Bernanke: Fed Must Avoid Greenspan Errors

Well, its a start:

Federal Reserve Chairman Ben S. Bernanke may encourage lawmakers today to stimulate the economy while aiming to avoid his predecessor’s "regret” of being tied to specific measures.

Legislators will question the Fed chief on steps to avoid the first recession since 2001 when he testifies to the House Budget Committee in Washington. Bernanke told members of Congress this week that some kind of fiscal stimulus is needed, according to Democratic lawmakers.

Former Chairman Alan Greenspan "misjudged” the environment in which he endorsed tax cuts in 2001, and had "intense” regret the eventual legislation excluded his specific guidance, he wrote in his 2007 book. Bernanke will try to avoid backing any particular tax or spending policies because doing so could earn criticism from legislators who oppose them, putting the Fed’s reputation for independence at risk, analysts said.

Now if we can get the Fed to avoid the Greenspan policy of inflating our way out of every situation to the detriment of those who suffer from inflation, we will be making some progress.

Note that the major coverage of these Fed Chair comments misses the subtext of what Bernanke was implying (though Bloomberg came the closest):  "Greenspan f&^%ed up! He compromised the Fed’s independence for partisan reasons, and damaged the Fed’s reputation. I won’t make that mistake."

In this coming Sunday’s NYT Magazine is a long piece by Roger Lowenstein titled   The Education of Ben Bernanke, and I suspect it will be required reading. (I already picked out a cigar and some scotch for that very purpose).

I already spied this wonderful quote from former Fed Chair Paul Volcker: :

“I think Bernanke is in a very difficult situation,” Paul Volcker told me. Volcker was the Fed chief who preceded Greenspan and who conquered, painfully, the great inflation of the 1970s and early ’80s. (He was chairman from 1979 to 1987.) “Too many bubbles have been going on for too long,” Volcker added. “The Fed is not really in control of the situation."

Note that when it comes to enjoying low inflation rates, Volcker is the man who was most responsible.    should get credit. Truth be told, both the 80’s Ronald Reagan boom and the 90’s Bill Clinton boom were benefactors of Volcker’s Fed. He broke rampant inflation, and the next 20 years of falling interest rates were the direct result of his policies.

When you compare the situation Greenspan inherited with the one Bernanke got stuck with . . .

UPDATE: January 17, 2008 11:45am

Testifyin: 

Chairman Ben S. Bernanke
The economic outlook
   
Before the Committee on the Budget, U.S. House of Representatives   http://www.federalreserve.gov/newsevents/testimony/bernanke20080117a.htm

>

Sources:
The Education of Ben Bernanke
ROGER LOWENSTEIN
NYT,  January 20, 2008
http://www.nytimes.com/2008/01/20/magazine/20Ben-Bernanke-t.html

Bernanke Aims to Avoid Greenspan’s Stimulus `Regret’
Scott Lanman
Bloomberg,
Jan. 17 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=axNV4KGulqxI&

Bernanke Likely to Support Stimulus Effort
SARAH LUECK and SUDEEP REDDY
WSJ, January 17, 2008; Page A2
http://online.wsj.com/article/SB120051473033395285.html

Bernanke Is Said to Support Stimulus Measures
By EDMUND L. ANDREWS and DAVID M. HERSZENHORN
NYT, January 17, 2008
http://www.nytimes.com/2008/01/17/business/17fiscal.html

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What's been said:

Discussions found on the web:
  1. techy commented on Jan 17

    I gotta give credit to the bears on this one.

    I do think that FED knew all along the problems of the housing and Credit crunch, but there was no room for them to do anything. hence they thought maybe optimism will keep the populace from cutting spending.

    which means, even now the FED may not have much room, except cutting the rate and pumping liquidity.

    btw i did notice that the mortgage rates are falling, which will be able to ease the housing pain a lot.

    and since libor rate has eased too, credit crunch may also get better.

    frankly i dont have too much expectations from politicians to solve economic problems, they want something to appease the masses….its an election year….what better than some free money in form of “Tax rebate”…

    the price we have to pay for democracy and free market….i hope we will have a better system one day, when humans will be out of the equation..

  2. Justin commented on Jan 17

    Why did they let lenders use the LIBOR in the first place. It is not tied directly enough to our “US” economy. And I am tired of these financial news reporters saying that “congress and the president are talking about a “stim-u-ass” plan to keep the economy out of recession,” don’t they realize that government behavior such as this, is to keep the economy out of a depression?

  3. Eric Davis commented on Jan 17

    That Uncle Ben story is a great read.

    Time to learn that you can’t grow an economy with inflation…. Even though it will look like it.

    If you want a criticysim of Ben…. He needs to learn “LEAD, FOLLOW, or GET THE HELL OUT OF THE WAY”

    I stick with my theory that Ben isn’t the fool greenspan is… problem may be that he has a little dick.

