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Austeri-FAIL

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I have never accepted the idea that economic austerity could be at all useful in resolving our unending economic crisis.  I posted my rant about this subject on December 19, 2011:

The entire European economy is on its way to hell, thanks to an idiotic, widespread belief that economic austerity measures will serve as a panacea for the sovereign debt crisis.  The increasing obviousness of the harm caused by austerity has motivated its proponents to crank-up the “John Maynard Keynes was wrong” propaganda machine.  You don’t have to look very far to find examples of that stuff.  On any given day, the Real Clear Politics (or Real Clear Markets) website is likely to be listing at least one link to such a piece.  Those commentators are simply trying to take advantage of the fact that President Obama botched the 2009 economic stimulus effort.  Many of us realized – a long time ago – that Obama’s stimulus measures would prove to be inadequate.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I pointed out that another stimulus program would be necessary because the American Recovery and Reinvestment Act of 2009 was not going to accomplish its intended objective.  Beyond that, it was already becoming apparent that the stimulus program would eventually be used to support the claim that Keynesian economics doesn’t work.  Economist Stephanie Kelton anticipated that tactic in a piece she published at the New Economic Perspectives website  . . .

It has finally become apparent to most rational thinkers that economic austerity is of no use to any national economy’s attempts to recover from a severe recession.  There have been loads of great essays published on the subject this week and I would like to direct you to a few of them.

Henry Blodget of The Business Insider wrote a great piece which included this explanation:

This morning brings news that Europe may finally be beginning to soften on the “austerity” philosophy that has brought it nothing but misery over the past several years.

The “austerity” idea, you’ll remember, was that the huge debt and deficit problem had ushered in a “crisis of confidence” and that, once business-people saw that governments were serious about debt reduction, they’d get confident and start spending again.

That hasn’t worked.

Instead, spending cuts have led to cuts in GDP which has led to greater deficits and the need for more spending cuts.  And so on.

On April 23, Nicholas Kulich wrote an article for The New York Times which began with the ugly truth that austerity has turned out to be a fiasco:

With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.

“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain.  “Does this mean that Merkel has lost completely?  No.  But it does mean that the very nature of the debate about the euro-zone crisis is changing.”

A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.

Joe Weisenthal of The Business Insider provided us with this handy round-up of essays proclaiming the demise of economic austerity.  Here is his own nail in the coffin:

As we wrote this morning, the bad news for Angela Merkel is that the jig is up: There’s almost nobody left who is willing to go along with the German idea that the sole solution forEurope is spending discipline and “reform,” whatever that means.

One of the best essays on this subject was written by Hale Stewart for The Big Picture.  The title of the piece was “People Are Finally Figuring Out: Austerity is Stupid”.

Those in denial about the demise of economic austerity have found it necessary to ignore the increasing refutations of the policy from conservative economists, which began appearing early this year.  The most highly-publicized of these came from Harvard economic historian Niall Ferguson.  Mike Shedlock (a/k/a Mish) criticized the policy on a number of occasions, such as his posting of January 11, 2012:

Austerity measures in Italy, Spain, Portugal, Greece and France combined with escalating trade wars ensures the recession will be long and nasty.

One would think that a consensus of reasonable people, speaking out against this ill-conceived policy, should be enough to convince The Powers That Be to pull the plug on it.  In a perfect world   .  .  .



Recession Watch

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A recession relapse is the last thing Team Obama wants to see during this election year.  The President’s State of the Union address featured plenty of “happy talk” about how the economy is improving.  Nevertheless, more than a few wise people have expressed their concerns that we might be headed back into another period of at least six months of economic contraction.

Last fall, the Economic Cycle Research Institute (ECRI) predicted that the United States would fall back into recession.  More recently, the ECRI’s weekly leading index has been showing small increments of improvement, although not enough to dispel the possibility of a relapse.  Take a look at the chart which accompanied the January 27 article by Mark Gongloff of The Wall Street Journal.  Here are some of Mr. Gongloff’s observations:

The index itself actually ticked down a bit, to 122.8 from 123.3 the week before, but that’s still among the highest readings since this summer.

