Monday, December 20, 2010

A Vote for Gold

Frederick J. 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"(, 2009)

"...Bank of Canada Governor Mark Carney tried to calm everyone's nerves by declaring that gold 'has no role to play in the international monetary system.'"
Globe and Mail, November 12, 2010
Carney did not calm the nerves of Hans Merkelbach, investor, advisor, investor advocate, and watch dog of money manipulators, who wrote to the central banker from his office on Bowen Island, British Columbia. After quoting the above, Merkelbach rebuked Carney:

"Let's get real! Would you explain to me why you, the ex-Goldman Sachs partner, besides having a warped idea of monetary matters, made such a ridiculous statement? The houses of cards are falling all around you, dear sir, but I guess it is hard to notice the bloody monetary mess from the ivory tower."

Carney, no fool, but offensively patronizing, replied: "I said in a recent speech...that it is the adjustment mechanism rather than the choice of reserve asset that ultimately matters."

And so he did; the link to his speech follows: Carney is correct. The adjustment mechanism is the topic, not a gold standard, per se. However, the speech makes clear the one adjustment mechanism he will not tolerate is gold.

Carney never addressed the gold standard other to declare it is a "barbarous relic" (Keynes' hackneyed description). The central banker went on to say (in his speech) that instability has followed "the breakdown of Bretton Woods." This is a reference to the 1944 "gold-exchange standard" agreement in which gold was the adjustment mechanism. Under its provisions, foreign governments could convert (pay) $35 to the U.S. government in exchange for one ounce of gold. The United States defaulted on its Bretton Woods commitment in 1971. Afterwards (quoting Carney), "capital flows exploded, rising three times faster than the rate of growth of trade over the past three decades."

That sentence is a tidy summation of why the world's financial system is destined to collapse. No longer constrained by the checks-and-balances of the gold-exchange standard, finance blossomed and grew so large that it is too-big-to-fail: until it collapses. There is no escape.

No company has profited more from this bonanza than Carney's former employer, Goldman, Sachs & Co. There were approximately 1,000 employees at the investment bank in 1971. Today, there are 35,400. They are well paid.

Carney acknowledged that the current "international monetary system is... increasingly unstable." In fact, there is no "system" to speak of other than a gaggle of central bankers, finance ministers and heads-of-state who are constantly issuing contradictory and deceitful statements.

Carney's solution is to beef up the G-20. The latter is a splendidly incoherent group of 20 countries still rehashing the senile economics that inflated Goldman, Sachs. Carney rooted for the "successful completion of G-20 reforms." A more accurate prediction was made by Financial Times columnist Gideon Rachman, who, attending the first G-20 conference last year, wrote: "Watching an Indonesian delegate wandering, apparently carefree, through the conference centre in Pittsburgh, I felt a stab of pity. 'You don't know what you are getting into,' I thought. 'You are going to waste the rest of your life talking about fish quotas.'"

Carney made no comment about the article Merkelbach attached to his letter, "Ben Bernanke: The Chauncey Gardner of Central Banking." The sentry on Bowen Island wrote a preface: "The following article displays the ignorance, stupidity and lies from your Professor partner in Washington."

A gold bar is no more intelligent than Bernanke, but it tells no lies. It should be apparent by now that George Bernard Shaw was right: "You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect to those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold."

Tuesday, December 14, 2010

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

Frederick J. 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"(, 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

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 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


"[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.

Monday, December 6, 2010

The Municipal Bond Pitch: "What You're Giving Me is Pure Bulls**t"

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" (, 2009)

Undaunted by falling municipal bond prices, rising yields, and withdrawal of funds, research reports by large brokerage firms still mollify the majority of clients and fund managers with numbers and assertions: "General obligation bonds do not default." "The general obligation default rate is 0.01%." "Most states are required by law to balance their budgets." To these and other airtight arguments in the muni marketing kit, the proper articulation of doubt may be expressed as: "Yeah, Yeah, Yeah." Or, one might read "Possible Misunderstandings by Municipalities and Their Bonds."

This précis was written in April 2010. It is a sign of the times that market-making brokerage houses and fund companies still roll out the same phrases and avuncular charm, dismissing critics, but with nothing new to add. Meredith Whitney, an Oppenheimer bank analyst (at the time), told an uncomprehending world in 2007 that banks were going bust. In September 2010, she issued a 600-page report that projected the same for mendicant states and municipalities. One expert replied that he was "somewhat skeptical about Ms. Whitney's sensational hypothesis and [felt] that she might be trying to hit a 'home run' like she did with the banking crisis."

Of course she was trying to hit a homerun! Why else would she write a 600-page report on municipal finance? That has nothing to do with her argument that California, New Jersey, Illinois and Ohio may either default or need a federal bailout in the next twelve months. (Ten months from now, since she stated the warning on September 30, 2010, via Bloomberg TV.)

It has become clear that the states and municipalities facing the greatest financial difficulties will default. This applies to their general obligations and probably many revenue projects, too. This forecast is a synthesis of observation. Those in hock cannot tie their own shoelaces. For investors who hold the municipal bonds of localities where evening news coverage from state houses and town halls could be mistaken for an episode of the Bowery Boys, there is no reason to expose your net worth as an air-raid shelter over the pathologies of American excess.

During the course of nearly two decades setting investment policy and asset allocation with companies, municipalities, and unions, it became clear to me there were organizations (companies, municipalities, and unions) that understood what needed to be done and did it. There were also those that avoided any sort of unpleasantness by delaying, forgetting, or concentrating on minutiae. It was rare for a pension plan's committee to hop from one of these categories to the other. Those that delayed turned manageable situations into quagmires. (A comparison to Washington is apt.)

And so we see, despite the extended period during which municipalities were granted to right their wrongs (the Federal government filled financial gaps), the general tendency among the damned and the dead is, still, to borrow more money. Nearly $42 billion of municipal bonds were issued in November 2010, according to the December 1, 2010; issue of the Bond Buyer. That is nearly one-quarter of the $177 billion municipal volume for all of 2006, a year when property taxes were rising faster than money could be spent, at least among the more sober-minded. The dysfunctional cities and towns managed to build high school gymnasiums that could house the Baths of Caracalla while others started - but never completed - baseball stadiums, renewable energy incinerators, and "tunnels to nowhere." The last is in Pittsburgh, a city apparently yearning for a Municipal Darwin Award. The city counsel is incapable of selling its parking garages for a bid of $423 million, money that is badly needed. The "tunnel to nowhere" is a $500 million public transit project, already $125 million over budget, a clogged artery symbolic of the minds that rule Pittsburgh and those in dozens of cities and states across the United States.

