Dear Ben . . .

Dear Ben,

Well, its been a rough couple of months.

Like most new Fed Chairs, you’ve had a baptism by fire. First, elevated inflation levels, then, the Housing slowdown, next, a credit crunch, then a substantial market correction, and now, a derivative morass of biblical proportions.  Oh, and by the way, we are likely entering a recession, with deflation threats in the future.

All Fed Chiefs seem to get off to a rocky start. If it is any consolation, most of it is not your fault. You inherited a mess from Easy Al. His answer to every problem was "Mo’ Money," and that just means "Mo’ Problems." The tech/telecom/dot com bubble, the Credit/Housing bubble, the lack of supervision or regulation of bank lending/Housing were all snafus on his watch. You were the relief pitcher who stepped onto the mound, with the count 3 and 0, bases loaded, no outs, down by 5 runs.

In some ways, you have already shown yourself to be Greenie’s better. You haven’t let the politicos sucker you into the tax/spending debate. You can communicate clearly and effectively in simple English. You haven’t endorsed any party’s specific wish list. Greenie already mea culpa’d doing that.

However, a few recent issues have developed that shall we gently say were not your finest hours. I don’t want to rehash these, I’m sure you are getting more unsolicited advice than you could ever sift through. Far be it from me to give you any advice — and damn to hell the Fed Chair who listens to bloggers or the media for that matter.

So rather than provide unsolicited prescriptions, please consider the following list as items worthy of further discussion. I am not suggesting solutions or even prioritizing. These are merely some issues you may not be aware of. Call it a leaping point for further discussion on the next FOMC retreat.


• Mr. Market is the world’s greatest fake out artist. His goal is to confuse the most people he can;

• Human intervention in complex systems often has unintended consequences.   

• Wall Street is dominated by Alpha Males. The Street is like a pack of wolves with more than one lead dog. All the Alphas will sometimes challenge the biggest, baddest wolf — especially if they sense he’s vulnerable.

• Which is worse: Inflation — or deflation?

• What do Central bankers know today they didn’t know last year? What have they learned since 2,000? And, since 1973?

• There are deeds, and there is perception. While related, sometimes the two behave independently;

• Has the Business Cycle been defeated? How much can we smooth out the peaks and valleys?

• The United States has seen its global
reputation battered in recent years. Other governments — especially
European, but Russia and Central America — are seeking some payback. I
wonder how much the ECB and other Central Banks have bought into that.

• Excesses accumulate in all systems. Sometimes they are specific, and sometimes systemic;

• All Fed Chiefs have had their independence questioned. Some have handled it better than others; Rate all the Fed Chiefs on this issue;

• Is it the mechanic’s job to clean the sand out of the gears, or is it to regulate the machinary’s speed?

• Which is worse: Over-reactions or under-reactions?;

• History treats idealogues poorly;

• What does it mean to not pop bubbles? Can we do anything other than slowing down a bubble’s progress — but not its ultimate destination? And, how desirable are either of those?

• Communication problems are different then policy issues: Discuss.

• Forecasting the future has proven to be folly. Question: What is the value of the Fed’s economic forecasts?  Are they just another manufacturer of predictions?

These are just ideas, questions, jumping off points for future discussion.  I hope you find them to be  helpful exercises.

And I wish you luck in resolving some of the weighty issues facing our economy. You are going to need it . . .

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  1. HCF commented on Jan 28

    Love the reference to ‘Mo Money, Mo Problems’… Another great quote from a rapper:

    “It’s a jungle sometimes, it’s makes me wonder how I keep from going under…”

    Now, if Ben & Co. start to become Mr. Market’s bitch, we might start singing “Money, Cash, Hoes.”

  2. Jim Haygood commented on Jan 28

    Speaking of ‘ideologues,’ all of central banking implements an ideology called central planning. And history has indeed been cruel to its exponents.

    One unmerited escapee from history’s censure is the slippery figure of Greenspan. I do not believe the market gods will be propitiated until G. is thrown bodily into a volcano, to expiate the manifold sins and wickedness of central banking.