*   *   *

That’s still not great, still in negative territory where it has been since the late summer.  But it is the best growth rate since September 2.

Whatever that means.  It’s hard to say this index is telling us whether a recession is coming or not, because the ECRI’s recession call is based on top-secret longer leading indexes.

Economist John Hussman of the Hussman Funds has been in full agreement with the ECRI’s recession call since it was first published.  In his most recent Weekly Market Comment, Dr. Hussman discussed the impact of an increasingly probable recession on deteriorating stock market conditions:

Once again, we now have a set of market conditions that is associated almost exclusively with steeply negative outcomes.  In this case, we’re observing an “exhaustion” syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo).  Worse, this is coupled with evidence from leading economic measures that continue to be associated with a very high risk of oncoming recession in the U.S. – despite a modest firming in various lagging and coincident economic indicators, at still-tepid levels.  Compound this with unresolved credit strains and an effectively insolvent banking system in Europe, and we face a likely outcome aptly described as a Goat Rodeo.

My concern is that an improbably large number of things will have to go right in order to avoid a major decline in stock market value in the months ahead.

Another fund manager expressing similar concern is bond guru Jeffrey Gundlach of DoubleLine Capital. Daniel Fisher of Forbes recently interviewed Gundlach, who explained that he is more afraid of recession than of higher interest rates.

Many commentators have discussed a new, global recession, sparked by a recession across Europe.  Mike Shedlock (a/k/a Mish), recently emphasized that “without a doubt Europe is already in recession.”  It is feared that the recession in Europe – where America exports most of its products – could cause another recession in the United States, as a result of decreased demand for the products we manufacture.  The January 24 World Economic Outlook Update issued by the IMF offered this insight:

The euro area economy is now expected to go into a mild recession in 2012 – consistent with what was presented as a downside scenario in the January 2011 WEO Update.

*   *   *

For the United States, the growth impact of such spillovers is broadly offset by stronger underlying domestic demand dynamics in 2012.  Nonetheless, activity slows from the pace reached during the second half of 2011, as higher risk aversion tightens financial conditions and fiscal policy turns more contractionary.

On January 28, Steve Odland of Forbes suggested that the Great Recession, which began in the fourth quarter of 2007, never really ended.  Odland emphasized that the continuing drag of the housing market, the lack of liquidity for small businesses to create jobs, despite trillions of dollars in cash on the sidelines, has resulted in an “invisible recovery”.

Jennifer Smith of The Wall Street Journal explained how this situation has played out at law firms:

Conditions at law firms have stabilized since 2009, when the legal industry shed 41,900 positions, according to the Labor Department.  Cuts were more moderate last year, with some 2,700 positions eliminated, and recruiters report more opportunities for experienced midlevel associates.

But many elite firms have shrunk their ranks of entry-level lawyers by as much as half from 2008, when market turmoil was at its peak.

Regardless of whether the economic recovery may have been “invisible”, economist Nouriel Roubini (a/k/a Dr. Doom) has consistently described the recovery as “U-shaped” rather than the usual “V-shaped” graph pattern we have seen depicting previous recessions.  Today Online reported on a discussion Dr. Roubini held concerning this matter at the World Economic Forum’s meeting in Davos:

Slow growth in advanced economies will likely lead to “a U-shaped recovery rather than a typical V”, and could last up to 10 years if there is too much debt in the public and private sector, he said.

At a panel discussion yesterday, Dr Roubini also said Greece will probably leave Europe’s single currency within 12 months and could soon be followed by Portugal.

“The euro zone is a slow-motion train wreck,” he said.  “Not only Greece, other countries as well are insolvent.”

In a December 8 interview conducted by Tom Keene on Bloomberg Television’s “Surveillance Midday”, Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute, explained his position:

“The downturn we have now is very different than the downturn in 2010, which did not persist.  This one is persisting.”

*  *  *

“If there’s no recession in Q4 or in the first half I’d say of 2012, then we’re wrong.  …   You’re not going to know whether or not we’re wrong until a year from now.”

