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Someone needs to sit Fed Chairman Bernanke and Treasury Secretary Paulson down in room and tell them that the financial world would be grateful if they would shut up for awhile. They need to explain to these two powerful policy makers that their words have not done much good over the last 15-months and that every time they speak they simply reinforce this point. The quicker this meeting takes place the better.
To get an idea of what I am talking about flash back to Monday, when Paulson felt it necessary to give another convoluted speech about the TARP. Apparently the Treasury boss wanted to assure people that his plan of attack - which changes by the week – will eventually succeed (perhaps also Paulson wanted to pre-empt a highly negative GOA report on the Treasury’s handling of the TARP with this speech?) Paulson also hinted that even as the global slowdown intensifies and depression fears abound, he is looking forward to handing off the TARP to his successor. So much for the argument that time is of the essence.
“We are actively engaged in developing additional programs to strengthen our financial system so that lending flows into our economy. When these programs are ready for implementation, we will discuss them with the Congress and the next Administration.” Paulson. December 1, 2008
Given that the “new authorities” granted to the Treasury in October proved ineffective at preventing the Citigroup meltdown/bailout and that the Fed has already been forced to pony up an additional $800 billion to try and do some of the lifting that the TARP was intended to do, you would think that Paulson would stop wasting energy telling us how the TARP’s ‘creative combinations’ will ‘maximize their impact on our system’. Quite frankly, the TARP is already recognized by most as a colossal 3-page blunder. For that matter, the historical record clearly shows that Paulson didn’t see today’s financial crisis coming, that he underestimated its severity when it arrived, and that he has failed to adopt any coherent strategic planning for the future. Why does Paulson feel the need to remind everyone of these things?
“We expect banks to increase their lending as a result of these efforts and it is important that they do so. This lending won't materialize as fast as any of us would like, but it will happen much, much faster as confidence is restored as a result of having used the TARP to stabilize our system and to increase the capital in our banks.”
The TARP stabilized the system and will restore confidence ‘much, much faster’? Using this logic you could argue that Bernanke’s rate cut on September 18, 2007 was an absolute blessing. After all, without this rate cut it would not have been possible for the next 375 bps of cuts or the trillions in desperate bailout funds to be unleashed and for the eventual recovery to take root.
Speaking of Bernanke, back in 2002 when it was taboo for central bankers to talk frankly about the Fed’s magical ‘printing press’ he broke with tradition and gave a memorable speech that is still widely discussed today. With Paulson and Bernanke apparently making a bet over the weekend to see who could make the most outrageous comments this week, Bernanke topped his 2002 anti-deflation speech on Monday:
“…although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited.
…there are several means by which the Fed could influence financial conditions through the use of its balance sheet, beyond expanding our lending to financial institutions. First, the Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand.” Bernanke. December 1, 2008
Against the backdrop of Treasury yields hitting record lows Bernanke takes the stage and says that the Fed may start buying Treasuries to try and stimulate the economy. If this is not a sign of just how dire things are today I am not sure what is. And for good measure he also uses the word ‘might’, as if to question his entire deflation fighting campaign. Is instilling the image of a more terrifying deflationary scenario into the minds of already spooked investors what passes for confidence building today Mr. Bernanke?
Bernanke also took time yesterday to ramble on about the housing market. I note the word ‘ramble’ because if memory serves this is one of the lengthiest speeches Bernanke has ever offered.
“Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy. More needs to be done. In the remainder of my remarks I will discuss, without ranking, a few promising options…” Bernanke. December 4, 2008
Last week the Fed pledges an additional $800 billion to the bailout cause and yesterday Bernanke concludes that all of his new bailout ideas “would require some [more] commitment of public funds.” Is anyone else wondering why the Fed doesn’t simply print whatever funds are required to nationalize whatever assets need nationalizing (I don’t agree or think bailouts are the way to go, but if you are going to do it why not do it right)? Already years into the housing bust and Bernanke is still debating what line of attack may work best at preventing foreclosures. Astonishing.