    Then young Ben can return to pulling his lever to spawn the next bubble, Bubble III. Rates, along with beans, will ascend to the teens. Got hedges?

  3. Stuart commented on Jan 28

    Meanwhile back at the ranch, Greenspan now sits back in a leather recliner, secure in his position advising Mr. hedge fund how to profit from shorting the housing market. Ben to Al… “thanks”. Wikipedia now considering expanding their examples of “moral hazard”

  4. gunthestops commented on Jan 28

    Good post Barry!!! I think most of our financial leadership in this country has has forgotten an important point “debt and leverage is not prosperity, it is only an allusion of prosperity”

  5. bsneath commented on Jan 28

    1) Can anyone come up with a scenario whereby the economy is at risk of overheating?

    Given home loan defaults, credit card delinquencies, declining home equity values, bank losses, bond insurance downgrades, hedge fund deleveraging, declining home and commercial construction, etc. etc.?

    2) Can anyone identify where another “bubble” might occur?

    Stocks? – been there
    Real Estate? – done that
    Leverage? – don’t think so

    I cannot see why the Federal Reserve should not cut rates very aggressively. If we let ourselves fall into a recession, the Fed will need to cut rates far more, the dollar will fall far more and our most productive assets will be purchased at a discount by sovereign wealth funds.

    How can we be concerned about inflation given these consequences if we do not first concern ourselves with maintaining a health economy?

    I really do not want to live in a serf economy, paying rent to foreign landlords (any more than what will be necessary as it is)

    Congress and the Federal Reserve are absolutely on the right track. Fiscal stimulus to buy time for monetary policy to work, coupled with aggressive interest rate cuts. In my opinion, the Fed should cut an additional 75 – 100 bps this week, but should also let it be known that they will take it back as soon as the economy is back on track.

    Those who think we should not cut interest rates are simply practicing Hooverian Economics.

    It is not possible to rectify overnight the global economic imbalances that have been building up for at least 20 years. Not possible that is without destroying major economic institutions in the process. To do so would result in permanent destruction rather than creative destruction.

  6. zero529 commented on Jan 28

    Seriously though, I wonder under what circumstances BB would actually raise rates. Does he have a Volcker card up his sleeve? Or maybe it would come from the Rest of the FOMC?

  7. bsneath commented on Jan 28

    So help me understand….

    Greenspan aggressively lowered rates and staved off a potential depression culminating from the dotcom collapse, an economy gripped with fear from 9/11, and fear of a global SARS epidemic, and that was a bad thing?

    Greenspan’s low interest rates ignited a global economy that had been in malaise for years, thereby enabling the US to end its role of being the consumer of last resort thus setting the stage for global imbalances to correct and that was bad too?

    In the process, hundreds of millions of people worldwide have been afforded the opportunity to enter the middle class and get out of poverty – knowing that the best defense against terrorism is for people to have hope for a prosperous future, and this was wrong?

    The investment bankers, mortgage brokers, rating agencies and subprime borrowers are all victims of low interest rates and have no personal responsibility for their actions and greed?


  8. Ross commented on Jan 28

    Let’s sum this up.

    “Last night I went to bed at 2 with a 10, but I woke up at 10 with a 2”

    “I never went to bed with an ugly woman, but I’ve sure woken up with a few.”

    My Russian partner Gennady Ivanovich Nikonov
    explains this in an old proverb “There are no ugly women, just too little vodka.”

    Vodka = money. Subprime is perdy.

  9. Jim Haygood commented on Jan 28

    “I cannot see why the Federal Reserve should not cut rates very aggressively. … I really do not want to live in a serf economy, paying rent to foreign landlords.”

    Well, we all want to have our cake and eat it too. Aggressive rate cutting will lower the dollar’s external value, accelerating the acquisition of U.S. assets by foreigners which helps fund the gaping current account balance.