I’m afraid that we might know the answer before then.


 

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Trouble Ahead

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I find it very amusing that we are being bombarded with so many absurd election year “talking points” and none of them concern the risk of a 2012 economic recession.  The entire world seems in denial about a global problem which is about to hit everyone over the head.  I’m reminded of the odd brainstorming session in September of 2008, when Presidential candidates Obama and McCain were seated at the same table with a number of econ-honchos, all of whom were scratching their heads in confusion about the financial crisis.  Something similar is about to happen again.  You might expect our leaders to be smart enough to avoid being blindsided by an adverse economic situation – again – but this is not a perfect world.  It’s not even a mediocre world.

After two rounds of quantitative easing, the Kool-Aid drinkers are sipping away, in anticipation of the “2012 bull market”.  Even the usually-bearish Doug Kass recently enumerated ten reasons why he expects the stock market to rally “in the near term”.  I was more impressed by the reaction posted by a commenter – identified as “Skateman” at the Pragmatic Capitalism blog.  Kass’ reason #4 is particularly questionable:

Mispaced preoccupation with Europe:  The European situation has improved.   .  .  .

Skateman’s reaction to Kass’ reason #4 makes more sense:

The Europe situation has not improved.  There is no escape from ultimate disaster here no matter how the deck chairs are rearranged.  Market’s just whistling past the graveyard.

Of particular importance was this recent posting by Mike Shedlock (a/k/a Mish), wherein he emphasized that “without a doubt Europe is already in recession.”  After presenting his readers with the most recent data supporting his claim, Mish concluded with these thoughts:

Telling banks to lend in the midst of a deepening recession with numerous austerity measures yet to kick in is simply absurd.  If banks did increase loans, it would add to bank losses.  The smart thing for banks to do is exactly what they are doing, parking cash at the ECB.

Austerity measures in Italy, Spain, Portugal, Greece, and France combined with escalating trade wars ensures the recession will be long and nasty.

*   *   *

Don’t expect the US to be immune from a Eurozone recession and a Chinese slowdown.  Unlike 2011, it will not happen again.

Back on October 8, Jeff Sommer wrote an article for The New York Times, discussing the Economic Cycle Research Institute’s forecast of another recession:

“If the United States isn’t already in a recession now it’s about to enter one,” says Lakshman Achuthan, the institute’s chief operations officer.  It’s just a forecast.  But if it’s borne out, the timing will be brutal, and not just for portfolio managers and incumbent politicians.  Millions of people who lost their jobs in the 2008-9 recession are still out of work.  And the unemployment rate in the United States remained at 9.1 percent in September.  More pain is coming, says Mr. Achuthan.  He thinks the unemployment rate will certainly go higher.  “I wouldn’t be surprised if it goes back up into double digits,” he says.

Mr. Achuthan’s outlook was echoed by economist John Hussman of the Hussman Funds, who pointed out in his latest Weekly Market Comment that investors have been too easily influenced by recent positive economic data such as payroll reports and Purchasing Managers Indices:

I can understand this view in the sense that the data points are correct – economic data has come in above expectations for several weeks, the Chinese, European and U.S. PMI’s have all ticked higher in the latest reports, new unemployment claims have declined, and December payrolls grew by 200,000.

Unfortunately, in all of these cases, the inference being drawn from these data points is not supported by the data set of economic evidence that is presently available, which is instead historically associated with a much more difficult outcome.  Specifically, the data set continues to imply a nearly immediate global economic downturn.  Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has noted if the U.S. gets through the second quarter of this year without falling into recession, “then, we’re wrong.”  Frankly, I’ll be surprised if the U.S. gets through the first quarter without a downturn.

At the annual strategy seminar held by Société Générale, their head of strategy – Albert Edwards – attracted quite a bit of attention with his grim prognostications.  The Economist summarized his remarks this way:

The surprise message for investors is that he feels the US is on the brink of another recession, despite the recent signs of optimism in the data (the non-farm payrolls, for example).  The recent temporary boost to consumption is down to a fall in the household savings ratio, which he thinks is not sustainable.

