Freedom Line Blog

It was less than a month ago that the Federal Reserve wrapped up its annual economic symposium in Jackson Hole, Wyoming with all signs pointing to the prospect that the nation’s central bank was going to cool it on the “quantitative easing” (dumping new currency into the markets) for a while. Though the insanity has (at least temporarily) abated, the central bank is still making mischief.

As Politico reports:

The nation’s central bankers dusted off a 1960s-era plan in hopes of rousing the sluggish economy Wednesday, taking the unusual step of shifting $400 billion into longer-term bonds in hopes of slashing interest rates further.

The Federal Reserve’s Open Market Committee voted 7-3 to embark on what’s informally called “Operation Twist,” a move first used during the heyday of Chubby Checker and named for his song of the same name.

The policy is mostly inert, as it won’t actually result in a monetary injection ala quantitative easing. The early consensus is that it won’t have much effect one way or the other. But the possible rationale, if true, is revolting:

Exerting political pressure on Bernanke may have rallied the Fed to act, since the committee likely found “this political meddling repugnant,” wrote JPMorgan Chase economist Michael Feroli in a client note.

Let’s be clear about this: the Fed already operates independent of “political meddling.” Various members of Congress and candidates for president may have been carping about Bernanke’s leadership (a point on which they’re certainly justified), but their influence was limited to the range of their voices. Nothing they said could actually effect policy.

If something so immaterial to the Fed’s work could drive monetary decisions, then this may be the most petulant institution in the federal government. At a time when the economy teeters on the brink of another devastating downturn, making market decisions in response to slights real and imagined shows a staggering lack of seriousness. If this is Mr. Bernanke’s swipe at Governor Perry, he should note that he’s only strengthening the governor’s argument.

Eric Singer, portfolio manager of Congressional Effect Fund, identifies the single biggest problem with government regulators in his op-ed for Investor’s Business Daily:

JPMorgan’s Jamie Dimon recently asked Fed Chairman Ben Bernanke if he considered the cumulative impact of each regulation. Bernanke admitted he had not. The ongoing surprisingly bad unemployment numbers confirm that no one in charge is thinking about the cumulative impact of each tiny strangulation of capital and operating capability.

As Singer correctly concludes, “We need to go back to basics, cut these Lilliputian ropes and unleash the potential giant economy that is still on its back.”

As we prepare for the beginning of the era of the Federal Reserve as PR machine, we can anticipate a glut of federal statistics hand-picked to convince the public that the growing evidence of inflation is psychosomatic. Of course, it helps that the Fed’s core measure of inflation excludes such basic staples as food and energy. But as Jeffery Lord points out at the American Spectator, the main street indices tell a sharply different story than the Wall Street rationalizations:

Milk. A gallon of skim. At the local Giant in Central Pennsylvania:

January 11, 2011: $3.20
February 28, 2011: $3.24
March 6, 2011: $3.34
April 23. 2011: $3.48

That would be a 28 cent rise in a mere 102 days, from January to April of this year. The third year of the Obama misadventure.

Then there’s the celery. Same sized bag. Same store.

January 11, 2011: $1.99 a bag.
March 6, 2011: $2.49 a bag.

A rise of 50 cents in 54 days.

If this trend continues, the Fed will have to find an even more counterintuitive metric for gaging inflation. Perhaps one that doesn’t include prices.

CNBC’s Fast Money quotes an investment strategist who says that when Federal Reserve Chairman Ben Bernanke gives his first press conference on April 27, his remarks “could induce a 10 to 15 percent correction” in the market.  Here, “correction” means “drop.”

The reason the market might drop one-tenth of its value in a matter of hours is due to some analysts’ fear that Bernanke will not continue printing money (i.e. quantitative easing) to inflate the value of assets.  When values return to more realistic levels, investors are likely to stop banking on government-distorted policies to bail them out.

The purpose of the Fed is to tinker with the money supply and interest rates to stabilize the economy.  So far, the only stability it’s guaranteeing is as fake as a free lunch.

According to the Wall Street Journal:

In a break with tradition, Federal Reserve Chairman Ben Bernanke will hold public news conference four times a year, in the U.S. central bank’s latest move to boost transparency and improve communications after its policies came under attack.

Earth to Ben: policies like quantitative easing (i.e. printing more money) come under attack because they devalue the dollar through inflation.  Explaining that reality – or denying it – in more detail won’t make the policy more attractive.  If anything, it will doom any chance of getting re-nominated for your position.