The commonly cited 0.01% default rate applies to general obligation bonds issued since 1970 that were rated by one of the agencies. The 1970s was a decade of great trouble for some municipalities, most of which maneuvered out of harm's way. That was a different time. The level of debt, fixed costs, and corruption; the incapacity to manage, to act, to think logically has blossomed into a New Era. This New Era of concentrated madness, run amok among certain Nasdaq stocks in the late 1990s, was captured by James Burke, a science historian whose study for the Royal Society for the Arts, Opening Minds, was publicized in May of 1999: "Instead of judging people by their ability to memorize, to think sequentially and to write good prose, we might measure intelligence by the ability to pinball around through [sic] knowledge and make imaginative patterns on the web." The weird mutterings of the current Federal Reserve chairman is an example that barely needs mentioning.

Felix Rohatyn, who played the lead role in saving New York City from bankruptcy in the 1970s, spoke recently at a Grant's Interest Rate Observer conference at the Plaza Hotel in New York. His talk was distilled in a subsequent edition of Grant's: "Asked if his experience with New York in the 1970s provided a template for solving the public-debt problems of today, Rohatyn could only lift his palms and shake his head. The numbers are staggering, the constitutional barriers formidable and the political will absent."

The man who accomplished the impossible, the bailout of New York City in the 1970s, is at a loss: "I just don't see where you go to restructure this."

Rohatyn continued: "'I think that if you have to go into some kind of dramatic, last-minute restructuring with these kinds of amounts that we're dealing with, I would just shudder at that.' That the city muddled through in the 1970s Rohatyn attributed to the good-faith efforts of radically different (and usually antagonistic) interests to effect a compromise. In recalling what worked then, Rohatyn found his gravest cause for concern today. Said the long-serving Lazard partner: 'I don't see this anywhere on the horizons today, whether it's at the state or at the level of the city, where I could put together six people, eight people, or 10 people, that you could close the door with and say 'how do we do this?'"

Rohatyn's macro view complements the micro perspective of a veteran who has served on municipal committees and boards for the past forty years. As People magazine might say, what follows is from an exclusive, story-behind-the-story discussion with a man who knows where all the bodies are buried:

No one in the Town is worried about their rating or what others think of the balance sheet. [And, that the municipal bond market might shut down for rollover and new debt- FJS.] There is still a sense that they can pay to have their debt guaranteed and upgraded to save on interest. And rates are so low, what the hell.

All the Towns are in the process of rolling their debt while rates are attractive....The towns are not just rolling debt to lengthen maturities; they are in a sense taking equity out of the house. They are putting a bit of free cash (as it is called on budget) away for future needs, meaning that they are borrowing for next year's budgets. I think we can conclude that there are some new sub prime munis being issued this year. [These are still rated as high-grade bonds by the agencies - FJS]

A town treasurer helped the veteran, who was already well acquainted with municipal finance accounting (and mis-accounting): [He] made sure that I did not stop with the Town's latest "official Statement" dated Sep 1, 2010. "There are certain liabilities which are not on the balance sheet that you should know about. It says our total debt is $98 million, but that does not include our cost of closing the dump ($19 million), our interest due ($9mm), our health insurance liability ($35mm), and the cost of closing the Town's Street and Bridge Lots ($5mm for hazardous waste)." When I asked about the unfunded pension liability, which I know to be in excess of $72mm, he nodded and said something like: "No one is quite sure how to calculate the pension liability, and it is above my pay grade, but it is at least as much as the total Town Debt outstanding; I would use that number."

Felix Rohatyn just published his autobiography, Dealings: A Political and Financial Life. He remembers a meeting in 1975 with the then deputy mayor of New York, James Cavanaugh. The city's finances had so deteriorated that it was not able to issue long-term bonds. (This is a timely reminder of what to expect in 2011: There will be states and cities unable to issue bonds or rollover debt. If the federal government, including the ever-expanding Federal Reserve, does not or cannot fill the gap, scrip will be issued to pay municipal bills and salaries.) Cavanaugh claimed that New York City was running a balanced budget. Rohatyn disagreed. Cavanaugh "breezily" patronized Rohatyn: "I see you don't know much about municipal finance."

The investment banker who had negotiated the largest merger in American corporate history (ITT and Hartford Insurance Company) shot back: "Mr. Cavanaugh, I may not know much about municipal finance. But I know about bulls**t. And what you're giving me is pure bulls**t."

Back to the 40-year veteran. He found the most illuminating document in Massachusetts is the Official Statement (OS). The municipalities are required to publish the OS whenever a new bond is sold to the highest bidder:

The OS is similar to a prospectus, but is far more interesting to read. You need all the schedules so that you can adjust the Town's net worth, so to speak. None of this material is ever put on the web sites of the Town and though there is a law (I am told this) that the Commonwealth [of Massachusetts] should now be posting this information, it was decided by the State House that the cost of this action is not worth the result. They sited [Governor] Deval Patrick's goal of grouping towns as a reason not to put this information on the state's site.

Grouping the financial statements of towns in a consolidated statement, municipalities that already leave over half their liabilities off balance sheet, sounds like a combination of Enron's dirty dealing tucked inside an impenetrable Collateralized Debt Obligation. I may not know much about Massachusetts state house budgeting. But I know about bulls**t. And what the 40-year veteran was told is pure bulls**t."

Friday, November 26, 2010

There is No Food Inflation; the BLS Made Sure of That

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"(, 2009)

"Moreover, inflation has been declining and is currently quite low, with measures of underlying inflation running close to 1 percent....In this environment, the Federal Open Market Committee (FOMC) judged that additional monetary policy accommodation was needed to support the economic recovery and help ensure that inflation, over time, is at desired levels."

-Federal Reserve Chairman Ben S. Bernanke, Sixth European Central Bank, Central Banking Conference; Frankfurt, Germany; November 19, 2010

"CORE U.S. INFLATION SLOWEST ON RECORD: Core consumer prices in the U.S are at their lowest pace since records began, bolstering the case for the Federal Reserve to complete its planned $600 bn in asset purchases and extend the programme to buy more....Excluding volatile food and energy prices, the consumer price index rose by only 0.6% on a year ago...."

-Financial Times - headline and lead story on page one, November 19, 2010

"A key gauge of U.S. inflation has fallen to its lowest level since record keeping began in 1957, underscoring continued weakness in the economy and bolstering the Fed's case that it should continue its bond-buying program."