Larry Elliott of The Guardian focused on what Albert Edwards had to say about China and he provided more detail concerning Edwards’ remarks about the United States:

“There is a likelihood of a China hard landing this year.  It is hard to think 2013 and onwards will be any worse than this year if China hard-lands.”

*   *   *

He added that despite the recent run of more upbeat economic news from the United States, the risk of another recession in the world’s biggest economy was “very high”.  Growth had slowed to an annual rate of 1.5% in the second and third quarters of 2011, below the “stall speed” that historically led to recession.  It was unlikely that the economy would muddle through, Edwards said.

So there you have it.  The handwriting is on the wall.  Ignore it at your peril.


 

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Be Sure To Catch These Items

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As we reach the end of 2011, I keep stumbling across loads of important blog postings which deserve more attention.  These pieces aren’t really concerned with the usual, “year in review”- type of subject matter.  They are simply great items which could get overlooked by people who are too busy during this time of year to set aside the time to browse around for interesting reads.  Accordingly, I’d like to bring a few of these to your attention.

The entire European economy is on its way to hell, thanks to an idiotic, widespread belief that economic austerity measures will serve as a panacea for the sovereign debt crisis.  The increasing obviousness of the harm caused by austerity has motivated its proponents to crank-up the “John Maynard Keynes was wrong” propaganda machine.  You don’t have to look very far to find examples of that stuff.  On any given day, the Real Clear Politics (or Real Clear Markets) website is likely to be listing at least one link to such a piece.  Those commentators are simply trying to take advantage of the fact that President Obama botched the 2009 economic stimulus effort.  Many of us realized – a long time ago – that Obama’s stimulus measures would prove to be inadequate.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I pointed out that another stimulus program would be necessary because the American Recovery and Reinvestment Act of 2009 was not going to accomplish its intended objective.  Beyond that, it was already becoming apparent that the stimulus program would eventually be used to support the claim that Keynesian economics doesn’t work.  Economist Stephanie Kelton anticipated that tactic in a piece she published at the New Economic Perspectives website:

Some of us saw this coming.  For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery.  Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.

Despite the current “ridicule and scorn” campaign against Keynesian economics, a fantastic, unbiased analysis of the subject has been provided by Henry Blodget of The Business Insider.  Blodget’s commentary was written in easy-to-read, layman’s terms and I can’t say enough good things about it.  Here’s an example:

The reason austerity doesn’t work to quickly fix the problem is that, when the economy is already struggling, and you cut government spending, you also further damage the economy. And when you further damage the economy, you further reduce tax revenue, which has already been clobbered by the stumbling economy.  And when you further reduce tax revenue, you increase the deficit and create the need for more austerity.  And that even further clobbers the economy and tax revenue.  And so on.

Another “must read” blog posting was provided by Mike Shedlock (a/k/a Mish).  Mish directed our attention to a rather extensive list of “Things to Say Goodbye To”, which was written last year by Clark McClelland and appeared on Jeff Rense’s website.  (Clark McClelland is a retired NASA aerospace engineer who has an interesting background.  I encourage you to explore McClelland’s website.)  Mish pared McClelland’s list down to nine items and included one of his own – loss of free speech:

A bill in Congress with an innocuous title – Stop Online Piracy Act (SOPA) – threatens to do much more.

*  *  *

This bill’s real intent is not to stop piracy, but rather to hand over control of the internet to corporations.

At his Financial Armageddon blog, Michael Panzner took a similar approach toward slimming down a list of bullet points which reveal the disastrous state of our economy:  “50 Economic Numbers From 2011 That Are Almost Too Crazy To Believe,” from the Economic Collapse blog.  Panzner’s list was narrowed down to ten items – plenty enough to undermine those “sunshine and rainbows” prognostications about what we can expect during 2012.