In just a few hundred words a Wall Street Journal editorial writer summarizes how out-of-touch supposed ‘experts’ can be when it comes to how policies affect everyday Americans.  The object lesson comes courtesy of New York Fed President William Dudley’s failed attempt to convince citizens in Queens that the economy is doing much better than they think.

The former Goldman Sachs chief economist gave a speech explaining the economy’s progress and the Fed’s successes, but come question time the main thing the crowd wanted to know was why they’re paying so much more for food and gas. Keep in mind the Fed doesn’t think food and gas prices matter to its policy calculations because they aren’t part of “core” inflation.

So Mr. Dudley tried to explain that other prices are falling. “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said. “You have to look at the prices of all things.”

Reuters reports that this “prompted guffaws and widespread murmuring from the audience,” with someone quipping, “I can’t eat an iPad.” Another attendee asked, “When was the last time, sir, that you went grocery shopping?”

Mr. Dudley has been one of the leading proponents of negative real interest rates and quantitative easing, so this common-man razzing is a case of rough justice. If Mr. Dudley were wise, he’d take it to heart and understand that Americans aren’t buying the Fed’s line that rising commodity prices are no big deal. Unlike banks and hedge funds, they can’t borrow at near-zero interest rates, and most of them don’t have big stock portfolios. Wall Street and Congress may love the Fed’s free-money policy, but Mr. Dudley and Chairman Ben Bernanke ought to worry about losing the confidence of the middle class.

Ronald Reagan destroyed confidence in Jimmy Carter with one simple question: “Are you better off now than you were four years ago?”  Any Republican presidential hopeful that can channel the frustration in Queens into a similarly concise indictment of President Barack Obama will be well positioned to oust yet another bumbling Democratic incumbent.

Quin Hillyer, senior editorial writer at The Washington Times and senior editor of The American Spectator, analyzes the field of potential GOP presidential candidates, offers a solution to the NFL labor fight and discusses Federal Reserve Chairman Ben Bernanke and his policies.

Listen to the interview here.

In a November commentary, I warned that Ben Bernanke’s expansionary monetary policy threatened to erode the value of the dollar and weaken the American economy. Now the leading mind of the House GOP caucus is saying the same thing to the Fed Chairman’s face. With Bernanke appearing before the House Budget Committee earlier today, newly minted Chairman Paul Ryan of Wisconsin laid the consequences of “quantitative easing” on the line:

“There is nothing more insidious that a country can do to its citizens than debase its currency,” Ryan told Bernanke. “Chairman Bernanke: We know you know this. We know that you’re focused and concerned about this. The Fed’s exit strategy and future policy – it will determine how this ends.”

Ryan said he believed a “course correction here in Washington is sorely needed.”

“Endless borrowing is not a strategy,” he said. “My concern is that the costs of the Fed’s current monetary policy – the money creation and massive balance sheet expansion – will come to outweigh the perceived short-term benefits.”

“It is hard to overstate the consequences of getting this wrong. The dollar is the world’s reserve currency and this has given us tremendous benefits in the global economy,” Ryan said.

As usual, Paul Ryan is right. Unfortunately, there’s little that can be done from the outside. The Fed operates free of traditional rules of transparency (one of the reasons the push to audit its books has gained so much traction) and it works on the basis of a delusional proposition that it can be an engine of economic stimulus at the same time that it maintains the dollar as a stable store of value (a proposition that Ryan has rightly called into question). There’s still a lot of work to be done to rationalize American monetary policy. But it’s at least heartening to know that we’ve literally got our best man on it.

Since a majority of the smart people in Washington, D.C., agree that the nation’s astronomically high $14.3 trillion debt ceiling, chattering class consensus says all the “sane” members of Congress will stand together and once again extend America’s line of credit.  With that in mind, GOP budget cutters are proposing to get deep spending cuts in return for raising the debt ceiling.

Not so fast, says Federal Reserve Chairman Ben Bernanke.  Playing his faux apolitical persona to the hilt yesterday, Bernanke said House Republicans should “not play around” with the debt ceiling vote to extract any spending concessions.  That would make a fiscal issue too political.  Instead, they should treat spending and tax issues separately; exactly the unconditional debt raising approach espoused by the Obama Administration.

But the logic of the Republicans’ negotiating tactic is clear: get spending cuts now so that the debt limit becomes a true ceiling once more instead of a temporary marker.  Having a limit on one’s credit card does not require the user to treat it as a goal.  It’s an emergency option, not a default.  Because fiscally conservative House and Senate members are the only public officials actually trying to get control of the budget, demanding concessions from the debt ceiling vote may be the only way to make progress in a fractured government.