-Wall Street Journal, first sentence, top of page one, November 19, 2010

A BRIEF REVIEW: The Federal Reserve launched QE2 (a.k.a.: printing money) on November 3, 2010. Chairman Bernanke justified this laboratory experiment as a measure to prevent deflation. He wrote in the November 4, 2010, Washington Post: "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...." This "2 percent" hokum is an invention of Bernanke & Comrades, but the chairman pretends it is chiseled into the Federal Reserve charter. The contention is important since it is on this rock the Fed has built its justification for launching the $600 billion asset purchase, referred to in the Financial Times headline above.

The media, as represented by the newspapers above, not only accept the Consumer Price Index as released by the Bureau of Labor Statistics, but also: (1): accept the rationale that food and energy prices should not be included in the price index because of their excessive volatility, and, (2): notify readers that such low inflation "bolsters" the Fed's case to continue pumping up asset prices. Note that both papers link the happy inflation news to the $600 billion purchase with the word "bolster." This has the whiff of a press release delivered by the Fed to the media.

It went unnoticed how the Bureau of Labor Statistics (BLS) relieved the volatile food and energy prices of volatility. The BLS also relieved the CPI of "extreme values and/or sharp movements [of prices] which might distort the seasonal pattern [which] are estimated and [are] removed from the data." So out went milk, cheese, oil, and cars from the CPI, if they did not meet the BLS volatility criteria. (The excisions also include non-edibles and non-combustibles, including cards, trucks and textbooks.)

Below are some monthly lists of items removed from the monthly Consumer Price Index Summary calculation and the excuses for doing so. (The lists were cut-and-pasted from the BLS website at the time. It looks as though the BLS only posts tables (no words) from the monthly CPI releases prior to May 2007.) There is nothing particular to the months shown. The reader may note the lists stop in 2006. This is because the BLS stopped releasing the list of items after December, 2006; possibly because the deception was so clear as to show the entire CPI calculation is a fraud. This is suggested without much conviction since there weren't ten people outside of the BLS or Federal Reserve who knew it existed, possibly because critics of BLS methods had so many other fish to fry: hedonic adjustments, geometric averaging, substitution bias, owners' equivalent rent, and on and on it goes.

To keep this short, the BLS methodology is not discussed. It is described in "Intervention Analysis Seasonal Adjustment," a paper on the BLS website. The "procedure" referred to is the "X-12-ARIMA Seasonal Adjustment Method," which may or may not apply to a particular item since (quoting the BLS) "components change their seasonal adjustment status from seasonally adjusted to not seasonally adjusted, not seasonally adjusted data will be used in the aggregation of the dependent series for the last 5 years, but the seasonally adjusted indexes will be used before that period." Yeah, right.

This prescribed method of stupefying the public successfully deterred me from attempting to understand the changes to food and energy prices. And, as mentioned above, there are so many other distortions to the CPI that one is better off to assume the consumer price index is rising 5% to 10% a year and to adjust one's life (and investments) accordingly. John Williams, author of the Shadow Government Statistics website, calculates that if the BLS used the same methodologies for compiling the CPI today that it employed in 1990, the government's number would be 4.5%. If the BLS used the same methodologies as in 1980, the official CPI would be 8.5%.

Year-in and year-out, some items (e.g. motor fuels, new cars) are apparently a nuisance to stable prices, with the same stated rationale for not including them. How can the errant products forever be in need of adjustment (or banishment), since the selection is supposed to include temporary aberrant conditions? Of course, this whole procedure should not exist, if the CPI is a measure of the change in consumer prices. But that is not its purpose. Chairman Bernanke cannot stop reminding us that one of the Federal Reserve's "mandates" from Congress is "stable inflation." Thus, throw out prices that change. The wonder is after primping the inflation calculation he still has such difficulty keeping it stable.


Extreme values and/or sharp movements which might distort the seasonal pattern are estimated and removed from the data prior to calculation of seasonal factors. Beginning with the calculation of seasonal factors for 1996, X-12-ARIMA software was used for Intervention Analysis Seasonal Adjustment. For the fuel oil, natural gas, motor fuels, and educational books and supplies indexes, this procedure was used to offset the effects that extreme price volatility would otherwise have had on the estimates ofseasonally adjusted data for those series. For the Nonalcoholic beverages index, the procedure was used to offset the effects of a large increase in coffee prices due to adverse weather. The procedure was usedto account for unusual butter fat supply reductions and decreases in milk supply affecting the Fats and oils series. For the Water and seweragemaintenance index, the procedure was used to account for a data collectionanomaly. It was used to offset an increase in summer demand in the Midwest and South for Electricity. For New vehicles, New cars, and New trucks, the procedure was used to offset the effects of a model changeover combined with financing incentives.

[My underlining. This preface introduced (until January 2007) each month's "Note on Seasonally Adjusted and Nonadjusted Data" in the BLS' Consumer Price Index. I left it out of the following examples.]


For the fuel oil, natural gas, motor fuels, and educational books and supplies indexes, this procedure was used to offset the effects that extreme price volatility would otherwise have had on the estimates of seasonally adjusted data for those series. For the Nonalcoholic beverages index, the procedure was used to offset the effects of labor and supply problems for coffee. The procedure was used to account for unusual butter fat supply reductions, decreases in milk supply, and large swings in soybean oil inventories affecting the Fats and oils series. For the Water and sewerage maintenance index, the procedure was used to account for a data collection anomaly and dry weather in California. For Dairy products, it mitigated the effects of significant changes in milk production levels and higher demand for cheese. For Electricity, it was used to offset an increase in demand due to warmer than expected weather, increased rates to conserve supplies, and declining natural gas inventories. For New vehicles, New cars, and New trucks, the procedure was used to offset the effects of a model changeover combined with financing incentives.


For the Fuel oil, Utility (piped) gas, Motor fuels, and Educational books and supplies indexes, this procedure was used to offset the effects that extreme price volatility would otherwise have had on the estimates of seasonally adjusted data for those series. For the Nonalcoholic beverages index, the procedure was used to offset the effects of sharp rises in the price of coffee futures. The procedure was used to account for unusual butter fat supply reductions, changes in milk supply, and large swings in soybean oil inventories affecting the Fats and oils series. For Dairy products, it mitigated the effects of significant changes in milk, butter and cheese production levels. For Fresh vegetable series, the method was used to account for the effects of hurricane-related disruptions. For Electricity, it was used to offset an increase in demand due to warmer than expected weather, increased rates to conserve supplies, and declining natural gas inventories. For New vehicle series, the procedure was used to offset the effects of a model changeover combined with financing incentives.