The final item on my list of “must read” essays is a rebuttal to that often-repeated big lie that “no laws were broken” by the banksters who caused the financial crisis.  Bill Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City in the Department of Economics and the School of Law.  Black directed litigation for the Federal Home Loan Bank Board (FHLBB) from 1984 to 1986 and served as deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC) in 1987.  Black’s refutation of the “no laws were broken by the financial crisis banksters” meme led up to a clever homage to Dante’s Divine Comedy describing the “ten circles of hell” based on “the scale of ethical depravity by the frauds that drove the ongoing crisis”.  Here is Black’s retort to the big lie:

Sixty Minutes’ December 11, 2011 interview of President Obama included a claim by Obama that, unfortunately, did not lead the interviewer to ask the obvious, essential follow-up questions.

I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal.

*   *   *

I offer the following scale of unethical banker behavior related to fraudulent mortgages and mortgage paper (principally collateralized debt obligations (CDOs)) that is illegal and deserved punishment.  I write to prompt the rigorous analytical discussion that is essential to expose and end Obama and Bush’s “Presidential Amnesty for Contributors” (PAC) doctrine.  The financial industry is the leading campaign contributor to both parties and those contributions come overwhelmingly from the wealthiest officers – the one-tenth of one percent that thrives by being parasites on the 99 percent.

I have explained at length in my blogs and articles why:

• Only fraudulent home lenders made liar’s loans
• Liar’s loans were endemically fraudulent
• Lenders and their agents put the lies in liar’s loans
• Appraisal fraud was endemic and led by lenders and their agents
• Liar’s loans could only be sold through fraudulent reps and warranties
• CDOs “backed” by liar’s loans were inherently fraudulent
• CDOs backed by liar’s loans could only be sold through fraudulent reps and warranties
• Liar’s loans hyper-inflated the bubble
• Liar’s loans became roughly one-third of mortgage originations by 2006

Each of these frauds is a conventional fraud that could be prosecuted under existing laws.

It’s nice to see someone finally take a stand against the “Presidential Amnesty for Contributors” (PAC) doctrine.  Every time Obama attempts to invoke that doctrine – he should be called on it.  The Apologist-In-Chief needs to learn that the voters are not as stupid as he thinks they are.


 

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The Battle Over Bernanke

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January 25, 2010

Ben Bernanke’s four-year term as chairman of the Federal Reserve ends on January 31.  There is presently no vote scheduled to confirm President Obama’s nomination of Bernanke to that post because four Senators (Bernie Sanders, D-Vt.; Jim Bunning, R-Ky.; Jim DeMint, R-S.C. and David Vitter, R-La.) have placed holds on Bernanke’s nomination.  In order for the Senate to proceed to a vote on the nomination, 60 votes will be required.  At this point, there is a serious question as to whether the pro-Bernanke faction can produce those 60 votes.  A number of commentators have described last week’s win by Scott Brown as a “chill factor” for those Senators considering whether to vote for confirmation.  Ryan Grim of The Huffington Post put it this way:

Opposition to the reconfirmation of Federal Reserve Chairman Ben Bernanke is growing in the Senate in the wake of a Republican Scott Brown’s victory, fueled by populist rage, in the Massachusetts Senate race.

James Pethokoukis of Reuters explained the situation in these terms:

Liberals in Congress want him gone.  Then again, they want pretty much the whole Obama economic team gone.  But Geithner and Summers aren’t up for a Senate vote.  Bernanke is.  And if Dems start bailing, don’t expect Republicans to save him.  No politician in America gains anything by voting for Bernanke.  A “no” vote is a free vote.  Wall Street still loves him, though.  Geithner, too.

At The Hill, Tony Romm reported:

Bernanke has taken heat as Wall Street’s profits have soared while unemployment has become stuck in double digits, and the wave of economic populism soaring through Washington in the wake of a stunning Democratic loss in the Massachusetts Senate races comes at a bad time for his confirmation.

If Bernanke is not confirmed, he will continue to sit on the Federal Reserve Board of Governors because each Fed Governor is appointed to a 14-year term.  Donald Kohn, the vice chairman, would serve as the interim chairman until Bernanke’s successor is nominated and confirmed.

