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Bernanke Starting to Look Dumb

by Michael Nystrom | November 9, 2007
Bull! Not bull

Part I

It was nostalgic for me to see footage of Ron Paul addressing Ben Bernanke on live TV yesterday, as it was almost five years ago that I was first introduced to Ron Paul in the same way. Back then (February 27, 2002), I saw Dr. Paul for the very first time, live on CNBC as I was getting ready for work. At the time I didn't know who he was, but I was astounded by what I heard. He was addressing then Fed Chairman Greenspan on the Federal Reserve, and speaking plain and honest truths: "In many ways I feel that the system you have been asked to manage is similar to an Enron system..."

Enron had just gone bankrupt, so I couldn't believe my ears. He continued on, stating truths about the fraudulent Federal Reserve System that nearly everyone else in Washington actively seeks to avoid.

I was hooked, and five years later Dr. Paul is still at it. Yesterday he was addressing Ben Bernanke, hauling the Fed's polite euphemisms out into the sunshine, naming them for what they are: "...they don't say inflate the currency, they don't say debase the currency, they don't say devalue the currency, they don't say cheat the people who save...They say, 'lower interest rates.' But ... I don't hear you say too often, 'The only way I can lower interest rates is to create more money.' ...So my question boils down to this: 'How can we expect to solve the problems of inflation...with more inflation?"

Part II

I've had the pleasure and the good fortune to meet Dr. Paul and spend some time with him. He is as kind and as humble as any neighbor. So every time I see the good doctor in such a situation, going head to head with the likes of Greenspan, Bernanke or Rudy Giuliani - men who seem somehow larger than life - I feel a certain warmth and kinship. I root for him the way I root for any underdog, for the little guy, for Rocky Balboa. I cheer when he scores points, as he always does with truth and common sense.

What I want to impress more than anything is that Ron Paul is just like you or me. He is one of us. The difference is that he has somehow found the strength to fight for us - for all of us. He refers to his seat in Congress as "our seat." Without hesitation he steps right up to the plate, looks down the middle and swings the bat, no matter who the pitcher might be.

Even on television, his sincerity is somehow immediately apparent. So each time he makes an appearance on TV, whether it is during a debate or in his official role as legislator facing off against the Chairman of the Federal Reserve, I just have to smile and wonder how many people are seeing him for the first time and dropping their toothbrush, their bowl of cereal, turning up the volume on the TV and wondering - who is this man? How many people are having their faith restored that there are still honest people who are working tirelessly for us in the government?

Part III

After Bernanke's first non answer, Dr. Paul persisted: "How can you pursue this policy that you have without further weakening the dollar?" Then, his voice rising in almost the same manner and pitch as that of Jimmy Stewart, "There's a dollar crisis out there, and people's money is being stolen! People who have saved, they're being robbed!"

Unlike his predecessor Greenspan, who could speak eloquently for hours without saying anything, Dr. Bernanke laid an egg. He stuttered and responded with an answer that any high schooler should be able to see through: "If somebody has their wealth in dollars, and they're going to buy consumer goods in dollars, as a typical American, then the only effect it has on their buying power is that it makes imported goods more expensive."

Has Bernanke forgotten that hardly any consumer goods are made in the US anymore, and that most typical American buy gasoline, which is made from imported oil? And what about atypical Americans like me who travel overseas from time to time? And by now we all know that it was excess credit creation, facilitated by the Fed, that led to the internet bubble and subsequent housing bubble.

It smacked of a desperate answer, and Bernanke looked extremely weary and tired, bags under his eyes as though he hadn't slept in days. Bernanke's poor performance reminded me of something I'd read two years prior and have been carrying around in my head ever since. It was a report by Robert Prechter, just as Bernanke was taking over his new job as Fed Chairman. The report appeared in the November 17, 2005 issue of the Elliott Wave Theorist and is titled, "The Coming Changes at the Fed." I dug it up from my hard drive, and with permission have reproduced some pertinent excerpts below.

Remember, Prechter wrote this almost exactly two years ago:
The consensus appears to be that the long-term expansion in the credit supply will continue or even intensify under the Fed chairmanship of Ben Bernanke. One reason many people share this belief is their recollection of Bernanke's November 2002 speech, "Deflation: Making sure "It" Doesn't Happen Here," in which he likens the Fed's printing press option to dropping money from helicopters. There are reasons to believe, however, that the outcome will not be as the majority expects...
Prechter continues:
When credit expands beyond an economy's ability to pay the interest and principal, the trend toward expansion reverses, and the amount of outstanding credit contracts as debtors pay off their loans or default. The resulting drop in the credit supply is deflation. While it seems sensible to say that all the Fed need do is to create more money, i.e. FRNs, to "combat deflation," it is sensible only in a world in which a vacuum replaces the actual forces that any such policy would encounter (emphasis mine). If investors worldwide were to become informed, or even suspicious, that the Fed would follow the 'copter course, it would divest itself of dollar-denominated debt assets, causing a collapse in the value of dollar-denominated bonds, notes and bills. This collapse would be deflation...

This illustrates perfectly the bind that Bernanke finds himself in today. As a man who has spent his entire career in academia, he is finding out that the real world is not so clean and neat as his theories and models:

Bernanke's plan, according to articles, is to aim for a 2% annual inflation rate. "Bernanke has called that the Goldilocks idea: not to hot, not too cold. The just-right spot..." He is convinced that such a policy is all the economy needs to keep it steady. Clearly, Bernanke is a firm believer in the idea that the economy is a machine, whose carburetor simply needs fine-tuning to get it to run smoothly. Economists, deep believers in the potency of social directors, are convinced that "monetary policy...moves the entire economy." ... Because of this proposed targeting plan, Bernanke is expected to act "More openly. More methodically. More predictably." Well, Ben might aim to do those things, but society, the economy, the credit supply and the stock market do not behave in such a manner. When you think you have them under your thumb, they have you.

Prechter closes with the following, very blunt statement:
Bernanke will surely reign in a bear market when every decision he makes will be seen as dumb.
This prophecy finally appears to be coming true. Prechter did not say it to be mean, but rather as a reflection on the position that Bernanke has put himself in. Bernanke has studied the Great Depression his entire life, and he's convinced that he can prevent the US from suffering another. "I will do everything in my power to ensure the prosperity and stability of the US economy," he said.

But that is far too large a responsibility for one man to take on, especially considering the mess that he inherited. The coming collapse will not be his fault. But he'll take the blame, which is already beginning, according to this NY Times article:
But in a disappointment to investors, Mr. Bernanke offered no signal that the central bank might soften the blow by lowering interest rates for a third time this year at its next policy meeting on Dec. 11...
Mr. Bernanke's message did not sit well. Wall Street analysts quickly criticized him for ignoring the real risk of a serious downturn. And at least one Republican, Senator Sam Brownback of Kansas, begged him at length to cut interest rates as soon as possible.
What can Dr. Bernanke do? No matter what he does, no one will be happy. His decision to raise, lower or leave interest rates unchanged will be met with severe scrutiny and second guessing as the economy worsens. Whatever happens, Bernanke will take the blame.

Prechter was right. After a brief honeymoon, Bernanke is starting to look dumb.

[Note: I've made special arrangements with EWI to have a four-page excerpt of Prechter's November 2005 report - which is well worth reading - available this week (Nov 7 - 14, 2007) by clicking here.]

Turn off the TV and think!

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