    Oh wait, it’s your landlord calling … “Herro, we fund you long time! Now we need big rent increase. So solly, Neath-chan!”

  10. Helicopter Ben commented on Jan 28

    Dear Barry:

    Thank you for the kind words and thoughts. I don’t think that it is really necessary to address them point by point, though.

    In sum: I have a helicopter. I also have a printing press. And a rate-cutting knife…did I mention that?

    Hugs & Kisses,

    Helicopter Ben

  11. wunsacon commented on Jan 28

    >> The investment bankers, mortgage brokers, rating agencies and subprime borrowers are all victims of low interest rates and have no personal responsibility for their actions and greed?

    bsneath, focusing on that would undercut the “(all) regulation is bad” proposition from laissez-fairists. For many people with that point of view, it’s more natural to criticize the regulators than the market participants.

  12. Loren Steffy commented on Jan 28

    BizLinks | 1.28.08

    Landry’s gets buyout proposal — Fertitta offering $23.50 a share in cash. International selloff points Wall Street to lower opening Halliburton beats profit expectations on foreign sales CEO gives up $40M payout Shell chief fears oil shortage in seve…

  13. john jansen commented on Jan 28

    Regarding economic forecasting and the Central Bank: It always amazes and surprises me that market participants ascribe to the Fed perfect knowledge. In fact what they have is better knowledge than most economic players but not perfect knowledge. They are sitting at 50yard line of the fooball game but occasionally their vision is obstructed by the beer vendor and they miss a touchdown play!
    John J Jansen

  14. Al Greenspan commented on Jan 28


    I am not feeling the love, here. Bsneath seems to be the only one who understands me…I mean I crave the love just like Arthur Burns did, and when Paul Volker came in and undid all the good work Arthur did, no one gives old Art any cred. By the way, I am working on a new rap cd, and I would appreciate it if you would mention it on you blog…it will be out next month and the title is,” I’m MR. Greenie, and I made it almost free”…catchy, ain’t it.

    Your bud,

    Big Al

  15. scorpio commented on Jan 28

    only Republicans (so-called free marketeers) have the balls to make the various Feds lower rates into elections they need to win (because they’re really mercantilists). and Ben has certainly demonstrated that he knows how to jump when asked. post-inauguration he will take these cuts back to attempt to regain the Fed’s lost credibility and standing in the financial world. and that’s when things gets lively.

  16. Don commented on Jan 28

    Kevin Hasset, of the American Enterprise Institute and John McCains presidential campaign, believes the Fed got it right in 1994, 1998 and 2001 cutting rates between meetings. He even quotes BR as saying it’s not the Fed’s job to backstop the equity markets, but does so to point out how foolish are the howls of derision about its recent inter-meeting rate cut.

    He leaves out the rate cuts that ultimately yielded a 1% fed funds rate in 2003. This is the true beginning of the housing mania and it’s corollary messes. Greenspan saw the spector of deflation by dint of productivity increases, particularly amongst our trading partners (like China), that would have ordinarily caused significant price declines, and he choked.
    Artificially inflating prices of consumer goods that would otherwise have been heading down in price seemed better than to experience the angst of Japan in the nineties (and even today). A sunny and mild inflation in consumer goods seemed a better option than a depressing deflation. Inflation, i.e., increasing the money supply greater than output, is always psychologically and politically more appealing than allowing prices to fall, or even stay the same.

    But all that extra money, after artificially inflating the price of widgets bought from China and elsewhere, had to go somewhere, and the stock market had recently burned a great many. Thus it settled on housing, whose appreciation cycle, once started, had to continue to make all the bets on it feasible.

    But like all artificially inflated goods, housing eventually came back down to earth, after its artificially inflated demand collapsed. In the meantime, some of those excess dollars fed a huge inflation in internationally-traded commodities, which know no borders and care not a whit about central banks worries–they just mindlessly inflate and deflate according to the amount of fiat currency chasing them.