For the Fuel oil, Utility (piped) gas, Motor fuels, and Educational books and supplies indexes, this procedure was used to offset the effects that extreme price volatility would otherwise have had on the estimates of seasonally adjusted data for those series. For the Nonalcoholic beverages index, the procedure was used to offset the effects of sharp rises in the price of coffee futures. The procedure was used to account for unusual butter fat supply reductions, changes in milk supply, and large swings in soybean oil inventories affecting the Fats and oils series. For Dairy products, it mitigated the effects of significant changes in milk, butter and cheese production levels. For Fresh vegetable series, the method was used to account for the effects of hurricane- related disruptions. For Electricity, it was used to offset an increase in demand due to warmer than expected weather, increased rates to conserve supplies, and declining natural gas inventories. For New vehicle series, the procedure was used to offset the effects of a model changeover combined with financing incentives.

Monday, November 15, 2010

Bernanke Clips the People's Coin - From Bakersfield to Burma

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"(, 2009)

"Ben Bernanke: The Chauncey Gardiner of Central Banking" examined the Federal Reserve's November 3, 2010, decision to save the economy by inflating the asset markets. Chairman Bernanke shared his unpardonable rationale for QE2 in the Washington Post, on November 4, 2010. His deadly cruise missiles, QE1 and QE2, were described in "Chauncey Gardiner."

The subject of CG2 - Chauncey Gardiner, Part 2 - is Bernanke's ignorance of the United States' unavoidable association with the rest of the world. The consequence of Federal Reserve money expansion is not only disrupting foreign economies; the backwash from dollars piling up overseas is raising food prices in the U.S.

In his Washington Post commentary, Bernanke never mentioned the dollar, the currency that is being aggressively depreciated by the Federal Reserve. In the Post, Bernanke resorted to "price stability," a deceptive phrase invented to justify inflating prices, in the present instance, by 2% a year. No Federal Reserve chairman before Bernanke claimed he needed to inflate prices to prevent them from deflating. Congress has not addressed this new coin-clipping mandate of the Fed, nor will it. Bernanke could declare tomorrow that a 5% annual currency debasement is necessary for price stability. This, too, would be met by silence. What is the point of paying the House of Representatives since it does not represent?

Depreciation of the dollar at home is handcuffed to depreciation of the dollar against other currencies. (This is a "competitive devaluation" in which most countries are participating, but the U.S. is the most assertive aggressor.) Even before the Fed's announcement of QE2 on November 3, denouncements from overseas warned Bernanke he was about to rouse a new round of anti-Americanism.

On October 13, 2010, the China Securities Journal (an affiliate of the Chinese government's official news agency Xinhua News) warned: "The U.S. expansionary monetary policy could hijack the global economy, and emerging markets are the most likely to suffer the consequences." After this and many other declarations from the Chinese, the Congressmen and Senators who demand China cooperate in currency adjustment said and did nothing about the Fed's QE2 operation. The politicians either want to launch a trade war (goading nationalism could help beleaguered office-holders) or are unable to rub two thoughts together at the same time.

Speaking of the untutored, the (London) Daily Telegraph targeted Bernanke on October 16 when it warned: "America's attempt to print itself out of far from proven [and] could actually make things worse. QE on this scale now being proposed has never been tried. It is beyond the realms even of economic theory." (In the aftermath of QE2, Germany's Finance Minister Wolfgang Schaeuble seconded this opinion: "However you look at it, my impression is the U.S. is in a state of desperation.")

The broadsides did not stop: On October 23, 2010, German Economic Minister Rainer Bruederle addressed both the European Central Bank's balance sheet and the well advertised intention of the Federal Reserve to commence its attack on the world economy: "An excessive, permanent increase in money [supply] is, in my view, an indirect manipulation of the (foreign exchange) market." China Commerce Secretary Chen Deming warned on October 26: "Because the United States issuance of [dollars] is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing... problems."

The flow of Federal Reserve Notes overseas is indeed causing problems. Commodity prices are at all-time or generational highs when quoted in the most overabundant currency on the world, U.S. dollars: natural rubber, synthetic rubber, corn, soy, wheat, cotton, iron ore, steel, and cattle. It is always the case when prices become distorted that shortages develop. Today there are scarcities of palm oil, vegetable oil, soybeans, diesel fuel, engineers, welders, pipe fitters, electricians, and coal. Federal Reserve officials, operating as they do in a theoretical world, certainly did not consider before this latest act the food riots that spread across at least 20 countries in 2006 through 2008, as commodity prices (food, in particular) were doubling and tripling.

Chairman Bernanke is an ignorant man, evident whenever he speaks, but wondrously displayed in comments after his November 3 launch. Bloomberg news described a talk by Simple Ben in Jacksonville, Florida on November 5: "Federal Reserve Chairman Ben S. Bernanke said the central bank must focus on the U.S. rather than overseas economies when trying to spur the recovery by purchasing an additional $600 billion in Treasuries."

Ben is deaf to anger that has been directed against the U.S. since his latest dollar dump. The gathering trend towards rising trade barriers, capital controls and protectionism shifted into a higher gear after the Fed's announcement. This is not good for the United States. These tendencies did not work out well for the U.S. in the 1930s and that was a time when the world admired America. The insistence of his fellow, establishment economists to still call Bernanke "an expert on the Great Depression" shows this so-called profession is gurgling its death rattle.

After his Jacksonville address, Bernanke was asked how his duplicitous description of inflation (it is too low) could be true given "skyrocketing" commodities prices. The disoriented cosmonaut replied that rising commodity prices are "the one exception" to a broad reduction in inflationary pressure. He went on to say the "excess slack in the economy" will make it "difficult for producers to push through higher prices to consumers."

It will be difficult for producers to stay in business if they don't. Over the past year, the price of wheat has increased 74%; corn: 14%; oats: 68%; heating oil: 29%; gasoline: 25%; pork: 60%; coffee: 27%; beef: 18%; sugar: 44%; copper: 37%; and cotton: 66%.

Some companies have been unable to pass on costs. Kimberley Clark, Wendy's/Arby's Group, and CKE restaurants (among many others) announced third quarter 2010 profits fell even though total sales rose. Squeezing profits out of companies contracts the job market; it does not "spur" it. Some companies, including General Mills, McDonalds, and many supermarket chains have raised their prices, in defiance of Bernanke's contention that it will be "difficult for producers to push through higher prices to consumers."