The forces pushing for Bernanke’s confirmation have now resorted to scare tactics, warning that dire consequences will result from a failure to re-confirm Bernanke.  Senator “Countrywide Chris” Dodd warned that if Bernanke is not confirmed, the economy will go into a “tailspin”.  An Associated Press report, written by Jennine Aversa and carried by The Washington Post, warned that a failure to confirm Bernanke could raise the risk of a double-dip recession.  At The Atlantic, Megan McArdle exploited widespread concern over already-depleted retirement savings:

Spiking his nomination may have grim effects on 401(k)s throughout the land.

Not to be outdone, Judge Richard Posner issued this warning from his perch at The Atlantic:

If he is not confirmed, the independence of the Fed will take a terrible hit, because the next nominee will have to make outright promises to Congress of bank bashing, and of keeping interest rates way down regardless of inflation risk, in order to be confirmed.

I guess that these people forgot to mention that if Bernanke is not confirmed:

A plague of locusts shall be visited upon us,

The earth will be struck by a Texas-sized asteroid,

An incurable venereal disease will be spread via toilet seats,

The Internet will vanish, and   . . .

Osama bin Laden will become the next Justice of the United States Supreme Court.

At the Think Progress website, Matthew Yglesias pondered the issue:

What happens if Ben Bernanke isn’t reconfirmed?  Well, some folks seem to think it will send markets into a tailspin.  But it’s worth emphasizing that in literal terms almost nothing will happen.

Beyond that, as Sudeep Reddy and Damian Paletta explained in The Wall Street Journal:

The Federal Open Market Committee — which consists of the presidentially appointed Fed governors in Washington and the presidents of the regional Fed banks — meets Jan. 26-27 and traditionally elects a chairman and vice chairman at its first meeting of the year.  The committee, which makes monetary policy decisions, is set to elect Mr. Bernanke as its chairman at that meeting, a move that doesn’t require approval of the White House or the Senate.

Min Zeng of The Wall Street Journal filled us in as to what else we can expect from the FOMC this week:

Next week, the two-day FOMC meeting will end Wednesday afternoon with a statement on an interest-rate decision and policymakers’ latest outlook on the economy and inflation.

The FOMC is widely expected by market participants to keep its main policy rate — the fed-funds target rate — at ultra-low levels near zero as recent data haven’t demonstrated a persistent and strong economic recovery, with a jobless rate still hovering around the highest level in more than two decades.

Fed policymakers are also likely to stick to their plan to end the $1.25 trillion mortgage-backed securities purchases program at the end of March.  The central bank should also reiterate its plan to let some emergency lending programs expire Feb. 1.

The Fed could soon hike the rate it charges on emergency loans, known as the discount rate, but that would largely be symbolic now that banks have been borrowing less and less from it as financial markets stabilized.

Meanwhile, the battle against the Bernanke confirmation continues.  Mike Shedlock (a/k/a Mish) has urged his readers to contact the “undecided” Senators and voice opposition to Bernanke.  Mish has also provided the names and contact information for those Senators, as well as the names of those Senators who are currently on record as either supporting or opposing Bernanke.

I’d like to see Bernanke lose, regardless of the consequences.  The rationale for this opinion was superbly articulated by Senator Jim Bunning during the confirmation hearing on December 3.  If you’re not familiar with it — give it a read.  Here is Senator Bunning’s conclusion to those remarks, delivered directly to Bernanke:

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure.  You stated time and again during the housing bubble that there was no bubble.  After the bubble burst, you repeatedly claimed the fallout would be small.  And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for.  Where I come from we punish failure, not reward it.  That is certainly the way it was when I played baseball, and the way it is all across America.  Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case.  I will do everything I can to stop your nomination and drag out the process as long as possible.  We must put an end to your and the Fed’s failures, and there is no better time than now.

Amen.