    It’s also possible, that there is a bit of a Zen stratagy.

    Cheers to The big Picture

  4. Eric Davis commented on Jan 17

    Sorry, let me fix that….

    That Uncle Ben story is a great read.

    Time to learn that you can’t grow an economy with inflation…. Even though it will looks like growth.

    If you want a criticism of Ben…. He needs to learn “LEAD, FOLLOW, or GET THE HELL OUT OF THE WAY”

    I stick with my theory that Ben isn’t the fool greenspan is… problem may be that he has a little dick.

    It’s also possible, that there is a bit of a Zen strategy.

    Cheers to The big Picture

  5. Eric Davis commented on Jan 17

    Justin,

    the reason they used libor(IMO) is because the money came from Europe and asia(if you don’t know, for the most part we don’t have any money to loan, because we don’t save.), and the lenders wanted the money tied to the London rate, and not the Greenspan rate.

    It also makes it harder for the U.S. to devalue the loans on repayment.

  6. Bill commented on Jan 17

    yet the dollar has lost 98% of its purchasing power since creation of the fed.

    seems like alot of blame for said destruction lies at the feet of the fed as an institution.

    btw, reagan (versus paul v) got blame for the recession of 1982 – remember the constant media bombardment of reagan vis-a-vis souplines and homeless – until the economy turned.

  7. dave commented on Jan 17

    Barry, in today’s 24/7 media environment could Volcker be Volcker? No policy is given time to work, the second guess starts immediately, regardless of whether the move is action or inaction. The political environment has changed accordingly. Volcker existed in Charlie Wilson’s time, that was a blessing. Congressional dolts react almost as fast as the market with a fraction of the knowledge and darker motives. Over the next few months we will find out what the General is made of, I hope it is tougher stuff than his predecessor.

  8. Eric Davis commented on Jan 17

    Bill,

    I thought Paul Volcker got credit for getting stagflation under control. After pulling us off the gold standard, then loose money policy to fight Vietnam which had caused 4(maybe 3) recessions in 7 years.
    Massive Devaluation of the Dollar(which if it is good for us, why didn’t we boom in the 70’s?)

    Usually truth is in between…. or not.

    Strong monetary policy may not stop recessions, which may be inevitable, But it stops the death of a thousand cuts, which is stag-flation.

    I think there may be a place for creating growth with looser money… But it’s relative, you cant create growth by moving from loose money to loose money.

    As much as Government policy(not by conspiracy, but by incompetence, and lassitude) wants to create “pretend Growth” by having 8% inflation, and calling it 2%. and an economy contracting at 5%, and pretending it’s growing at 2-3%.

    I’m psyched for “Inflation” to get into the public discussion…..

  9. Jay Weinstein commented on Jan 17

    “Perhaps the Great Moderation has been the result of good luck. Or perhaps it has been because of improved management skills —business learning not to overstock inventories, for example. Bernanke has written that it is something else. He sees it as a result, in large part, of better monetary policies. He says that central bankers have finally learned how to guide economies — not with mystique but with economic science. If that is so, we will not need a wizard behind the curtain anymore, only intelligent engineers who can steer markets to a promised land of rational expectations. To prove that he is right, Bernanke will need to minimize or, if possible, avoid the looming recession that looks ever more likely. It will not be easy. Bernanke’s education has just begun.”

    It is the middle part of this paragraph that troubles me. As good investors know, the world is a chaotic and unpredictable system–the hubris of humans to think that they are smart enough to “intelligently engineer” such a system is what leads to situations like we have now.

    While this is mostly Greenspan’s fault, BB is stuck with the mess. If he thinks he has good answers, he is likely to make it worse rather than better IMO.

    Personally, I would like them to cut rates to about 3% this month and just state that they will stay there until further notice. Greenspan’s idiotic “quarter and a quarter and a quarter” philosophy left them way behind the curve and kept the bubble inflating on the way up. He should have jerked rates from 1 to 4 or so very quickly.

    But what do I know? I’m just a comment in a rock and roll blog….

  10. Mike M commented on Jan 17

    Hey, Ben how about something like this in your next speech:

    The future strength of the US economy depends on production and savings. It will be the Federal Reserves policy to protect the dollar and provide a strong incentive to savers. Therefore, the Federal Reserve will maintain a tight monetary policy for the indefinite future.

  11. D. commented on Jan 17

    I get the feeling that this bunch of idelogues truly believed that American households would actually do what’s good for them in the long term. Or wanted to believe that.

  12. Stuart commented on Jan 17

    Never thought I’d see myself writing this, but go Cramer go…. meltdown part deux. There will be some this morning who will not be pleased with his comments, for certain.

