders on gross negligence.
His response to the credit crisis was just as bad. He thought he could inject excess reserves into the banking system and juice the lending markets. He couldn’t have been more wrong. Banks are never reserve constrained, but this lifelong academic clearly didn’t understand this because he has never experienced reserve accounting first hand. His approach was to make too big to fail too BIGGER to fail and strengthen the Enron banking system based on the misconception that he is the wizard behind the curtain controlling the entire economy via monetary policy (clearly a falsehood in a balance sheet recession). But as we see Ben continue to push on a string we see that he is entirely wrong and has in fact done very little to contribute to this so-called “recovery”.
His testimony this morning is a confounding one. If you just looked at the market’s response to his speech you might think that this man was right about everything over the last few years and that he really truly knows what is going on. He is reassuring in the same way that an ER doctor is after he diagnoses you with life threatening cancer and then extracts it with great ease (mind you, our great Doctor Bernanke has had no such success in diagnosing anything or extracting anything).
In his testimony he uses the word “recovery” 6 times. What recovery? The one on Wall Street? Sure, there has been a v-shaped recovery in banking profits, but there has been no recovery on Main Street. There is no demand for loans. Small businesses are still struggling and unemployment remains just shy of its highs. I know employment is a lagging indicator, but just how long is this lagging indicator going to lag? We’re now almost two years past Lehman and yet there are almost no signs of recovery on Main Street.
Even worse are his comments regarding the monetary system. I thought there were signs that Bernanke was beginning to get it. He recently admitted to Barney Frank that there is no worry of solvency in the USA. In a Q&A session in late 2009 he even acknowledged that he can’t monetize the debt as long as he targets the Fed Funds Rate. Both statements display a clear understanding of the monetary system. But then today he goes off the deep end again talking about how he is “worried about the impacts of our long-term debt”. Long-term debt? What debt? The Chairman of the Federal Reserve is convinced that bond auctions actually fund the future spending of the United States. Again, he couldn’t be more wrong.
Ben Bernanke has been wrong throughout the entirety of the credit crisis. His policy response has been entirely wrong and it’s clear that he still doesn’t understand the issues that confront us. Why does anyone even listen to this man? The market’s think he is in control, but more and more it looks like Bernanke is helping to walk us off the edge of the cliff.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.