Mr. Bernanke Speaks to Congress this Week

Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve will give his semiannual monetary policy report to the House Finance Financial Services Committee on February 29.

Mr. Bernanke is in no-mans land…a place that he created for himself. 

There are no precedents for the predicament that Mr. Bernanke finds himself in.  In his wisdom, he led the Federal Reserve down a new path in the fall of 2007 followed by massive financial bailouts, massive financial market bailouts, and two attempts at quantitative easing.

After failing to understand the credit bubbles created by the Fed in the earlier 2000s, Bernanke missed the initial financial market bust in August 2007.  Bear Stearns filed for bankruptcy on July 30, 2007 and on Monday August 6 a market meltdown began.  The Fed reacted slowly, waiting until the next Friday to respond. (http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson)

Then, in the week of September 8, 2008, the US government nationalized Fannie Mae and Freddie Mac.  On Monday September 15, Lehman Brothers filed for bankruptcy.  On Wednesday afternoon, September 17, Chairman Bernanke “reached the end of his rope.” (http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panichttp://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic)   Bernanke called Treasury Secretary Hank Paulson and that Friday he and Paulson read the riot act to members of Congress. 

Nothing has been the same since.  All the old rules relating to monetary policy were thrown out the window. Since then, the Federal Reserve and the United States government have been feeling their way forward as they go along.  No “new” rules have been written since.

Mr. Bernanke has been trying to invent some rules as he has gone along, many of them being labeled “efforts at transparency.”  Right now we are told that the economy will remain weak for a long time and that the Fed’s target Federal Funds rate will stay close to zero percent until late in 2014.  But, other than this, the Federal Reserve is operating by “feel”.

So, this Wednesday we are going to hear Mr. Bernanke try and make some sense out of the current situation and attempt to give us some confidence that he knows what he is doing.

My guess is that he will accomplish neither. 

What can Mr. Bernanke say about the economy that has not already said: “In January, the Fed lowered its projected range for growth this year to 2.2 percent to 2.7 percent, down from 2.5 percent to 2.9 percent in November. The range for next year now is 2.8 percent to 3.2 percent, down from a previous forecast of 3 percent to 3.5 percent. The U.S. expanded 1.7 percent in 2011.” (http://www.bloomberg.com/news/2012-02-27/bernanke-pessimism-drives-easy-credit-with-forced-government-spending-cuts.html)

The banking system remains fragile with more than 850 commercial banks on the FDIC’s list of problem banks and with many more that are either insolvent or on the edge of insolvency.  The housing market still remains in the tank along with the commercial real estate market.  Then one out of every four or five individuals of working age are under-employed.  And, the pension system is still grossly underfunded. (http://seekingalpha.com/article/391131-little-problems-here-and-there-pension-plans)

The fiscal apparatus of the United States government is a mess with little or no hope for any leadership to surface this election year.  We should thank the Chinese and the Japanese for buying so much of the US government debt being piled up.  And, we should also thank the Europeans for all their ineffectiveness for this too has caused international monies to come into the United States Treasury bond market providing help for the US government to place its debt and keep interest rates low.

And, in terms of the Europeans, the European recession is present and accounted for while European officials still fail to bring any sense of resolution to the economic and financial crisis now taking place in that area of the world. 

Furthermore, the only thing that is keeping the United States dollar from falling further in the world is the weakness that has come about in the euro.  Otherwise, the value of the United States dollar would continue its forty-year decline against the other major currencies of the world.

So, Mr. Bernanke must make some sense out of this environment and provide us with enough information on what the Federal Reserve has in store for us to give us more confidence about the future. 

Good luck, Ben!    

Greece: Initial Response to the Latest "Kick of the Can Down the Road"

The eurozone has acted.

Greece is going to postpone bankruptcy for a while longer as it was given 130 billion euros to help it cover, among other things, debt coming due in March. 

Problems still remain.

First, Greece is still insolvent.

Second, Greece still has major structural problems in its economy and society.

Third, Greece is in a severe recession.

Fourth, the eurozone is in the midst of a recession.

Fifth, 90 percent of the holders of Greek debt must sign up for the bond swap.  If they don’t there may be severe legal problems.

Sixth, the Greek government must still implement the policies and programs required by the bailout plan.

Seventh, Greek society must hold together.  The question still remains about how the Greek people will “suffer” the policies and programs required by the bailout plan.

Eighth, elections for a new Greek government will be held in April.  There is uncertainty about what will result from this election. (http://seekingalpha.com/article/374631-liar-liar-pants-on-fire-the-greek-case)

Ninth, there is concern over what is going to happen in the Middle East.  The focus is on Iran, Israel, Europe, and the United States.

Tenth, enough said, given all the other problems and uncertainties in the world today.

Bottom line: the major issues outstanding have not been dealt with; there is little or no confidence in the officials in charge; and the world needs to move on but still has the Greek problem to deal with.