  13. Eric Davis commented on Jan 17

    In trading, it’s fun to watch when trade channels collide, and that is what is going on in the economy Austrian vs Keynesian economics. It’s time to move to the other Trade Channel…. Or we can Malinger.

    Super Fun!!!

  14. D. commented on Jan 17

    Another comment… let’s not forget that we are mostly being run by a bunch of men who put their careers first while for most of us it’s the other way around.

    Most of us spend our career acting like we’re putting our career ahead of our family.

    Most leaders probably don’t spend much time at home and only have a vague idea of what a nuclear family really is. And they’re the ones judging us and deciding how we should live our lives.

  15. Eric Davis commented on Jan 17

    Cramer is on it again, Acceptance? anger?…. In his defence…
    This will sound lame…. but you don’t see anyone else on CNBC hugging people….(Queen Latifa, Michael Chiklis)…

    being Wrong…. is the human condition…. You can’t fault everyone who has ever been wrong…. Even if they continue to be.

    Everyone is perfect, and could use a little improvement.

  16. Greg0658 commented on Jan 17

    Having just sat thru Mad Jims rant

    I was thinking of Garth Brooks as Chris Gaines singin “Right Now” wondering who’s to blame

    question – when you buy alot alota of stocks in a company are you buying the company or the right to manage it?

    cause we don’t save in America because we invest in infrastructure buying stuff making corporations rich and packing our homes and lives with 5 senses candy

  17. Winston Munn commented on Jan 17

    To me, the really telling comment above is when Volcker states that the Fed really is not in control of the situation. Bernanke also alluded to this in his Jackson Hole speech – action by the Fed on the short term intraday rates have little effect on the capital markets.

    What has been termed the shadow banking industry is the driving force behind these asset bubbles.

    Until the capital markets once again start to function somewhat normally, it will be a rocky road to recovery.

  18. Neal commented on Jan 17

    The Fed has proven itself so far behind the curve that it is essentially irrelevant to how this crisi sorts itself out.

    The time for action was years ago, when a slight turn of the wheel would have sent us south of the icebergs.

    The scraping noise heard below, a few months ago, meant that contact had been made.

    Water is filling the below decks. Didn’t they say that the ship was divided into separate water-tight compartments? The ship is unsinkable, right?

    By the way, did anyone count the number of lifeboats?

  19. Eclectic commented on Jan 17

    I read the whole thing yesterday with a couple of Bud lites.

    Wonderful and incredibly vigorous in its historical and academic understanding, it’s the best picture I’ve seen of Dr. Benber N. Anke yet.

    But, I’ve already written long and hard here on this blog commentary why Bernanke and the Fed are victims of self-deception regarding their religiosity for M-O-N-E-T-A-R-I-S-M.

    The author, Roger Lowenstein, likens the current environment to being a sort of “laboratory” for Bernanke’s understanding of the macroeconomics of the Great Depression, partly deriving the title for his long well-written piece.

    Well, Bernanke’s and the Fed’s experiments in that lab have just about blown up… and they’re going to blow up soon if they don’t figure out the core psychological basis for the current crisis.

    P.S., a side note:

    I’m reminded of once when a frantic chemistry teacher ran screaming across the lab floor to prevent an unknowing dumbass student from tossing a beaker full of water into a lab jar full of pure sodium metal. She just made it by the skin of her teeth, and therefore because there is a merciful God nobody got hurt with what would have been the explosive results of that moment frozen in time in my memory forever.

    The Fed is not screaming across the floor to prevent another sort of failed experiment… not yet anyway.

  20. cinefoz commented on Jan 17

    Yesterday, before the close, I put out some cash into the market. I Think this is a big, bouncing bottom. The market will trend upwards, but the talking heads will make the market look like a bad place to be. If the market acts predictably, I will add more next week or the following week.

    As I said yesterday, I DON’T think it will hit the moon in a few days. Rather, the big damage has been done and it will take something new and vicious to keep the market going down. It will likely vacillate for a few days or a couple of weeks before marching onward and upward.

    Given the terrible place various sectors are in right now, and the fact that all bad news is old news, this is like finding free money on the sidewalk and I’m not afraid to pick it up.

    I went for tech, small cap, value, finance, Europe, large/mid cap international, transports, and some mutt stuff.

  21. zero529 commented on Jan 17

    nitpick: I believe Reagan and Clinton were beneficiaries of Volcker’s Fed, and have him (their benefactor) to thank.

  22. Eric Davis commented on Jan 17

    I’m loving the comments(all about me right.(other note, sorry to Troll this morning(hopefully some dissenters can come in without getting blasted))

    It’s obvious that neither monetary policy can stop recessions. And it seems obvious that Newton’s laws remain solidly in force… For every Action there is an equal and opposite reaction…. Everything you inflate has to be deflated, or you get Disaster… I think there is a place for lowering the rates….

    But it’s all part of the bargaining process, Bust Cycles are part of the Boom, and you can’t have one without the other.

