In-depth analysis on Credit Writedowns Pro.

Sell Bernanke and the U.S. dollar; Buy gold and silver

Who am I? What is Money? The Fed is Here to Help.

by Frederick Sheehan

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and " The Coming Collapse of the Municipal Bond Market"(Aucontrarian.com, 2009)

"I am a macroeconomist rather than an historian. My focus will be on broad economic issues rather than details."

-Professor Ben S. Bernanke, "The Macroeconomics of the Great Depression: A Comparative Approach,"1995

"These days central banking is my line of work as well. Before that, I was an academic economist and economic historian."

-Federal Reserve Chairman Ben S. Bernanke, "Economic Policy: Lessons from History,"April 8, 2008

60 MINUTES: "You’ve been printing money?"

BERNANKE: "Well, effectively, and we need to do that."

-"60 Minutes" interview, March 15, 2009

CONGRESSMAN JEB HENSARLING, (R-TX.) "Will the Federal Reserve monetize the debt?"

CHAIRMAN BERNANKE: "The Federal Reserve will not monetize the debt…."

-Federal Reserve Chairman Ben S. Bernanke, Testifying before Congress on June 3, 2009

BERNANKE: "One myth that’s out there is that what we’re doing is printing money. We’re not printing money."

-"60 Minutes," December 5, 2010

"New research shows that one of the first signs of impending dementia is an inability to understand money and credit, contracts and agreements."

-New York Times, "Money Woes Can Be an Early Clue to Alzheimer’s," October 31, 2010

"It would be fair to say that monetary and credit aggregates have not played a central role in the formulation of U.S. monetary policy since [1982], although policymakers continue to use monetary data as a source of information about the state of the economy."

-Federal Reserve Chairman Ben Bernanke, Open Opportunity Economic Forum, Washington, D.C., November 1, 2006 Response to Federal Reserve Chairman Ben Bernanke:

"…Is it really possible for a policy described as ‘monetary’ to be formulated and implemented without money playing a central role in it? Indeed, the suggestion that monetary policy can be conducted without assigning a prominent role to money seems like an oxymoron – a statement containing apparently contradictory terms, if not worse: for the literal meaning of the Greek word ‘oxymoron’ is ‘pointedly foolish.’"

-Lucas Papademos, Vice President of the European Central Bank, Open Opportunity Economic Forum, Washington, D.C., November 1, 2006

"I don’t fully understand movements in the gold price."

-"Bernanke Puzzled by Gold Rally" Wall Street Journal blog, June 9, 2010

"[The rising gold price is] strictly a monetary phenomenon…an indication of a very early stage of an endeavor to move away from paper currencies…. What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment."

-Former Federal Reserve Chairman Alan Greenspan, Bloomberg, September 9, 2009

BERNANKE: "Well, this fear of inflation, I think is way overstated."

-"60 Minutes," December 5, 2010

"The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

-Federal Reserve Chairman Ben S. Bernanke, Bloomberg, June 9, 2008

"We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

-Federal Reserve Chairman Ben S. Bernanke, speech at the Federal Reserve Bank of Chicago, May 17, 2007

"[T]he recent capital inflow [has shown up in] higher home prices. Higher home prices in turn have encouraged households to increase their consumption. Of course, increased rates of homeownership and household consumption are both good things."

-Federal Reserve Governor Ben S. Bernanke, speech before the Virginia Association of Economics, March 10, 2005

"Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run."

-Federal Reserve Chairman Ben S. Bernanke, Washington Post, November 4, 2010

60 MINUTES: "Is keeping inflation in check less of a priority for the Federal Reserve now?"

BERNANKE: "No, absolutely not. What we’re trying to do is achieve a balance. We’ve been very, very clear that we will not allow inflation to rise above two percent or less."

-"60 Minutes," December 5, 2010

"The unwarranted assumption that ‘creeping’ inflation is inevitable deserves comment. This term has been used by various writers to mean a gradual rise in prices which, they suggest, could be held to a moderate rate, averaging perhaps 2 percent a year….Such a prospect would work incalculable hardship….Even if it were possible to control it so that prices rose no more than 2 percent a year – the price level would double every 35 years and the value of the dollar would be cut each generation. Losses would thus be inflicted upon millions of people, pensioners, Government employees, all who have fixed incomes, including those who have their assets in savings and long-term bonds…."

-Former Federal Reserve Chairman William McChesney Martin, Senate testimony, 1957

"If a policy of active or permissive inflation is to be a fact, then we can rescue the shreds of our self-respect only by announcing the policy. That is the least of the canons of decency that should prevail. We should have the decency to say to the money saver, ‘Hold still, Little Fish! All we intend to do is gut you.’ "

-Malcolm Bryan, President of Atlanta Federal Reserve Bank, 1956

EXPLANATION OF THE FEDERAL RESERVE’S "QUANTITAVE EASING" OBJECTIVE:

"[T]here is a…prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead the government commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates – interest rates measured in purchasing power – could become negative…. Ben S. Bernanke, Fed chairman, is the perfect person to make the commitment to higher inflation…. [T]he goal could be to produce enough inflation to ensure that the real interest rate is significantly negative…."

-Professor Greg Mankiw, "It May be Time for the Fed to Go Negative," Wall Street Journal, April 19, 2009

Mankiw is just the man to recommend such policies:

"[W]hen you look at the mistakes of the 1920s and 1930s, they were clearly amateurish. It is hard to imagine that happening again – we understand the business cycle much better."

