Strategas Research is reporting the latest (Rasmussen) poll numbers on Bernanke’s reappointment. They show that in July 26% were in favor of the reappointment and 33% wanted a new Fed chairman. Their December 5 missive says the latest November numbers are that 41% want a new chairman and only 21% favor Bernanke’s reappointment.
Other polls show that the Federal Reserve is held in very low esteem by mainstream Americans. Various measures of public sentiment are not supportive of the Fed. This attitude among Americans has empowered the Fed’s detractors in Congress. It has empowered Senators and Representatives to attack the Fed and to offer legislation which changes the Fed’s structure. Some of those proposals will certainly intensify the amount of political influence that the executive branch will have over the central bank.
In our view the Fed has handled this political attack miserably. For a while the Fed’s leadership maintained a business as usual attitude. Now they have realized that they are at risk and we see chairman Bernanke in a more public role than in earlier times. His next message will be in his Washington speech on Monday. We also see this message of Fed independence coming from other sitting Fed governors and regional bank presidents and from former Fed governors like Krozner and Mishkin and Meyer.
Is this counterattack enough to blunt the politics that will permanently change the Fed’s status? We believe that the answer is no. The Fed is offering too little and too late. And it is relying on giving opinions instead of citing facts that are credible in the eyes of the public.
Former Feddies who are defending Fed independence have limited credibility. Sorry, Randy, Rick, and Larry. You are all bright and articulate and accomplished economists. You are also viewed as insiders. You are seen as having been there when the problems were created, and you are viewed as part of the problem. Rick, you voted for some of these emergency actions, which are now highly questionable. Randy you did, too. Larry, you argued there was no proven direction of causality between margin requirement setting and stock price bubbles. You argued that with me at a NABE meeting in Washington when the world was thirsting for a sign that the Fed would rein in an asset bubble.
Therefore, spouting broad opinions now doesn’t help the Fed’s cause. To argue well you need very pointed and concrete examples of why the Fed must act independently and with workable emergency powers. Cite the work of the Fed in payments after the 9-11 attack and show how the Fed was able to continue the flow of funds in the country because of the redundant system in Atlanta when the New York system was under a pile of rubble. And demonstrate how the Fed gave the system a massive liquidity boost on an emergent basis. Show how the Y2K transition evolved without a shutdown and how you took the lead in global planning after the satellite failure in the late 1990s alerted you to the possibilities. Show how Fed regional banks perform roles that assist the banking system. Explain how the Board of Governors has no money and how the regional banks are the financing conduits for policy.
And get the perspective on the New York Fed clearer. Newly installed NY Fed president Bill Dudley is trying his best. Because of his position he cannot criticize the faults of his predecessor, whose record is tainted by behaviors that are now revealed. But I can and so can you if you stop being polite. Tell your story with facts. Opinions do not help now when the general public no longer believes you.
And stop trying to oppose an audit. It is coming. When 300 Congressmen sign onto a bill, you can rest assured it will be in the final conference version in some form. And the country doesn’t believe it when you say an audit will hurt the Fed’s independence. You have to show why and how. The more a federal body opposes an audit of itself, the more the public and the Congress want it. You are making yourself the scapegoat. Instead, explain why any audit has to be confidential. Explain why disclosure of an institution’s condition can be misunderstood and trigger a run on a bank. Point out how the Defense Department audits are done with confidentiality rules that protect military secrets. Use your expertise to shape the audit so it doesn’t hurt the country. The audit is coming. What form it takes is still under debate and discussion.
Instead of an immediate confirmation vote there will be a delay on Bernanke‘s nomination. That will trigger a period of speculation as to whether he will make it. We think he will, but the margin will be thinner and the vote may go to the wire. The delay may impact markets, because it introduces a risk premium.
Meanwhile the politics favoring changing the Fed’s structure will continue and intensify. We do not know how the various pieces of legislation will coalesce and become law. We do know that ALL OF THEM narrow or alter the Fed’s independence. Our conclusion: whatever comes out of this Congress will limit the Fed’s powers and transfer some its ability to set an independent monetary policy. That transfer will shift control to the executive branch. That means more of the policy will be made by the President and a very few people around him, like the Treasury Secretary and his chief advisers.
Welcome to the new 2010 structure in America.
Does a politicized central bank mean we are going to have high inflation? No. In Japan, two members of the cabinet sit in every central bank policy meeting. They have powers to delay implementation of decisions. Japan has double the debt-to-GDP ratio we do. It has had over a decade of deflation and has very low interest rates. Politics in central banking doesn’t always lead to Zimbabwe. You can get ice as well as fire.
What politics does is weaken the compromising center. The strength of the US central bank is that it combines the views of the Board of Governors with those of the regional presidents. The unique power of the NY Fed was an accident of history formed in the days when transactions were done with paper and handwritten ledgers. The 12 regional banks found that they were trading through brokers and transacting with each other. They centralized things in New York because of the need for “runners” and “physical delivery” of securities. The whole structure that empowers NY and the Wall Street center acts to the disadvantage of the rest of America and is an antique. It can be changed. Talk about it. Debate it. Do it.
How many Feddies are speaking about changing structure? I haven’t heard this chorus. And I haven’t heard anyone defend why we need to have this private club of a few primary dealers. That club and the Fed’s oversight of it gave us Countrywide, Bear Stearns, Merrill, and Lehman. Shouldn’t the membership rules be changed? These are the types of issues that Feddies should be addressing in public. They get to the heart of why there has been a failure at the Fed in both communication and explanation.
We see all this risk demonstrated in the currency markets. The Fed produces only one thing: dollars. They manufacture US dollars. When the rest of the world wants to shift away from what the Fed manufactures and redirect wealth to something manufactured by another central bank or by a gold mining company, the world sells dollars and buys something else. It is as simple as that.
Cumberland’s global multi-asset class allocation has favored a majority of exposure outside the United States. We believe that financial policy is changing to the detriment of America in a relative way. We describe this in economic and financial terms. We still have terrific imbedded personal freedoms in this country, including the ability of a writer like me to criticize the Treasury Secretary and the President and not get shot because I did it. But our financial strength is under attack; and sadly, the harm has originated, in part, from within.
David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com
-December 5, 2009
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Copyright 2009, Cumberland Advisors. All rights reserved.
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