It is the consumers who can least afford who suffer the most from rising commodity prices, especially since personal income in the U.S. continues to fall, as it did once again in September, 2010. According to the Bureau of Labor and Statistics, the 20% of Americans with the lowest wages spend nearly 60% of their after-tax income on food and energy. The highest 20% of earners spend about 10% of their after-tax income on these necessities.

Only a celebrity economist could think rising commodity prices will be "contained." (A reminder of Federal Reserve Chairman Ben Bernanke's consistent record of being wrong: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." - March 28th, 2007). UPS just announced it is increasing shipping rates by 4.9%. College tuitions for 2010-2011 rose 7.0% at 4-year public colleges. Holiday airfares in 2010 are expected to be 18% higher than a year ago (

Like coin-clippers of yesteryear, Bernanke denies any wrong doing. In the Post, he claimed inflation is so low it is "unhealthy." But this is one of the gravest crimes one can commit against the People. (Coin-clipping was the practice of clipping small amounts of gold or silver from each coin and then selling the shavings.) We have become so refined, the crime goes unmentioned. It was not always so.

In 1278, King Edward I raised the penalty for coin clipping to execution. There were 298 offenders who were hung for offenses against "our Lord the King's Coin." Under Queen Elizabeth I in 1576, "a goldsmith named Thomas Green was drawn from Newgate to Tyburn, and was there hanged, beheaded, and quartered for the clipping of gold and silver coins." On June 21, 1776, Phoebe Harris was burned at the stake, at Tyburn, for High Treason. The specific crime was coin clipping. A crowd of 20,000 gathered to watch. The odor from her body smoke left some spectators gasping.

The People - from Bakersfield to Burma - should settle for the disestablishment of the Federal Reserve and send Ben and his silly friends back to college campuses where they can teach students who are silly enough to believe their disgraceful professors whose empty-headed curriculum they will someday teach.

Tuesday, November 9, 2010

Ben Bernanke: The Chauncey Gardiner of Central Banking

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).

"[H]igher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes."

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

In Ben Bernanke's Washington Post elucidation of Fed policy, "What the Fed Did and Why: Supporting the Recovery and Sustaining Price Stability," the Fed chairman cut-and-pasted misleading paragraphs from earlier misleading speeches. He did not discuss the two most important aspects of his money experiment. Bernanke did not address, first, the real economy or, second, the rest of the world. It will be the first of these lapses that will be discussed below.

On November 3, 2010, the Federal Open Market Committee's [FOMC] decided to buy $600 billion in bonds. The exchange works as follows: $600 billion of cash will be dispensed to the banking system by the Fed and $600 billion of U.S. Treasury bonds will be extracted. The Fed will also reinvest over $400 billion of maturing mortgage securities it bought earlier and buy Treasuries. The total purchases of over $1 trillion will satisfy, to some degree, the Federal Reserve's unstated but sine qua non obligation to fund the Treasury Department's deficit.

This package is known as QE2: quantitative easing, second round. The first round was initiated in March of 2009. On March 18, 2009, the Fed announced it would buy $750 billion of mortgage-backed bonds, $100 billion of Fannie Mae and Freddie Mac securities, and $300 billion of long-term Treasury securities.

To herald the New Era in central banking, Chairman Bernanke appeared on "60 Minutes." His March 15, 2009, TV appearance was introduced with fanfare: "You've never seen an interview with Ben Bernanke... By tradition, Federal Reserve Chairmen do not do interviews. That is, until now."

On the show, Chairman Bernanke forecast that "green shoots [will] appear in different markets."

INTERVIEWER: "Do you see green shoots?"

Chairman BERNANKE: "I do. I do see green shoots."

"Do you see green shoots?," became the question on CNBC that every guest was asked. Most saw green shoots, some were looking for them, and others thought the question was childish, and probably did not receive another invitation to this carnival.

Before embarking on QE2, one might suppose the FOMC studied the aftermath to QE1. In this regard, the central bankers were handed a treat. Bernanke's Domino Theory in the November 4, 2010, Washington Post is quoted above. The catalyst for recovery is "higher stock prices." The stock market has risen 75% since March 9, 2009. Bernanke could not have asked for a more boisterous number to plug into his equation.

The result? Incomes have fallen. Employment is hard to find. In the Washington Post, the Fed chairman justified QE2 (as he had QE1) by stating the Fed's mandate "to promote a high level of employment." The official and understated unemployment rate was 8.1% when Bernanke was interviewed in March 2009. The official rate has risen to 9.6%. The "U-6" level of unemployment has risen from 15.6% to 17.0% since March 2009. This number, calculated and released monthly by the Bureau of Labor Statistics, includes the unemployed plus those who are "discouraged" - people who have not looked for a job in the past four weeks because they think there are none - plus, those working part time because they cannot find a full-time job. The number of unemployed who have been without a job for 27 weeks or longer rose from 3.2 million in March 2009 to 6.2 million in October 2010.

Nevertheless, Bernanke's central-planning unit will fix higher stock prices: Please note, in his Domino Theory, "higher stock prices" are not conditional. Bernanke's assumption should not be taken unconditionally to the market, since Bernanke's plan will fail, but it may produce a Garden of Eden before we drown in a Valley of Tears. An example of Bernanke's checkered record in market rigging is the Fed's failure to boost the housing market. The Fed has bought over $1 trillion of mortgage securities. According to the National Association of Realtors, the average existing home sales price in March 2009 was $170,000. This rose to $183,000 in June 2010, but has now fallen to $172,000. This much can be said of the Fed's mortgage effort: without it, house prices would be much lower.

Another noteworthy feature of the Post article is Bernanke's narrow understanding of an economy. He described it as a "virtuous circle that will 'further support economic expansion.'" (Further expansion is false, but so was the entire article.) The virtuous circle will "lower mortgage rates" and "lower corporate bond rates" and prod "higher stock prices," according to Bernanke. This will "spur spending."

He did not mention that personal consumption did rise in September 2010 (by 0.1%). Alas, this was achieved the old-fashioned way: Americans spent more than they earned. The chairman shows no signs of understanding there are many paths by which "increased spending will lead to higher incomes" and that he is navigating the worst one. (For the lower 99.9% of the American people that is, not for the Federal Reserve chairman.)

That is the entire American economy according to the Fed chairman, the former college economist, who calls himself a macroeconomist. What "macro" means to the professor is uncertain, but the dictionary defines a macroeconomist as one who studies the economy "as a whole."

