Stocks sold off a bit on Wednesday and Thursday following the release of the minutes from the Federal Reserve’s last policy meeting. Investors were apparently concerned that Bernanke & Co. may pull the Free Money Truck back into the garage ahead of schedule. The minutes from the last Federal Open Market Committee (FOMC) indicate that more than a couple FOMC members are worried that the Fed is inflating asset bubbles and encouraging speculative excess in financial markets. That asset bubbles and speculative excess are the result of pinning interest rates at zero for years and printing over $1 trillion annually can only come as a surprise to the academics who sit on the board of the FOMC. To the rest of us, it is just common sense.
But don’t fret. After only two down days in the stock market, the plunge protection team is on the scene. Bloomberg is out this morning with a report that at a recent Treasury Borrowing Advisory Committee (TBAC) meeting Dr. Bernanke shrugged off the risk of asset bubbles.
What is the Treasury Borrowing Advisory Committee? It is an advisory board comprised of executives of the nation’s largest financial institutions. The Chairman of the TBAC works for J.P. Morgan and the Vice Chair for the Muppet masters (aka Goldman Sachs). So in other words, Bernanke gave the nod to the big guns on Wall Street that the Free Money Truck still has a full tank of gas and it is revving to go.
I don’t know whether to be more frightened that Bernanke is again ignoring signs that there is overheating in financial markets or that he privately showed his hand to Wall Street’s big banks. Bernanke has a dubious forecasting record (see below) so when he snubs the warnings of economists and members of his own FOMC about the risks of continued money printing, investors should say alert.
Courtesy of the Center of Economic and Policy Research below are some of Bernanke’s greatest misses.
7/1/05 – Interview on CNBC
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?
BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.
11/15/05 – Confirmation Hearing before Senate Banking Committee
SEN. SARBANES: Warren Buffet has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?
BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable… With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions.
3/28/07 – Testimony before the Joint Economic Committee, Congress
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
1/10/08 – Response to a Question after Speech in Washington, D.C.
The Federal Reserve is not currently forecasting a recession.
2/27/08 – Testimony before the Senate Banking Committee
I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.
6/10/08 – Remarks before a bankers’ conference in Chatham, Massachusetts
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.
7/16/08 – Testimony before House Financial Services Committee
[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.
Jeremy Jones, CFA
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