    So here we are again. If Uncle Ben cranks up the presses to stave off the price declines that would otherwise occur, as it appears he is poised to do, then we will go through this whole cycle once again. Unfortunately though, each succeeding inflation is like each successive drink to a drunk–it becomes less and less capable of producing that “feel good” sensation that motivates alocholics and the appearance of higher demand that motivates businesses. Eventually, the inflation becomes so pervasive that the medicine of strictly limiting the money supply must be taken, wiping away the illusion of higher demand, pushing prices down, and unemployment temporarily higher, ie., recession.

    All Uncle Ben will be doing is forestalling the inevitable day of reckoning, and ultimately the dosage required for a cure. If we took the cure now, the recession might be mild and beneficial. By forestalling, we just keep our buzz for a while longer, until the mother of all hangovers arrives.

  17. scorpio commented on Jan 28

    i dont know what Hassett is referring to about Fed rate cuts in 1994. the Fed raised rates from 3.0% in March 1994 to 5.5% in Nov 1994. Democrats lost the House of Representatives for the first time in 50 years. i believe as a direct result of Greenspan’s tightening. he took advantage of Clinton’s weak first two years in office to slam the guy. there was no effective Democratic administration for the final 6 years of his presidency.

  18. michael schumacher commented on Jan 28

    60 minutes last night did a horrible job of presenting the problems.

    I’ll spare you the details as many of you watched it. Suffice to say they ended up portraying the banks as victims and made no mention of the amount of leverage (pretty paramount to the actual problem)they have attached to all these “bad loans”.

    Next time I think that the little “issue” of leverage that the banks put themselves in would go along way to allowing people to understand that the whole mess was not caused by mortgage brokers-they had a say in the problem but they did not margin these loans to infinity and then sell them back to the system.

    Overall a VERY poor job where the uninformed have more questions than answers. Especially for giving the banks a free pass for any sort of culpability.

    “it’s the fault of those poor people”
    is sort of the tome it set.


  19. D.H. commented on Jan 28


    I love this blog and check it several times a day. I think you are one of the rare realist voices in the financial media.

    However, over the past week you are starting to sound as focused on and emotional about the Fed as Jim Cramer. If I were to treat your opinion with a dose of skepticism, I would venture to guess you advised your clients to take some positions that will not work out as well with the Fed cuts. Otherwise, I cannot understand why you have moved so quickly from calm explainer of the market rollover to emotional critic of the Fed??

    Over the past two weeks I have noticed that my trader/money manager friends have been either elated or pissed based on how they placed their recent bets. If I am wrong and you are advising your clients based on the reality of the Fed, then I would assume you would be fine with their actions because the emergency cut was no surprise.

    I only raise this issue because I have noticed a change in the sentiments of your postings. I know you are not a prophet, and do not expect you to be, but some of the recent posts are really just rants guised with some analytical language …

    I am just trying to understand the change. Thanks.

  20. soNotInTheKnow commented on Jan 28

    This should cheer up all you Greenspan lovers

    Anna Schwartz blames Fed for sub-prime crisis – The Telegraph

    Anna Schwartz, the revered economist, Anna Schwartz blames Fed for sub-prime crisis shares her views on the credit bubble with Ambrose Evans-Pritchard

    “”There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,” she says.”

  21. Pat Gorup commented on Jan 28

    That’s quite a laundry list of considerations. I like this one the best:
    “Is it the mechanic’s job to clean the sand out of the gears, or is it to regulate the machinary’s speed?”

  22. ECONOMISTA NON GRATA commented on Jan 28


    Acute awareness of what end of the gun one is standing on…..

    Best regards,


  23. Peter Davis commented on Jan 28

    I would agree that Bernanke’s in a tough spot. There are certainly few of what I would consider “sane” people who don’t believe that Greenspan chaired this entire credit mess through both accommodative policies and his wonderful habit of ignoring anything that might have threatened our eternal boom.

