A week ago we outlined here how and why Ben Bernanke lost a significant vote in the recent Fed Open Market Committee meeting. The vote was not so much to launch immediately QE3 when QE2 comes to an end this month; it was to keep Quantitative Easing as a tool in the Fed’s arsenal of monetary weapons. So far, the mainstream media have not yet realized how significant a shift this is in Fed policy, but other bloggers are beginning to notice, and so is the stock market. Yesterday Chairman Bernanke spoke at the International Monetary Conference in Atlanta, at which he made no mention of Quantitative Easing now or down the road sometime. The stock market certainly reacted to this omission; having traded noticeably higher during the day, the Dow Jones industrial average closed down 19 points, losing most of its ground in the last fifteen minutes of the session when Bernanke began speaking.
Here are some perceptive comments about the speech from Cullen Roche on his Pragmatic Capitalism website:
*His speech was certainly market moving and as reports of the speech hit the wires the equity markets began to reverse on fears that QE3 is off the table. But there was a more interesting tone in his speech today than we’ve seen in the past. The Chairman was exceptionally defensive. In fact, the entire speech is basically an explanation as to why QE2 did not hurt the economy (of course it did).
*Beating deflation is largely a psychological battle, however, giving the public the impression that you are going to cause massive inflation through policies that neither you nor the public fully understands is no way to accomplish that effect. An economy battling deflation needs real economic growth and leaders who are not only willing to recognize the problems, but are willing to implement the right policy to combat this horrid economic disease.
*The banker of all bankers has zero actual banking and market experience so it would not be surprising to find out that the Chairman is oblivious with regards to the psychological impact of monetary policy on markets.
*It’s time for the Wizard to step out from behind the curtain and inform Congress that he is not the omnipotent leader that everyone thinks he is. The Fed desperately needs the help of the US Congress in recognizing the plight that the US economy faces. The longer we wait and the longer Dr. Bernanke pretends to be the Wizard the longer this economic catastrophe will continue.
Do read Mr. Roche’s entire piece. While he identifies the fact that Ben Bernanke is “exceptionally defensive”, he doesn’t quite get to the point I was making as to the source of his defensiveness. It is not simply that many outside economists and analysts blamed the Fed for the run-up in inflation that began decisively when QE2 was implemented, and which brought us a $1,500 gold price and oil at $120/bbl. It is that criticism of his policy came from within the Fed - from the voting members of the FOMC who are the only people in the world who can cause Chairman Bernanke to shift course. He simply didn’t have the votes to force through even a mild statement of support for Quantitative Easing, but he certainly had quite a few of his colleagues on the FOMC going public with their criticisms of his policy. No Chairman of the Federal Reserve ever wants to be in that position, and Bernanke’s mentor, Alan Greenspan, would never have allowed himself to be out-maneuvered by FOMC colleagues (he was “The Maestro”, remember).
We don’t know how badly wounded Ben Bernanke is within the FOMC. As with anything to do with the Fed, much depends on the future course of economic activity in the US, and on politics in Congress and the White House. Quantitative Easing can always be revived if a desperate nation turns its lonely eyes to the Fed, pleading for it to do anything to combat an economic depression, which is what still lies before us if massive amounts of government support are now withdrawn from an economy which has postponed and forestalled the day of reckoning for over-indebted borrowers and imprudent creditors.
There are no guarantees even in extremis that the Fed will accommodate such pleas. It has already tried Quantitative Easing. It already has a Chairman who has positioned himself as economically and financially omnipotent, and who has declared himself the Savior of the Nation – the person who along with the White House fought off another Great Depression. Now it appears that all this was empty posturing. The FOMC members know that the reputation of the Fed has been damaged because of these policies and this pretence of omnipotence; some of them may have begun to realize that the continuing existence of the Federal Reserve is at stake, if after all that has been done, the economy still meets up with its deflationary destiny. They may understand that it is time for the Fed to withdraw from the battle, not so much to admit defeat, but to admit its own limited resources when faced with a debt overhang that afflicts every economic sector, which is unprecedented in size for the United States, and which has already begun to implode in an unstoppable sequence of personal bankruptcies, corporate defaults, and government debt payment moratoria, all of which will result in a massive economic collapse.