If Bernanke is too partisan to see that, he should at least recognize that politics isn’t just an exercise in means; it’s the attainment of principled ends as well.

Canaries and markets are sensitive creatures.  Take a canary down a coal mine and the poor bird starts dying as soon as the toxic levels of coal dust start rising.  Wait too long, and coal miners will be following their yellow feathered friend down the River Styx.  The key is to monitor the canary carefully for signals that it’s time to stop digging before it’s too late.

The market is a similar beast, even though the data miners of economic trends at places like Princeton and the Federal Reserve Board choose to think otherwise.

Practitioners of microeconomics presume they have “perfect information” by which they mean knowing all the relevant data before making a decision.  Thusly armed they sally forth to wage war on behalf of whatever economic model (or political interest) they claim provides the greatest good.

Such is the case with Federal Reserve Board Chairman Ben Bernanke, the Princeton economist responsible for authorizing the printing of hundreds of billions of dollars to “quantitatively ease” the lack of money flowing in the marketplace, and spur a “healthy” bit of inflation.  Bernanke is doing this because he assumes he has all the relevant data to support such a move.

A new price survey of a Wal-Mart grocery basket says otherwise.  The retail giant is raising prices, a market signal that inflation is already underway without government interference.  Like any market leader, Wal-Mart’s actions will be quickly emulated by others in their sector, with down market effects reverberating across the economy.

The market is already sensing the need for inflation and is acting accordingly.  A massive injection of “Fed Stimulus” to achieve the same goal will result in accelerating inflation beyond what’s considered healthy, devaluing the dollar and making it harder for middle class families to buy necessities.  That kills an economy.  If Bernanke continues to ignore the ability of the market to adjust itself, it will soon be his career lying lifeless in the shaft.

Further proof that the Beltway Keynesians have taken us down the economic rabbit hole: it’s now falling to Europeans to warn us that inflation and stimulus are tanking the dollar. Consider the following from the Financial Times:

Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro …

A senior European policy-maker, who asked not to be named, said a further aggressive round of monetary easing by the US Federal Reserve would be “irresponsible” as it made US exports more competitive at the expense of its rivals…

Russia’s finance minister Alexei Kudrin, in a meeting with European Union officials, blamed the US – and others – for global currency instability.

He said one reason for exchange rate turmoil “is the stimulating monetary policy of some developed countries, above all the United States, which are trying to solve their structural problems in this way”.

The entire justification for the creation of the Federal Reserve was to ensure that monetary policy would be insulated from political pressure. If Ben Bernanke chooses to act as a handmaiden for the profligacy of the Obama Administration, then he deserves to be cleaning out his desk just as much as the president.

One only has to go back to the first of the year to find conservatives distraught by the leftward lurch of Washington (if not the country).

What a difference the last week has made. A relatively conservative Republican won the Massachusetts U.S. Senate seat previously held by Ted Kennedy, the health care bill seems to be dying, the Supreme Court struck a stirring blow for free speech by eviscerating much of McCain-Feingold campaign finance reform, and now comes word that Ben Bernanke may not have the votes to be confirmed for another term as Chairman of the Federal Reserve.

Conservatives shouldn’t expect this good luck streak to continue unabated. The next year will be filled with contentious battles. Even a big Republican win in this year’s midterm elections won’t inexorably alter political reality. As the sudden reversal of fortune for Democrats show, big wins can be squandered quickly. Republicans will have to develop a positive alternative to the Obama Administration and the Democrats in Congress if they plan to consolidate their gains and be competitive in the 2012 presidential election.

There’s still much work to be done. But this week has been a good start.

There were three people at the center of the federal government’s response to the economic meltdown during the latter months of 2008. President Obama still employs two. Tim Geithner got a promotion from heading the New York Federal Reserve to Treasury Secretary. Now Fed chief Ben Bernanke is up for rehire. And while the Senate Banking Committee had some heated words for the Fed’s handling of the worsening economic downturn, it offered “measured support” for the man responsible for handling the Fed. This, despite labeling the Fed itself as a “failed” regulator doing a “horrible job.”

And yet, Bernanke is widely expected to be confirmed for a second term. Coupled with Geithner’s tax evasion, one is left to wonder what could have possibly disqualified former Treasury Secretary Hank Paulson from getting a plumb assignment in the Obama Administration.