    But here’s what I find interesting (or troubling, depending on how you view it): the credit crisis is a serious problem and one this country has not faced in a very long time – certainly not one of this magnitude. Additional factors – such as unprecedented levels of consumer debt and the consumer’s lack of access to new lines of credit due to collapsing house prices; tremendous government debt; huge trade imbalances which have resulted in record amounts of foreign holdings of US dollars; and a general unwillingness of US financial institutions to lend – have shed light on credit bubble caused by asymmetrical monetary and fiscal policy.

    Yet , the Fed’s reaction is both typical and potentially disastrous. The sharp lowering of interest rates is certainly to be expected and is one of the few tools at the Fed’s disposal. But given that it was excessive credit that got us into this mess, perhaps it’s not unreasonable to expect the nation’s chief economist to address the root causes of credit problems in this country. Instead, we get the usual drivel of how growth is “slowing” – right before Helicopter Ben commences one of his money drops.

    I’m not suggesting that the Fed shouldn’t cut rates. I am suggesting that perhaps it is time to both face up to the realities of the credit crisis and its root causes as well as to consider some innovative solutions which address both the acute and systemic problems this country faces.

    As Marc Faber said back in the fall, it is ludicrous to think that the problem can be cured with the same medicine that caused the problem in the first place – excessive credit. I am not at all surprised that politicians would seek to solve the problem with an ill-conceived, short-term solution. But I would expect someone of Bernanke’s ilk to actually consider the systemic problems. Greenspan seemed to care less about this and, unfortunately, Bernanke has thus given no indication that he does either.

  24. bart commented on Jan 28

    Dear Ben,

    I just wanted to add a little love.

    Nice job on letting the CONgress do your job with that ~$150 billion “stimulus” package. It’s just like a $150 billion POMO (permanent open market operation) but keeps the heat and attention off the Fed… while basically adding over a trillion after fractional reserve effects.


  25. kk commented on Jan 28

    Lets get some patience and give Ben a chance.

    I happen to think he had np choice but to cut big. If you want to argue about the timing I say get over it. It’s done. The bet going forward is how will our economy respond in 6-12 months.

  26. Don commented on Jan 28

    kk…it will respond like always when the amount of money is growing faster than the supply of goods and services to buy…bubbles will re-inflate, demand will be temporarily and artificially juiced…and the economy will appear to grow, but somewhere down the road (a road that gets shorter w/ each binge), it will all fall apart, again.

    Uncle Ben is just trying to cure a hangover w/ more hair of the dog that bit us. We’ll get that warm glow of a buzz again, but eventually we’ve got to sober up and realize that houses don’t appreciate 25% a year in any sort of a real way. It’s just the whiskey talking.

  27. kk commented on Jan 28

    I don’t think the rate cut will cure the housing bubble, just like the cuts didn’t reinflate (help) the 1998-2000 stock bubble.

    Time (lower asset prices) is the cure.

    It will however help the banks and help some people that are on the ropes (of course they have to qualify this time around), as well as help the economy away from housing.

    Up until 2000-2002 the mantra was don’t fight the fed. That didn’t work for many momentum large caps and tech in 2000-02 that were selling at stupid valuations. And it may not work for some stocks today that have valuation issues. However, there are stocks selling at reasonable valuations with very low expectations that will benefit. If you are a value investor it is a good time to look over and pick at the merchadise. If you are a momentum investor….good luck hiding in Ag.

  28. larrybob commented on Jan 28

    anna schwartz is a very respected academic, but do note the recent push back that krugman and delong have engaged in after the recent death of uncle miltie (yes, MF was a god, but a very human one). as for ambrose evans pritchard…well,he ain’t his ol’ man, and after his stint in DC i’m surprised he still gets published. buy hey, let’s keep those conspiracies goin’.

  29. rickyny commented on Jan 28

    Barry, what do you think of this?

    “I believe the monoline insurance companies like Ambac and MBIA are in worse shape than most realize, the counter-party risk in the $45 trillion Credit Default Swap market is much worse than we realize, and the exposure by various banks to their problems is much larger than currently understood. The Fed understands this, and realizes that they have been behind the curve but need to catch up.