It is surprising the P.R. division at the Fed did not tell the horticultural expert he should at least mention "Main Street," or the "real economy," two terms used to distinguish the rest of America from Wall Street and Washington. (Wall Street and Washington being one in the same.) In the Post, Bernanke's only solution to economic doldrums is to manipulate asset prices. He has spent the past 18 months distorting stock, bond, commodity, and currency markets. This is from a man who never spent a day off a university campus until he went to Washington. (From the "60 Minutes" interview: "I've never been on Wall Street.")

Jobs and higher incomes are produced from profits. Bernanke never used the word "business" in his Post piece. He never mentioned "banks" or "banking" or "credit." Saving the banking system was (apparently) his crutch for pouring money into banks and regenerating their criminal culture. He is, after all, running the central bank, but his financial system, and his economy, has been reduced to stocks and bonds.

Nevertheless, taking the world as it is and not as Simple Ben would have it, business and bank loans are part of the economy and QE1 had little influence on either. In his one, glancing reference to the job-creating world, the Fed chairman asserted: "Lower corporate bond rates [courtesy of the Fed's manipulations - editor's note] will encourage investment."

Really? In its latest poll, the National Federation of Independent Business (NFIB), which represents small businesses, found that 52% of its members do not want a loan. That is a record high. Only 3% of NFIB members said getting a loan was a problem. Stephen Schwartzman, co-founder of Blackstone, the ubiquitous private-equity buyout firm, sees no point to QE2: "It's not an enormous incentive to do something different with your businesses because rates are down a few basis points. Money is already quite cheap." It is so cheap that Wall Street has leveraged itself to an estimated record $144 billion payout in 2010 bonuses, according to MSN News.

Again, taking the world as it is and not as it should be, we are stuck with Simple Ben. He has announced QE2, restating the same ambitions as when he launched QE1. Albert Einstein has been quoted by several critics in reference to QE2: "The definition of insanity is doing the same thing over and over again and expecting different results." Bernanke's inability to do anything other than what he has done before resembles a fictional character with a narrow view of the world.

Chauncey Gardiner (actually, Chance the gardener), was the mentally incapacitated gardener played by Peter Sellers in the screen version of Jerzy Kozinski's sagacious novel Being There. Chauncey, a man whose life was limited to gardening and watching TV, became, through a series of misapprehensions, the top adviser to officials in Washington, including the President:

President "Bobby": Mr. Gardener, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause]
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
President "Bobby": In the garden.
Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President "Bobby": Spring and summer.
Chance the Gardener: Yes.
President "Bobby": Then fall and winter.
Chance the Gardener: Yes.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we're upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
Benjamin Rand: Hmm!
Chance the Gardener: Hmm!
President "Bobby": Hmm. Well, Mr. Gardiner, I must admit that is one of the most refreshing and optimistic statements I've heard in a very, very long time.
[Benjamin Rand applauds]
President "Bobby": I admire your good, solid sense. That's precisely what we lack on Capitol Hill.

President Bobby adopted Chance's optimistic advice in an address before the Financial Institute of America. His speech was the talk of the town. Television, even in that distant past (Being There was written in 1970), was on the spot, with its unfailing ability to trivialize any topic.

The host of "This Evening," a fictional, national TV news show with 40 million viewers, asked Chauncey Gardiner to appear after the Vice President cancelled.

Chauncey was asked for his opinion of the President's address, in which President Bobby "compared the economy of this country to a garden and indicated that after a period of decline a time of growth would naturally follow." Chauncey replied: "I do agree with the President: everything in it will grow strong in due course. And there is still plenty of room in it for new trees and new flowers of all kinds."

At the end of Chauncey's appearance, the host embraced him center stage. The audience's "applause mounted to uproar."

After his "green shoots" prophecy, Chairman Bernanke closed his "60 Minutes" performance. He offered Americans a sunlit future: "I think we will see recession coming to an end, probably this year [2009]. We'll see recovery beginning next year, and it will pick up steam, over time."

In the wake of this rousing prediction from the Chauncey Gardiner of Central Banking, Wall Street TV performers have talked the stock market up 75%. We are seeing new vistas of instability.

Friday, October 29, 2010

The Fed Underwrites Asset Explosion

"That the economists...can explain neither prices nor the rate of interest nor even agree what money is reminds us that we are dealing with belief not science."

-James Buchan, Frozen Desire (1997)

The Federal Reserve is in disarray. Unsure of whether its QE2 strategy (quantitative easing - second round) should be tabled (see speeches of Thomas Hoenig, president of the Kansas City Federal Reserve Bank) or if it should pump $10 trillion into the economy (the unsolicited advice from economic columnist Paul Krugman), the New York Federal Reserve Bank has now asked bond dealers what it should decide at its upcoming November 3 meeting. [ "Fed Asks Dealers to Estimate Size, Impact of Debt Purchases."]. Since it is the belief in the integrity and competence of the Fed that backs the dollar, asking Wall Street what it wants is another reason to sell dollars.

Two recent speeches by Federal Reserve officials clarify the dishonesty and paranoia of this debauched institution. Both were delivered on October 25, 2010.

Speech number one is a fabricated history of the housing crisis, delivered by Chairman Ben S. Bernanke in Arlington, Virginia. He gave it at the Federal Reserve System and Federal Deposit Insurance Corporation Conference on Mortgage Foreclosures and the Future of Housing. The conference title alone is enough to know that no good will come from this boondoggle:

"It was ultimately very destructive when, in the early part of this decade, dubious underwriting practices and mortgage products inappropriate for many borrowers became more common. In time, these practices and products contributed to problems in the broader financial services industry and helped spark a foreclosure crisis marked by a tremendous upheaval in housing markets. Now, more than 20 percent of borrowers owe more than their home is worth and an additional 33 percent have equity cushions of 10 percent or less, putting them at risk should house prices decline much further. With housing markets still weak, high levels of mortgage distress may well persist for some time to come.

"In response to the fallout from the financial crisis, the Fed has helped stabilize the mortgage market and improve financial conditions more broadly, thus promoting economic recovery."

You may note, not a word of the Federal Reserve's complicity - not its mad money expansion, not its one percent interest rate (the fed funds rate) that turned susceptible mortgage-buyers into highly leveraged speculators, not the Fed's decade-long enticement of Americans out of savings and into "risk assets," not its terrorist tactics at frightening the American people into saving the parasite banks, and then, having successfully terrorized itself, cutting the fed funds rate to zero, a condition that is suffocating the lower 99%.

In Bernanke's final sentence (In response...), he claims the Fed saved the mortgage market and restored the American dream, or whatever the imposter is trying to sell. It would be more accurate to confess that if the Federal Reserve did not exist, there is a good chance there would have been no need to stabilize anything.

