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Bernanke's Reappointment Anointment

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For four more years, all hail the Lord of Money.

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Editor's Note: This article was written by Chris Tormey, who is presently retired. Until March 2009, he was a partner at SpearpointCapital, a Global Macro Hedge Fund located in New York City.

I didn't see Ben Bernanke's speech in Jackson Hole, Wyoming last Friday (August 21). I don't even know if it was televised, having weaned myself from the "off track-betting monitor" called CNBC several months ago. But I did read it in essentially real time, and I imagined the thunderous applause on all sides as he reflected on his great achievements of the prior 12 months. Little did I know that he'd already gotten the nod from President Obama, and would remain "Lord of Money" for four more years (following what will be a short and friendly "q&a" session with his buddies at the Senate, of course).

So what did "Lord Ben" tell us at Jackson Hole? For, although he was surrounded by all the other Lords and Masters who had flown in on company and Congressional jets with staffs and concierges that would make Louis XIV blush, he knew, of course, that his great words would be broadcast around the world, making the masses either fear or rejoice for what the money master decided about the past and his great vision into the future. Let's take a peek:
He starts:

"History is full of examples in which policy responses have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs."

Now, since history always happens only once, "greater economic damage" than what, we're only left to guess. Apparently 9.5% unemployment, 35% of stock market "wealth" evaporated in 24 months, a complete collapse of residential real estate prices (remember "the sub-prime problem is contained") and a commercial real estate implosion looming is the good outcome coming from Bernanke's magic buckets and broom. I shudder to think what may have transpired without his masterly control of the markets.

He continues, taking us down his glowing memory lane of the events and catastrophes of the previous 12 months. It seems, always, that he was on top of things. He was in control, like General Ike, beating back the enemy from both fronts; a master planner in his moment to show his great skills, to soar above the huddled masses and protect the world.
Well then, what were his highlights of the past year?

His first highlight is the collapse of Indymac. Huh? I had to go back and review this little tidbit in the year of incendiary destruction. Indymac! That was the thrift that NY Senator Chuck Schumer caused the run on! The little joke of a thrift that charged high rates to widows and orphans in the "reverse mortgage" structure to loot what might be left of their decaying estate. Hmm. Why Indymac? I pondered for a while, but couldn't come up with a reason why Bernanke decided to open with that one. Perhaps it was a nod to Schumer for the upcoming Senate hearings? Certainly a degree in politics is far more useful than one in economics for the job that Bernanke had prepared all his life for.

Then onto the big ones:

No mention of Bear Stearns to kick off the party. It would get a mention much later in the "technical" discussion about repo rates and margin calls. He starts with Lehman, a situation he knew would be trouble, but alas, his hands were tied. The Fed couldn't lend against deficient collateral. Evidently, that smidge from their otherwise completely mangled charter would have to be respected. Sadly, "the government lacked resolution authority or ability to inject capital" as well, so Lehman had to go.

The next collapse led to success, as American International Group (AIG) had "sufficient financial and business assets." So he and Hank saved that one. Warning: Has anyone heard of Maiden Lane 1, 2, or 3, the decrepit cesspool of assets that the Fed still retains on its balance sheet and Congressman Ron Paul wants so desperately exposed to the public? You may likely be hearing more about it in the months and years ahead, especially as you all essentially own these perpetual liabilities created by the whiz kids at the fabled AIG Financial Products.

He then goes on to list all the nearly averted catastrophes; the alphabet-soup programs that he and the government cooked up, along with a 0.1% Fed funds rate as all great and complimentary things. He had particular pride in his "international coordination of rate cuts" as if printing money globally directly from an array of electronic money machines was some great feat.

But wait. What caused the crisis? Nothing on that had yet been mentioned. Was it an attack from Mars, a la the novel by H.G. Wells? Was it a gigantic hurricane, a sort of "Katrina squared" kind of event? What was causing all the world's esteemed financial institutions to go bust? Dr. Bernanke's answer: "Elements of a classic panic."

He does concede that there were some "fundamentals" to point to:

1. "The economy was already in recession." (From what cause, he doesn't delve into.)

2. There was "a dramatic decline in house prices." (But no mention of why! Had there been a huge Fed-driven housing bubble, growing debt burdens to backbreaking levels for most Americans? Not a mention of this possibility.)

3. "Investors remained distrustful of virtually all forms of private credit." (Wait! That's the classic panic, right?)