    If I am wrong and the Fed was responding to the stock market, then we will likely not see a cut this next week. But if we get another 50-basis-point cut, as I think we will, then it means the Fed is responding to concerns about the credit crisis. And we will get another cut the next meeting and the next until we get down to 2% or below.
    Paul Jorion

  30. Northern Observer commented on Jan 28

    Peter Davis,
    Frankly I think all the top people are terrified of the long term solution, which is tighter consumer credit; ie credit card regulation. And increased taxation levels for an exteneded period of time, (25 years)to close the federal budget deficit.
    It’s an all spinach solution to America’s problems and the American voter has not been conditioned to accept the idea of spinach. When the right sells the spinach it tends to offer bonbons to the 1%ers. When the Dems sells the spinach they are too timid and dilute the program in all directions. America is asking the rest of the world to force it to eat its spinach.
    It’s taking time, but we are getting there.

    I wonder, when will the US will have its Canada 93 or Argentina 2001 moment?

  31. douglas commented on Jan 28

    How much can fed rate cuts effect mortgage resets? The biggest reset for the year is coming up in March.

  32. bob16 commented on Jan 28

    >> Greenspan’s low interest rates ignited a global economy

    Not in the US.

    Bush had the worst job creation.

    5 million more people in poverty.

    Just check his approval rating on handling the economy. It’s been in the low 30’s to low 20’s for years now. You don’t get those kinds of numbers from any so called “ignited” economy.

    The big boys made the money. The middle-class was bypassed. That is why the repubs got killed in the 2006 election

  33. stanleyb commented on Jan 28

    Every President knows if you don’t stimulate the economy, you don’t get elected.

    What Bush 41 learned is, if you start the stimulation too late, by the time it trickles through the economy, your opponent is sitting in office and getting all the credit for the great new economic changes in March of the following year instead of in October of the current one right before people start to vote.

    The main problem with the “presidential cycle” theory for explaining these rate cuts is Bush 43 is not running for re-election and has no designated successor. Why even bother in 2008?

    And meanwhile, the lower you drive interest rates, the lower the national savings rate as a whole. Why bother saving cash when T-bills don’t even match the inflation rate?

  34. Greg0658 commented on Jan 29

    Regards from Bart:
    a $150 billion POMO (permanent open market operation) but keeps the heat and attention off the Fed… while basically adding over a trillion after fractional reserve effects

    I wonder, tax payments coming April 15th, defaults to that account wouldn’t look good at all

    did ya see the State of the Union, GWB (did he write a new one, or recycle last years) will veto a $18 Billion package of bacon but the $150B is a’ok

  35. Imelda Blahnik commented on Jan 29

    Re: bsneath at 8:51

    Can anyone identify where another “bubble” might occur?

    Stocks? – been there
    Real Estate? – done that
    Leverage? – don’t think so

    Beanie Babies?

  36. Ron commented on Jan 31

    Greenspan did not do create this mess by mistake or ignorance – the creation of Federal Reserve is to let the Few control and issue money. This is how America is being ruled by Few – once you control a country’s money you can finance leading candidates of both political parties and control media. Every day I and other ordinary American citizens have our money stolen by the Few who control Fed. Germany in 30s had Mark collapse similar to whats happening to dollar which some believe ultimately led to Hitler’s rise to power. When American’s realize how the Few who control Federal Reserve and rule America by proxy are stealing their money via inflation and credit bubbles and bust their will be political repercussions. Greenspan has done more harm to Americans then all the corrupt enron type executives combined. He and the Federal Reserve should be held accountable. Their control of nations money and credit should be re-evaluated. Money and Credit growth should be be limited to economic growth. Allowing the most unreliable, corrupt Few to control Fed is ignorant, primitive and unjust. It behooves on those of us who have some understanding and means to Fight the Fed and the corrupt Fewish control of our money and make the change. else they’ll do what they have always done to other countries.

    “Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild,

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