There are moments when Federal Reserve officials speak the truth. In 1934, Eugene H. Stevens, chairman of the board of the Federal Reserve Bank of Chicago, spoke clearly about ridding ourselves of zombie banks. Quoting the October 24, 1934, New York Times: "The cleansing of the American banking structure of the parasites of 'occasional incompetency and dishonesty' in the last year and a half has put it in the strongest position of safety and good management."

Two years after the United States missed its opportunity to clean house, the banking system is in a weak position of instability and bad management.

Speech number two, by New York Federal Reserve President William C. Dudley, is an insult to anyone not getting rich within the parasitic Washington-Wall Street nexus: In response to a question from his audience at Cornell University, Dudley asserted:

"To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so."

In his speech, Dudley, a former managing director at Goldman, Sachs & Co., described how the Federal Reserve has amortized this debt to the American people:

"The Fed responded aggressively and creatively... [to the] financial crisis that broke in mid-2007.... [W]e took aggressive steps to ease monetary policy in order to support economic activity and employment.... When the Fed buys long-term assets, it pushes down long-term interest rates. This supports economic activity in a number of ways, including by making housing more affordable and boosting consumption in households that can refinance their mortgages at lower rates."

In other words: the Fed has cornered markets in an attempt to induce overextended households to spend money again and restore an economy the Federal Reserve has hollowed out. Again, this is a warning to investors: any substantive rationale for holding assets that trade on markets needs to be weighed against the knowledge that prices are not real. There are consequences - intended now, unintended later - to trillion dollar experiments dreamt up by academic economists.

Dudley said what is demanded of Federal Reserve officials when they discuss the bank bailouts:

"A handful of times, we made the difficult decision to make emergency loans to prevent the disorderly failure of particular firms. We did so not because we wanted to help the firms, but because allowing them to collapse in a disorderly fashion in the midst of a global crisis would have harmed households and business throughout the United States." [My underlining.]

Why does he use the word "firms" instead of "banks?" There is probably no Federal Reserve official who knows better the disorderly fashion in which the Too-Big-To-Fail banks collapsed. His then-current employer, Goldman, Sachs, an investment bank, had failed. It was saved by the dubious Federal Reserve maneuver of turning the investment bank into a commercial bank.

Dudley told his audience to leverage its portfolios:

"With regard to monetary policy, the Fed has in place a highly accommodative stance. The FOMC has said that it will keep short term interest rates at exceptionally low levels for an extended period of time. The Fed also retains large amounts of mortgage-backed bonds acquired in order to support the housing market and help bring down mortgage and other long-term interest rates to the historically low rates in place today.

"The FOMC and the Chairman have stated their commitment to take further actions to bring interest rates down further should economic conditions warrant."

Dudley avoids typical Federal Reserve euphemisms here. He states the Fed controls short-term interest rates, is supporting long-term interest rates (is preventing them from rising), and is supporting the mortgage market (is preventing mortgage securities and house prices from falling). Not in this speech, but elsewhere, Dudley and other Fed officials have indicated they are propping up the stock market. It is doing more than that: U.S. stocks have risen 10% since this latest Federal Reserve, carpe diem, open-mouth policy debuted last month.

Federal Reserve ringmasters do not discuss how their capricious manipulations disturb the dollar's relationship with other currencies. When foreign buyers have decided it is time, the dollar, the stock market, the mortgage market, house prices, long-term interest rates and short-term interest rates will respond to the Bernanke "puts" just as they did to the Greenspan "puts" (the Nasdaq in 2000, houses in 2006). They will explode.

Wednesday, October 27, 2010

Unpublished Letters to the Financial Times and the New York Times

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).

To the Financial Times, October 7, 2010:

Dear Sirs,

It is scandalous that you continue to give Alan Greenspan a forum ["Fear undermines American economy," FT, October 6, 2010]. He prattles on in his successful effort at rehabilitation by writing and speaking with the imprimatur of the Financial Times, the Brookings Institute, the Council on Foreign Relations and other institutions that should have no truck with the man most responsible for the financial ravages inflicted on The American people, and, indeed on the rest of the world.

To the Financial Times, October 13, 2010

Dear Sirs,

Edwin Truman, regarded as the wisest staffer during his time at the Fed, argued for the U.S. Treasury to sell the country's gold stock. ["Time to Unlock Fort Knox and Sell the Bullion" FT, October 13, 2010]. Truman rebuts the common argument for the gold stock to be held as a "rainy day precaution" with a question: "But after the recent economic and financial crisis and with the prospect of misery for several more years, how much more rain must pour before the US acts?"

In the Walt Disney movie Aladdin, the wise Blue Genie states: "You'd be surprised what you can live through".

It's a shame Mickey Mouse is not running the Fed. On second thought, he already is.

To the New York Times, October 15, 2010

Dear Sirs:

In "The Next Bubble," [editorial: October 13, 2010] you rue the "large inflows of capital" that "complicate macroeconomic management" of emerging economies. You identify the deadly consequences: These flows "promote fast credit expansion - which can cause inflation, inflate asset bubbles, and usually leave a pile of bad loans."

Here, you have stated matters of fact. But, you then write, there "is little policy makers in the rich world can do to stop these flows." There is everything the policy makers in the rich world ("formerly rich" -?) can do to stop these flows. We simply don't want to do what needs to be done; that is a different matter. The heart of the problem lies with the enormous creation of money and credit, most conspicuously in the United States, and which the Federal Reserve largely controls, that ricochets around the world and leads to such ruin.

The solution to this problem, both at home and abroad, is for the Federal Reserve to reduce the supply of money and credit. Your economic writer, Paul Krugman, wants the Federal Reserve to increase the supply of money and credit by several trillion dollars. Obviously, this will cause even greater "inflation, asset bubbles, and pile of bad loans" than those that are asphyxiating us today.

Leadership is not easy. You must choose your poison: Save the world or publish Krugman.

To the Financial Times, October 25, 2010

Dear Sirs,

Frederic Mishkin has made a useful suggestion in "The Fed must adopt an inflation target," [Financial Times, October 25, 2010]. He has not always been so radiant.

In 2006, when he served as adviser to the Icelandic government, Mishkin gave the green light to the country's banking system, claiming, "financial fragility is currently not a problem, and the likelihood of a financial meltdown is low." In 2007, Federal Reserve Governor Mishkin stated: "To begin with, the bursting of asset price bubbles often does not lead to financial instability....There are even stronger reasons to believe that a bursting of a bubble in house prices is unlikely to produce financial instability."

