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Courage to Act; Reflections on Fed Hubris; What if Whatever it Takes is Not Enough? Fed Troika?

This past week, Ben Bernanke was in London promoting his book "Courage to Act". Today, Albert Edwards at Societe Generale pinged me with his thoughts.

Edwards writes ...

Ben Bernanke is in London to publicise his book 'The Courage to Act'. Although the various open events would have been fascinating, I thought it best not to attend. I would not have been able to control myself. In a repeat of the protest at the April ECB press conference I would have probably stormed the stage, thrown confetti money at him and been unceremoniously dragged out by security. But speaking to people who were there and reading the pre-vetted Q&A on the web, reminded me just how overconfident central bankers are to their very core - even after their actions are clearly ruinous. Bernanke again paraded his lack of insight of the Fed's leading role in causing the 2008 crisis. Indeed he was self-congratulatory about the Fed's success in averting another Great Depression, not accepting that they almost actually caused it! Central bankers are doomed to repeat the same mistake until they acknowledge their role in the last crisis and stop blaming everybody else. Unfortunately it now appears from recent comments that ECB President Mario Draghi is also demonstrating the same hubris. Indeed it is becoming clear that ECB QE is already failing.

It should not be forgotten that after Draghi's 2012 whatever it takes comment, he also said in the next breath "and believe me, it will be enough" in another demonstration of central bank overconfidence. Regular readers will know I have long been an extreme critic of central bank policies, particularly of the Fed and the Bank of England with their negligent pursuit of ultra-loose money policy in the mid-noughties policies that ultimately proved ruinous in the 2008 Global Financial Crisis. I believe the Fed and BoE have learned practically nothing from their previous mistakes and we are heading down exactly the same road to catastrophe as the financial markets creak and groan under the strain of QE-inspired, excess valuations. I would definitely now also put the Draghi ECB firmly in that same camp. Contrary to the Pavlovian salivations of the markets, the evidence is mounting that "whatever it takes" is not going to be enough.

Private Lending

Edwards cites private sector lending as evidence of ECB failure.

Effect of FED Balance Sheet Expansion on Private Sector Lending

The goal of the ECB was to spur private lending and increase inflation. The ECB succeeded at neither, but it did create huge, destabilizing asset bubbles, as did the Fed.

Reader Comments

Reader Randy pinged me this morning with a question: "Have you read Bernanke's book yet? Seriously Mish, I've never witnessed someone willingly display such hubris in my life. And it's scary as hell."

No, I haven't read the book and do not intend to. I do not want one dime going to Bernanke.

Fed Troika

In a blog response to Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself? Reader John, offered these comments.

I watched Ben Bernanke today at the London Pimco Investment Summit. His comments were surprisingly frank: It takes ~80k jobs created a month to maintain unemployment, and if the two jobs reports between now and the December meeting are of the order of 150,000 or more the Fed should/will hike.

Interestingly, he was also made a number of snide remarks about the Regional Fed presidents, with an implicit shot Minneapolis Fed president at Narayana Kocherlakota. Bernanke stated that market participants should only take notice of 'the Troika' (his term, not mine) of the Chair, Vice President and NY Fed President.

In the event of another recession, Bernanke stated negative interest rates would be likely.

Stanley Fischer Vice-Chairman Background

With those comments (thanks John!), inquiring minds may be interested in the background of Stanley Fischer. On June 14, 2014 Forbes explained Why The Fed's New Vice Chairman Will Be A Disaster For the U.S. Economy.

The U.S. Senate finally confirmed former Bank of Israel governor Stanley Fischer as vice chairman of the Federal Reserve on Thursday. As the second-most influential Fed board member, Fischer will play a key role in advising and assisting Fed chairwoman Janet Yellen.

As the governor of the Bank of Israel from 2005 to 2013, Stanley Fischer earned praises for his management of Israel's economy during and after the Global Financial Crisis. In 2009, 2010, 2011 and 2012, Global Finance magazine's Central Banker Report Card gave Fischer an "A" rating. Bank of Israel was ranked the world's most efficiently functioning central bank under Fischer's leadership in 2010.

Contrary to popular belief, Israel's so-called economic strength is the byproduct of a temporary economic bubble that Fischer helped to inflate rather than the result of sound and sustainable monetary policies. Stanley Fischer is a member of the New Keynesian school of - a group that is notorious for using incredibly stimulative monetary policies (to create artificial economic growth, while virtually ignoring the existence of obvious economic bubbles and the risks of monetary policy-induced inflation.

During his tenure as governor of the Bank of Israel from 2005 to 2013, Stanley Fischer's New Keynesian policies caused the country's M1 money supply to surge by an astounding 250 percent:

Israel's money supply growth during this period caused consumer prices to increase by approximately 25 percent according to the official CPI. The Israeli public wasn't fooled by these questionable inflation figures, however, when hundreds of thousands of people flooded the streets in 2011 and 2012 to protest the soaring cost of living.

Israel experienced the largest property price increase of all OECD nations during Stanley Fischer's time as Bank of Israel governor, which has made the country's housing market more overvalued and less affordable than ever before.

The fact that rapid increases of the money supply lead to inflation and bubbles is obvious to nearly everyone but heavily indoctrinated Keynesian and neoclassical economists like Stanley Fischer, who are greatly overrepresented on the boards of central banks, unfortunately. Austrian economist Murray Rothbard may as well have been describing Israel's current economy when he stated in 1962 that "Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of 'prosperity.'"

The accolades that the international economics community have heaped on Stanley Fischer are the result of a temporary bubble-driven economic boom that will end in a crisis when it finally ends.

Hubris Coupled with Stupidity

Ben Bernanke is nothing but a self-promotional charlatan. Contrary to his the title of his book, it did not take courage to act, it took courage to do nothing! It also takes courage to admit mistakes.

Bernanke failed twice.

Instead, of letting excesses settle in a painful, but short-term fashion, wiping out excesses and clearing out the bank CEOs who attributed to the problem, Bernanke bailed out the banks and here we are back in an even bigger asset bubble than we had prior to the the great recession.

Fed sponsored boom-bust cycles clearly have increasing amplitudes and troughs.

Does that represent "courage" or "stupidity"? I strongly suggest the latter.


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