-Professor Greg Mankiw, Wall Street Journal, February 1, 2000

"If it were possible to take interest rates into negative territory I would be voting for that."

-Federal Reserve Governor Janet Yellen, speech at the University of San Diego, then-President of San Francisco Federal Reserve Bank, February 22, 2010

60 MINUTES: "Do you anticipate a scenario in which you would commit to more than $600 billion?"
BERNANKE: "Oh, it’s certainly possible"

-"60 Minutes," December 5, 2010 [Note: $600 billion is the amount of money Bernanke has stated he will to print to buy Treasury securities during "QE2" - Quantitative Easing, Part 2.]

The Fed "could theoretically buy anything to pump money into the system" including "state and local debt, real estate and gold mines – any asset."

-Unnamed Federal Reserve official to the Financial Times, 2002

"Hello, young man. I’m with the Federal Reserve. Today, we’re buying baseball cards."

-Cartoon in Grant’s Interest Rate Observer, 2010; Federal Reserve official is speaking to a boy at his front door.

"The truth is the current Fed governors, together with their crack staff of Ph.D. economists and market analysts, are as close to an economic dream team, as we are ever likely to see…. The best Congress can do now is to let the Bernanke bunch do its job."

-Professor Greg Mankiw, Harvard University, New York Times, December 23, 2007. Mankiw was chairman of President George W. Bush’s Counsel of Economic Advisers

60 MINUTES: "Can you act quickly enough to prevent inflation from getting out of control?"

BERNANKE: "We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now."

-"60 Minutes," December 5, 2010

"There is no validity whatever in the idea that any inflation, once accepted, can be confined to moderate proportions."

-Former Federal Reserve Chairman William McChesney Martin, Senate testimony, 1957

60 MINUTES: "You have what degree of confidence in your ability to control this?"

BERNANKE: "One hundred percent."

-"60 Minutes," December 5, 2010

"Mr. Bernanke has used the analogy of a golfer with a new putter: Unsure how it will work, he finds the best strategy is to tap lightly at first and keep tapping until the golfer figures out how best to use the putter. [Quoting Bernanke]: ‘When policymakers are unsure of the impact that their policy actions will have on the economy, it may be appropriate for them to adjust policy more cautiously and in smaller steps than they would if they had precise knowledge of the effects of their actions.’"

-Wall Street Journal, October 27, 2010

"We have been living in a fool’s paradise…. [If] the central bank creates money or if you like the phrase better, prints money, I think it can only do one thing, depreciate the currency."

-Former Federal Reserve Chairman William McChesney Martin, before the American Association of Newspaper Editors, 1968

"We are in the wildest inflation since the Civil War."

-Former Federal Reserve Chairman William McChesney Martin, from his farewell speech, 1970

"Inflation is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and aged."

-Federal Reserve Governor Henry C. Wallich, Commencement address at Fordham University, 1978 [Note: Wallich was born in Germany in 1914. He was nine years old, living in Berlin, during the 1923 German inflation. ]

"[T]he increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government."

-Federal Reserve Governor Henry C. Wallich, same address, 1978

"[L]ower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment."

-Federal Reserve Chairman Ben S. Bernanke, Washington Post, November 4, 2010

Note: Bernanke simply assumed his QE2 operation would drive down interest rates (the bold will). Just the opposite has happened. Federal Reserve Chairman Martin understood the foolhardiness of such a quest when professors prodded him to do the same:

"It has been suggested, from time to time, that the Federal Reserve System could relieve current pressures in money and capital markets without, at the same time, contributing to inflationary pressures. These suggestions usually involve Federal Reserve support of the Unites States Government securities market through one form or another of pegging operations. There is no way for the Federal Reserve System to peg the price of Government bonds at any given level unless it stands ready to buy all of the bonds offered to it at that price. This process inevitably provides additional funds for the banking system, permits the expansion of loans and investments and a comparable increase in the money supply – a process sometimes referred to as monetization of the public debt. This amount of inflationary force generated by such a policy depends to some extent upon the demand pressures in the market at the time. It would be dangerously inflationary under conditions that prevail today. In the present circumstances the Reserve System could not peg the government securities without, at the same time, igniting explosive inflationary fuel."

-Former Federal Reserve Chairman William McChesney Martin, 1957

60 MINUTES: "If you had a message for the American people in this interview what would it be?"

BERNANKE: "…I’d say first of all the Federal Reserve is here and is going to do everything possible to support the economy."

-"60 Minutes" March 15, 2009

"Think of all these people, decent, educated, the story of the past laid out before them – What to avoid – what to do, etc…. – trying their utmost – What a ghastly muddle they made of it! Unteachable from infancy to tomb – There is the first and main characteristic of mankind."

-Winston S. Churchill, Discussing World War I, 1928

Conclusion: Sell Bernanke and the U.S. dollar; Buy gold and silver.

Frederick Sheehan writes a blog at www.aucontrarian.com.

Frederick Sheehan

About 

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession. He is the co-author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. Mr. Sheehan was Director of Asset Allocation Services at John Hancock Financial Services in Boston. For more than a decade, Mr. Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for clients. He is a frequent contributor to Marc Faber's "Gloom, Boom & Doom Report." He also has written articles for "Whiskey & Gunpowder" and the Prudent Bear website, among others. He currently serves as an advisor to an investment firm and a non-profit foundation. A Chartered Financial Analyst, Mr. Sheehan is a graduate of Columbia Business School.