Oh, Ye Of Little Faith

By: Michael Ashton | Mon, Dec 6, 2010
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The December doldrums may have officially set in, with equity market volume today essentially matching the lowest readings of the year (with the singular exception of the day after Thanksgiving). And this, mind you, is on the day after Chairman Bernanke's appearance on "60 Minutes" to defend (again) the Federal Reserve's approach and reputation.

Some regular readers of this column might expect me to launch into the Chairman for this appearance and some of the things he said. But far be it from me to criticize a Princeton economics professor and his explanation of the Federal Reserve's mission and powers and the efficacy of monetary policy in bringing about economic Nirvana.

Indeed, there can certainly be no benefit in my commentary on remarks such as this:

Bernanke: Well, this fear of inflation, I think is way overstated. We've looked at it very, very carefully. We've analyzed it every which way...We've been very, very clear that we will not allow inflation to rise above 2% or less...We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.

Clearly, the Chairman is so much beyond my poor ability to comprehend that the apparent insensibility of this statement is mere illusion. I know what you're thinking. You're probably saying "but surely, if Professor Bernanke's students were to assert this, they would flunk the 'Money and Banking' course, since whether or not the Fed can practically raise rates instantly has no bearing on the fact that the (uncertain) effect of that policy action would only be felt six-to-eighteen months later."

Poor, poor benighted readers! Bernanke is playing the meta-game - the game behind the game. Mere mortals like us cannot begin to grasp his plan. This much must be obvious, even though you and I are sorely tempted to wonder why the interviewer doesn't ask something like "if you really have that kind of power, why don't you simply turn the dials and get growth and inflation to where you want it in the 15 minutes after we're done with this interview?" That would be very cruel: to imply that the Chairman either doesn't have the sort of power he asserts, or doesn't have compassion for all of those people who would really like him use this power for the personal benefit of the millions of out-of-work Americans and tens or hundreds of millions of underutilized workers around the world. For shame!

I do not speak for our great Chairman, but I can assure you that there is a greater good at play here. It obviously suits his purpose to let some people - for example, the self-righteous pundits who spill virtual ink on the internet but cannot comprehend the mind of Ben - believe that he doesn't have such power, that he is simply saying such things because he doesn't want bondholders to riot and stop him from getting away with monetizing their debt for a much longer period. What a great man he is, and must be, for saying things that would tend to make lesser people think he is actually a damn fool who believes in his own infallibility far more than is healthy for himself and for the economy. He accepts these slings and barbs, knowing that he is the right man, in the right place, at the right time, and ultimately He will triumph and smite the wicked.

Most of us, cursed with less certainty about our ability to predict with perfect foresight, would proceed far too tentatively. We would tend to be cautious, knowing that there is a natural cognitive bias towards overconfidence. But for one like Dr. Bernanke, gifted with superior prognosticative abilities (not to mention a devastating handsomeness), such plebeian concerns are almost amusing.

Pelley: You have what degree of confidence in your ability to control this?

Bernanke: One hundred percent.

So I hope that it is clear. We are in good hands. It is pointless to resist. You will be assimilated.


This seems as good a time as any for me to go have a nice, stiff glass of Diet Coke while reminiscing about other great feats of prognosticative certainty. "Peace for our time!" exulted Chamberlain.

It isn't that Bernanke is wrong, although I think he is. It is that he is preternaturally certain about things which, rationally, he should be not only less certain but, dad-blame-it, uncertain. This is extraordinarily dangerous.

Unless, of course, there is indeed a meta-game here that I am missing. I have said before in this space that I would find it incredible if the Fed actually believes that QE2 will have dramatic effects on growth (especially while they continue to restrain the passage of quantitative easing into the money supply by continuing to pay Interest on Excess Reserves). But I think they were in a situation - especially with some elements in Congress that would like to slap the Friedmanian shackles on them and constrain them to a very narrow mandate - where they needed to appear to be doing something. And, perhaps, Bernanke's appearance on "60 Minutes" is meant to burnish the Fed's reputation and buttress its defenses against Congressional incursions on its powers. But either way, it strikes me as ill-advised. By appearing certain, he may rally his support among the in-cognoscenti, but people who really do understand that monetary policy is an art (at best) rather than a science are just scared, scared. And those people are the ones who own trillions of dollars worth of bonds.

We can spend another day or two dwelling on the significance of the Chairman's appearance - there is no meaningful economic data until Thursday, and that is only if you define "significant" to include weekly Initial Claims during the holiday season.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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