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Turning Up The Heat

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December 21, 2009

By now you should be aware of the fact that for his 56th birthday, Federal Reserve chairman Ben Bernanke was named Time magazine’s “Person of the Year”.  Were the folks at Time so arrogant as to believe that this honor would insure the confirmation of Bernanke to a second term as chairman of the Federal Reserve?  More than a few commentators expressed the view that Time’s “Person of the Year” award might actually jeopardize Bernanke’s chance at confirmation.  For example, take a look at what Mike Shedlock (a/k/a Mish) had to say:

That Bernanke is on the cover of Time Magazine means one thing “Bernanke’s Time Is Limited” He is on his way out.  And that is good news.

*   *   *

The quicker this blows up, the quicker we can recover.  And knowing what we know about Time Magazine, Central Banking will blow up sooner rather than later.  Moreover, Bernanke will not be part of the solution, and that is a good thing.

I thank Time Magazine for the information and their kiss of death warning. However, I must also remind readers that Stalin made the cover twice, so immediate results just might be expecting too much.

When Bernanke was grilled by the Senate Banking Committee during the confirmation hearing on December 3, Senator Jim Bunning of Kentucky gave him a magnificent pummeling, most notable for the assertion:  “You are the definition of a moral hazard!”  My only criticism of Bunning’s diatribe was that he should have said:  “You are the personification of a moral hazard” or “You are the epitome of a moral hazard”  —  otherwise, it was perfect.  If that weren’t enough, Senator Bunning demanded that Bernanke answer seventy written questions submitted by Bunning himself.  Those of you who have ever been a party to a lawsuit might recall having to provide signed answers to written interrogatories.  Most jurisdictions place a limit on the number of such interrogatories to the extent of approximately 35.  Senator Bunning propounded twice that many to Bernanke and the nominee answered all of them.  Don Luskin of Smart Money analyzed one of these answers in a way that underscored the necessity of removing Bernanke from the Fed chairmanship.

On December 18, Victoria McGrane reported for Politico that the Bernanke nomination “could be in more trouble than previously thought”.  Although the Senate Banking Committee voted to confirm the nomination, ultimately the entire Seante must vote on the matter.  The fact that six Republicans and one Democrat from the Banking Committee voted against the nomination was portrayed as an ominous signal, casting doubt on the likelihood of confirmation.  Ms. McGrane discussed the reaction to the confirmation hearings expressed by Brian Gardner, a bank analyst for Keefe, Bruyette and Woods:

Two aspects of the two-hour debate that preceded the committee vote struck Gardner as worrisome for Bernanke:  the unenthusiastic — even apologetic — tone from some of the senators who voted yes and a dispute over the Fed’s refusal to release documents about the bailout of insurance giant American International Group to senators on the committee.

The article explained that the AIG bailout documents were available for review by “some banking committee staffers” although the documents have been withheld by the Fed from individual senators and the public, based on the Fed’s claim that the documents are “protected”.

This is apparently an assertion by the Fed that there is some sort of privilege protecting the AIG bailout documents from disclosure.  Nevertheless, if the fight over these records ever gets before a court, it is likely that production of the documents would be compelled, since any claim of privilege was waived once the Fed allowed the “banking committee staffers” to review the items.

The Politico report noted the significance of this matter:

That spat could have legs, Gardner said, and if it resonates with a public already fuming at the Fed, it could sway the votes of yes-leaning senators.

The battle over the AIG bailout documents was also the subject of an opinion piece in the December 19 edition of The New York Times, written by Eliot Spitzer, Frank Partnoy and William Black.  Here’s some of what they had to say:

No doubt, some of the e-mail messages contain privileged conversations among lawyers.  Others probably include private information that is irrelevant to A.I.G.’s role in the crisis. But the vast majority of these documents could be made public without legal concern.  So why haven’t the Treasury and the Federal Reserve already made sure the public could see this information?  Do they want to protect A.I.G., or do they worry about shining too much sunlight on their own performance leading up to and during the crisis?

What will these e-mails reveal about the actions of Ben Bernanke and “Turbo” Tim Geithner during the AIG bailout phase of the financial crisis?  Were laws violated or do they simply exhibit some poor decision-making and cronyism?

Most of us are now getting ready for the coldest month of the year – but for Ben Bernanke, the heat is being turned up  —  full blast.



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