Bernanke Gets Points For Fear Mongering But Paulson’s Idiocy Wins!
Paulson’s TARP speech alone may not have beaten Bernanke’s double dose of negativity. However, Paulson also suggested this week that China – which is on pace to own America one day – must allow its currency to float higher. Furthermore, Paulson really went the extra mile with the following:
“Here's the way I think about regulation and the free market system. We need to get to a place in this country where no institution is too big or too interconnected to fail...because regulation alone is never going to solve the problem. There's no regulator that's going to be so good they're going to be able to deal with or ferret out all the problems. So it takes balance between the right regulatory system and market discipline.
Only if we have the freedom to fail is there really going to be the freedom to succeed.” Paulson. December 2, 2008
With the financial world collapsing and nervous investor’s electing to get a nearly zero percent return on short-term cash as opposed to a fantastic return on any number of riskier instruments, can anyone explain why Paulson is blathering on about why regulators suck? Why doesn’t he just say ‘this next bailout goes against everything I stand for but we are so screwed it just doesn’t matter”? Suffice to say, Paulson won the bet.
When the markets crashed in 1987 former Fed Chairman, Alan Greenspan, released a 1-sentence statement saying the Fed would provide liquidity. Notwithstanding Greenspan’s innumerable faults, he proved with this post-crash statement to at least understand what market participants wanted to hear. With investor confidence shot what is the message that ‘Helicopter’ Ben and ‘Bazooka’ Paulson have conveyed to investors? Chaos and clumsiness come to mind.
A Few Good Men Liars
For better or more likely worse, the financial world has departed down Bailout Avenue, and people like Paulson and Bernanke are driving the bus. Since it is supposedly too late to turn back and let free markets sort things out, we must either entrust these drivers with our financial lives or start hoarding gold and ammo. Along with underestimating the severity of the crisis and being indecisive as to what role they wanted to play, the fundamental problem with Bernanke and Paulson is the sheer amount of useless words and off-point thinking they continue to generate. To wit, today’s investing public doesn’t want answers, and they are not all that concerned with the truth either. Rather, people want someone to assure them – repeatedly and succinctly - that the bleeding will soon stop. If in doubt when attempting to convey this message policy makers should at least learn to lie.
To use a baseball analogy, Bernanke and Paulson continue to throw sliders, change-ups, and knucklers when all the fans really want to see is the heat. Will the bailouts ever end Mr. Paulson? Is $3 trillion or $4 trillion enough Mr. Bernanke? If so, shut the hell up and print the money already…
The Day The Printing Presses Are Idled
The world desperately needs the U.S. economy and financial markets more than the U.S. needs the rest of the world, and if someone at the Fed or Treasury can help convince global policy makers and investors that this trumped-up story is true perhaps the U.S. can still hold a prominent seat at the table when a new monetary order is being shaped. As it stands now, Paulson looks content to spend his remaining days defending the TARP, Bernanke is putting on his maniac-hat to fight deflation, and every other U.S. policy maker, including incoming President Obama, is transfixed on the next big bailout. You can not help but wonder who, if anyone, is preparing the policy options for when the next big bust arrives.
The financial world used to be ruled by geniuses behind curtains. Bernanke’s scary openness and Paulson’s ramblings have changed this perception, and potentially for the worst. Like amateur sculptors overzealously chiseling a piece of granite, Ben and Hank have thrown off so many ideas and new bailout programs that they threaten to leave themselves short of material to build a post-USD hegemony masterpiece. And while it is somewhat comical to watch powerful policy makers deploy bumbling rhetoric and beg politicians to support their experimental bailouts, it is also frightening when considering how swiftly today’s crisis has engulfed investor and policy maker confidence. Someone really does need to pull Ben and Hank aside and say, ‘Shut up for awhile, when you do speak lie, and start preparing now for the next major text of USD hegemony’. A test that today’s bailout policies strongly suggest will one day arrive.
BWillett@fallstreet.com
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