SteveLendmanBlog – Bernanke Stays The Course – 20 September 2013

StevelendmanBernanke Stays the Course

by Stephen Lendman

Helicopter Ben surprised. Tapering was expected. Not now, he said. Reasons why include concern about economic strength.

He’s worried about how higher rates will impact global over-indebtedness.

When tapering was announced weeks earlier, these and other uncertainties were known. Why change policy now? Doing so makes Bernanke look like a taper tiger. 

On January 31, his term expires. He’s expected to step down. Perhaps he’ll stay the course until he does so. The longer it remains unchanged, the greater the future mess.

The Wall Street Journal headlined “Fed Stays the Course on Easy Money,” saying:

“Seeing a more uneven economic climate than they expected and the potential for fiscal discord in Washington, Federal Reserve officials got cold feet Wednesday and decided to keep their signature easy-money program in place for the time being.”

They did so after signaling they’d begin tapering in September. Failure to do so “marks the latest in a string of striking turnabouts,” said the Journal.

“Now, the Fed says it will carry on with a program investors had nervously been anticipating for months could gradually disappear.”

“Amid all of this uncertainty, business leaders aren’t brimming with confidence.”

“When will the Fed start unwinding its bond buying program? When will it finish it completely? Is the program working, or just loading the central bank up with future risks?”

A separate Journal editorial headlined “Mr. Bernanke Blinks,” saying:

Why now? “No Fed chairman in history has put more stock in offering ‘forward guidance’ to financial markets.”

“For him now to shrink at the market reaction he must have anticipated to his tapering guidance suggests a large failure of nerve.”

“It also undermines the credibility of the Fed’s future policy guidance.”

“For Mr. Bernanke to blink (as he’s) heading out the door shows how difficult it will be to return to monetary normalcy.”

If he continues unchanged accommodation, “imagine the pickle for” his successor.

The question remains: when will Fed policymakers “have the political fortitude to stop the music?”

The FOMC statement was typical Fed mumbo jumbo, saying:

“Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace.”

“Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated.”

“Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth.”

“Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.”

“The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.”

“The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”

“The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”

“Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy.”

“However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

“Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.”

“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.”

“The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”

“In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.”

“Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

“In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

“In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”

Market Ticker’s Karl Denninger called accommodative FOMC policy “Utter Insanity. Good God, you must be kidding. So we have exactly nothing other than spiking the stock market and (TV touts) spooging all over the set.”

“Stocks are rising most rapidly among (companies with) no earnings. That’s the reality.” Earlier Denninger called QE “the largest tax ever imposed on the American people in the history of the nation.”

Eventually it’ll debase the dollar. John Maynard Keynes warned of the potential consequences, saying:

“Lenin…was certainly right. There is no subtler, no surer means of overturn the existing basis of society than to debauch the currency.”

“The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not on man in a million is able to diagnose.”

Nine governors supported unchanged accommodation. Esther George alone dissented. She’s concerned about future economic and financial imbalances.

She’s worried about higher longterm inflation expectations. She stopped short of explaining a potential money driven madness driven economic bust.

Market analyst Yves Smith calls Bernanke Greenspan on steroids. He operates by Abraham Maslow’s maxim that “if the only tool you have is a hammer, every problem looks like a nail.”

According to an ancient proverb, “Those whom the gods wish to destroy they first make mad.” Perhaps it had central bankers in mind.

One day Bernanke may be remembered as the economy wrecker of last resort. Money printing madness substitutes for stimulative growth policies.

Market analyst Marc Faber expects Fed policy to “destroy the world. It just takes time. The fallacy of monetary policy in the US is to believe this money will go to the man on the street,” he said. It hasn’t so far and “won’t.”

“It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols.”

“I happen to believe that eventually we will have a systemic crisis and everything will collapse.”

“I think there is a huge misconception and fallacy that money printing can actually improve the rate of employment because the money flows down into the system.”

“It goes first into the banking system and into financial institutions, into the pockets of well-to-do people.”

“The endgame is a total collapse.” Fed governors “never worked a single day in the business of ordinary people.”

“They don’t understand that if you print money, it benefits basically a handful of people.”

The Fed “already lost control of the bond market. The question is when will it lose control of the stock market?”

For now, “we are in QE unlimited. Quite frankly, they have boxed themselves into a corner where they are now kind of desperate.”

Faber thinks Janet Yellen will make Bernanke “look like a hawk.” She favors inflation adjusted negative interest rates. She supports QE ad infinitum.

“The consequences of these monetary policies and artificially low interest rates is of course that the government becomes bigger and bigger and you have less and less freedom,” said Faber.

Former Reagan Office of Management and Budget Director David Stockman calls QE “high grade monetary heroin.” One day it’ll “kill the patient,” he believes.

Market analyst Mike Larson called Bernanke & Co. “gutless.” They missed their last chance to exit QE “without creating utter chaos in the bond market.”

The Fed’s locked in a trap of its own making. Eventually it has to taper. Delay makes an inevitable day of reckoning worse than what’s now expected.

Debt pyramiding doesn’t work. Delaying the inevitable postpones painful trouble. Money printing madness reflects grand theft America.

Bankers, other corporate favorites, big investors, and high net worth households alone benefit. It’s at the expense of economic and human wreckage.

QE works when used constructively. Money injected responsibly into the economy creates growth. It creates jobs. When people have money they spend it.

A virtuous cycle of prosperity is possible. America once was sustainably prosperous. Today it’s heading for a slow-motion train wreck.

Former Fed chairman Paul Volker calls multiple rounds of QE “the most extreme easing of monetary policy” he recalls. It’s “about as easy as it can get.” Continuing more of the same won’t “fix the problem,” he said.

In 1988, Bernanke knew QE didn’t work. Two Fed economists explained. Seth Carpenter and Selva Demiralp headlined “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?”

Their conclusion:

“In the absence of a multiplier, open market operations, which simply change reserve balances, do not directly affect lending behavior at the aggregate level.”

“Put differently, if the quantity of reserves is relevant for the transmission of monetary policy, a different mechanism must be found.”

“The argument against the textbook money multiplier is not new. For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if banks have access to external sources of funding.”

“The appendix illustrates these relationships with a simple model. This paper provides institutional and empirical evidence that the money multiplier and the associated narrow bank lending channel are not relevant for analyzing the United States.”

Fed-style money printing madness doesn’t work. It doesn’t stimulate growth. It doesn’t help Main Street. It doesn’t create jobs.

Dropping money on Wall Street helps asset prices soar. It comes at a time of Depression level poverty, unemployment, underemployment, hunger, homelessness and human misery.

Maintaining status quo conditions is official Fed policy. Obama and Congress endorse it.

Stephen Lendman lives in Chicago. He can be reached at

His new book is titled “Banker Occupation: Waging Financial War on Humanity.”

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