But the real cause was a panic. He says, "in a certain sense, a panic may be collectively irrational, it may be entirely rational at the individual level, as each market participant has a strong incentive to be among the first to the exit." Who says it was irrational? Why, of course -- Ben Bernanke! The man who, if he loses money, can just print up some more. So what to do in a classic panic? Ah, his old friend Walter Bagehot, the messiah of central banking, has the answer.

Bernanke's exact quote: "Bagehot instructed central banks -- the only institutions that have the power to increase the aggregate liquidity in the system -- to respond to panics by lending freely against sound collateral."

Now wait a moment. Banks alone, without the help of central banks, cannot increase aggregate liquidity in the system? Will someone please explain fractional reserve banking to Dr. Bernanke? Will someone explain to him that bank assets globally had doubled from $21 trillion to $42 trillion in merely three and a half years leading up to March 2008? All of this "aggregate liquidity" was literally created out of thin air by the commercial banks. All while Bernanke and his predecessor, the Machiavellian Dr. Greenspan, had supposedly been withdrawing liquidity from the system! Isn't that an increase in aggregate liquidity, driven by banks' greed and arrogant confidence that they'll be bailed out when credit collapses.

Now I'm no huge fan of Walter Bagehot, but respect is all relative when considering central bankers. So I looked into my copy of Lombard Street (Bagehot's master work, published 1873) to get some exact quotations:

1. "A good banker will have accumulated in ordinary times the reserves he is to make use of in extraordinary times."

2. "Very large loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain."

Very high rates! Hmm. Is 1% (or whatever it was at the time, since adjusted to 0.1%) considered a "very high rate"? Have the banks been punished for their impudence, like spoiled schoolchildren just after engineering a nasty prank? No. They were rewarded for their behavior. How could Bernanke be so free with money for these scoundrels? Easy answer: Money is free!

You see, in Bagehot's day, gold was money. Gold was a finite resource for the central bank and couldn't be squandered. Bagehot didn't have the revered "printing press" that could bring forth wealth with the flip of a switch for all who genuflected to the master (not really new wealth, just an unearned share of wealth already created, sort of like adding water to milk -- after the fact, who would know?).

Why all of Bagehot's recommendations are taken with such high regard by Dr. Bernanke is a bit bizarre. Bagehot couldn't imagine the entire world being on paper, so everything he wrote about was to protect gold reserves and defend his country against the rest of the world destroying his currency. This is all a bit moot when currencies are all backed by nothing.

Bagehot, if he were alive, would be absolutely stunned at the gullibility of the populous and the corruption of this whole regime. I think he'd be a little embarrassed that he hadn't tried it in his time, but perhaps it being only 100 years after John Law tried the same in France (leading to a complete and total economic collapse) he was a bit wary of trying to fool the people in England with that "paper money is okay" bit of nonsense.

Anyway, like any good speech writer, Dr. Bernanke sums up where he started: "The outcome could have been decidedly worse. Unlike the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, [this time the response was] aggressive and complementary."

Bravo, Dr. Bernanke, bravo. Take a bow. Take four more years of being shuffled around in a black town car, have your groceries shopped for you, your clothing tailored for you, as you look down from your ivory tower at the minions below as they scuttle back to work, back to the economy that you saved for them with your brave and daring actions of the previous year.

My final thoughts are that Dr. Bernanke is wrong when he says that "the line between insolvency and illiquidity may be quite blurry." That this game of "kicking the can down the road" with rates at 0.1% won't solve the residential and commercial real estate debt problems; won't allow the West to buy more stuff from the emerging world at ever cheaper prices; won't lead to new, productive jobs; and yes, there will yet be another deflationary crisis coming -- and shortly. Today was no day for a victory speech.

But because the market is king, we must step aside and let Bernanke take his bows through the canyon of heroes.

Let's leave it with a couple of quotes. Hans Christian Anderson wrote, "But, the bubble burst when an innocent child loudly exclaimed, for the whole kingdom to hear, that the Emperor had nothing on at all. He had no clothes."

I can only wonder: Where's that innocent child today?

Of course, there's the opposite (more cynical) view. Neil Gaiman (Sandman) wrote "It has always been the prerogative of children and half-wits to point out that the emperor has no clothes. But the half-wit remains a half-wit, and the emperor remains an emperor."

All hail the emperor. For four more years, he will lord over our money
No positions in stocks mentioned.

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