    But As Lau Tzu says, if you fight against the flow of the river, it has a tendency to drown you.

    In order to not Create a Rebounding reaction, you have to work in the opposite direction.

  23. Doug Watts commented on Jan 17

    Here’s a fun fact. The little envelopes of Kool-Aid have nearly doubled in price over the past 12 months. A year ago they were 5 for a dollar at the supermarket. This summer they went to 4 for a dollar. Last week they went to 3 for a dollar. Who knew the production cost of a tiny envelope of flavoring could increase so dramatically. It even costs more now to drink the Kool-Aid.

  24. scorpio commented on Jan 17

    after looking at the action in ag complex (MOS, POT) and Foster-Wheeler i wonder if Cramer’s short-busting club backfired on him in the New Year. were his momentum picks and his followers targeted by the smart money?

  25. eightnine2718281828mu5 commented on Jan 17

    scotch:

    If you haven’t already, try an unfiltered, cask strength scotch.

    Things on my shelf right now:

    Aberlour a’bunadh, Macallan, Ardbeg, Glenlivet Nadurra

  26. GreenMachine commented on Jan 17

    So for those of you with crystal balls, do I refi my 30yr fixed at 6.625% to a 15yr fixed at 5.125% or wait and hope for a lower rate in the 4s.

  27. Bill commented on Jan 17

    anybody have a link to the newest cramer rant?

    i gotta see it.

  28. D H commented on Jan 17

    “Economics is not that exact a science.”

    ~ Bernanke @ 11am

  29. Barry Ritholtz commented on Jan 17

    How about a link to the Cramer meltdown, please?

  30. VJ commented on Jan 17

    Eh, the American RightWing’s idea to stimulate the economy NOW, is to extend the tax cuts for the Rich & Corporate that expire in 2011.

    They must be taking the Purple Kool-Aid intravenously now.
    .

  31. Johnny Vee commented on Jan 17

    Don’t worry, Ben will drink the cool aide.

  32. Michael Schumacher commented on Jan 17

    green machine-

    You are not alone in wondering about that(and I don’t have crystal balls just steel ones LOL). I’m sooooo glad I saw this coming in January 2005 that I refi’ed at 5.25%…..it hasn’t made one damn bit of difference because the Fed took the chicken shit way out and lowered rates. I am waiting for it to drop to mid four and then I do it again.

    Be patient…..it will happen..just might not make it all the way to 4. Lenders will have no choice but to lower if only to “try” to work off that inventory.

    Rates will go lower but as a whole it’s a zero-sum game based on tightened standards and the ability to qualify getting harder and harder.

    Ciao
    MS

  33. John commented on Jan 17

    “Legislators will question the Fed chief on steps to avoid the first recession since 2001”.

    Why try to “avoid” a recession? The current problems are the result of excesses that need to be purged out of the system, and that is the role of recessions in all economic cycles. Failure to purge excesses, the causes of which are well-known by readers of this blog, only leads to a warped economy.

    Maybe recessions can be mitigated through effective monetary policy, but economic cycles will always remain. It’s hubris to think otherwise. The economy will be better off in the long run if the downside takes its course.

    I understand why the political class wants to avoid recession, but the Fed is supposed to be independent. Politicians are supposed to act for the long run health of the country instead of the next election, but fat chance of that happening.

  34. Pat Gorup commented on Jan 17

    “Now if we can get the Fed to avoid the Greenspan policy of inflating our way out of every situation to the detriment of those who suffer from inflation, we will be making some progress.”

    Not going to happen. The FED would rather we hyper-inflate then deflate for a myriad of reasons.

  35. small investor commented on Jan 17

    Contrary to Dick Cheney and recent WSJ editorials, it appears that Bernanke believes that deficits DO matter.

  36. Bill commented on Jan 17

    stormrunner, thank you for the cramer (reminds me of dutchie in the zulu movie) video. excellent.

  37. Innocent Bystander commented on Jan 17

    Writing loans to deadbeats and then getting paid for it? Is this a great country? Plus you get your liberal creds for putting people who can’t afford housing into homes.
    I can’t imagine why this crap blew up.

  38. Francois commented on Jan 17

    “Barry, in today’s 24/7 media environment could Volcker be Volcker?”

    Dave raises an excellent point. Since anyone who whants to be the Fed Chairman has to brown nose a bit (at least during the Congressional hearings) it would takes a really tough dude and a maverick with a tremendous reputation to tell politicians in their face to buzz off and keep their ideologies out of the way of sensible economic policy.

    Mind you, I would relish the TV clip that would show a Fed Chairman telling a Congressperson: “Sir/Mam, the policy you just mentioned is a non-starter, and quite frankly, as been laughed at by any serious economist and investor. So my answer is an unqualified Nyet!”

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