In this morning's Financial Times, Mishkin, the current A. Barton Hepburn Professor of Economics at Columbia University, and, co-author with Ben S. Bernanke of the text Inflation Targeting, writes that the Federal Reserve should adopt "a specific numerical inflation objective." The pen pal of the Federal Reserve chairman thinks 2% is the rate to hit.

In 1957, an Ivy League economics professor on the make (Sumner Slichter) charmed the Senate by claiming the United States needed 2% inflation. Federal Reserve Chairman William McChesney Martin told the senators that such a plot would place the heaviest burden on those who could not protect the value of their income or savings. Those "savings in their old age would tend to be the slick and clever rather than the hard-working and thrifty."

This may have been the best market prediction of the past half-century.

The advantage of Mishkin's proposal will be to put the long-running Fed policy of impoverishing the American people into writing. It will be official, as follows:

The Federal Open Market Committee (FOMC), in its September 21, 2010 press release, stated: "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent..." As a consequence, the average bank passbook savings rate in the U.S. is 0.09% (, September, 21, 2010).

The adoption of Mishkin's 2% numerical inflation objective will be an official confiscation of Americans' savings, at an annual 2% rate. Once this policy is in writing, the Federal Open Market Committee will be as guilty of robbery as Willie Sutton and FOMC members can be prosecuted and sentenced with the same determination and result.

Thursday, October 21, 2010

Orwell Targets Bernanke: An Unteachable Hole in the Air

On Friday, October 15, 2010, Federal Reserve Chairman Ben S. Bernanke delivered a dishonest speech: "Monetary Policy Tools and Objectives in a Low-Inflation Environment." What follows is not a critique of the talk, since that would be redundant. Please see one of my recent articles "Exploiting Bernanke" (September 21, 2010), which discussed the anticipated speech of October 15, 2010. Also see, "Central Bankers are Paid to Lie - Buy Corn" (October 5, 2010), which showed how Federal Reserve Chairman Arthur Burns fibbed his way through the 1970s. Investors who either believed him or were not adept at translating signals from the real world suffered.

Bernanke's mendacious speech confirmed my general investment advice in "Central Bankers are Paid to Lie": "Courses of protection include buying farms (including machinery companies, grain commodity funds, water rights, and desalinization companies), as well as precious metals, mining and drilling companies, and freeze-dried food." As a guess, Bernanke's current intention (this will change, and change often) is to add a trillion dollars to the economy. Such a wild, mad experiment has never been attempted before, outside of Argentina, Zimbabwe, and such.

The reason last Friday's speech could be analyzed three weeks before it was delivered is Bernanke's predictability. He will do nothing that veers from the course he found convenient for personal advancement three decades ago. He has neither said nor would dare process a thought that deviates from his doctoral thesis.

Even the title of his latest speech is a lie or stupid, as you wish - broadcasting as he did our "Low-Inflation Environment." Inflation is practically everywhere that counts: food, insurance premiums, utility bills, tuitions. ("Where it counts" does not include the deflation of what really counts: wages, net wealth, house prices. This is why the "inflation vs. deflation" question is false.) Commodity prices keep rising, partially because there is greater demand than supply; partially because we are used to seeing oil and corn quoted in dollars. Producer and consumer prices generally lag commodity prices. The length of the lag differs. Anywhere from three months to one year captures most instances, under normal conditions. (When further depreciation of the dollar against commodities is anticipated, the lag will be compressed.) The dollar has fallen against a basket of currencies by 13% over the past 18 weeks. It is prudent to at least hedge for a contraction of this lag.

Bernanke's speech was characteristic. He turned logic on its head and ignored the most debilitating consequences of his past actions. The Fed chairman used official government numbers to claim inflation was too low. Homage to government inflation calculations should have, alone, been enough for the media to ignore anything else he said. Of course, he was dutifully quoted and taken at his word.

It was not that long ago when an economist who claimed inflation was too low would have lost credibility. Bernanke stated "that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below." The FOMC is the Federal Open Market Committee - the body that has absolute authority to act upon such inverted thinking as 2% inflation being good for the country.

A step back, to 1957: This was a time when academic economists were learning that theories manipulated to satisfy politicians could put themselves in positions of power. Most from this guild never dreamt anyone outside a college classroom noticed their existence. They miscalculated, as is the rule for these humbugs.

Politicians want money and credit to fulfill their constituents' every wish. A Harvard economist told Congress that the U.S. needed a 2% rate of inflation to defeat communism. Washington loved him.

On August 13, 1957, William McChesney Martin, the Federal Reserve chairman at the time (and not an economist - he had been a Latin scholar at Yale, so understood that shortcuts destroy empires), lectured the Senate Banking Committee on the specific topic of the Federal Reserve "targeting" (Bernanke's word - not Martin's) a 2% rate of inflation: "Consumers are encouraged to postpone saving and instead purchase goods which they do not immediately need, and the incentive to strive for efficiency no longer governs business decisions...and speculative influences impair reliance upon business judgment." Of utmost importance, groups struggle to insulate themselves from the loss of purchasing power, then "fundamental faith in the fairness of our institutions and our government deteriorates."

The Bernanke Fed has stated its current policy is to chase consumers out of savings and into speculative ventures. (See The 2004 Fed Transcripts: A Methodical, Diabolical Destruction of America's "Wealth".) That is exactly the recipe for the Fed to accelerate its impoverishment of the American people. Alan Greenspan, of course, was the master at jumbling a few words to distract attention from this long-running plan to prevent the Fed's extinction. Bernanke also resorts to nonsense. From his October 15, 2010, speech: a 2% rate of inflation is to "attain... price stability" and to "bring the unemployment rate down significantly." He is doing exactly the opposite of what he pretends.

George Orwell wrote about "[t]his lunatic world in which opposites are turned into one another." That was not lunacy for lunacy's sake, nor is it today.

In 1940, Orwell wrote of World War II: "After 1936, of course, the thing was obvious to anyone except an idiot." He was not erasing his own past, as was common with many others and is universal among "experts" today. (See the first paragraph of Ben Bernanke's October 15, 2010, speech.) In 1938, upon returning to England from continental Europe, Orwell had written about the "familiar streets, the posters telling of cricket matches and Royal weddings, the men in bowler hats, the pigeons in Trafalgar Square, the red busses the blue policemen - all sleeping the deep, deep sleep of England, from which I sometimes fear that we shall never wake till we are jerked out of it by the roar of bombs." The bombs flattened London in 1940.

The British institutions in the 1930s were in the same condition that the Federal Reserve, other government manipulators, the so-called economics profession, and the revered think tanks are in today. Orwell wrote of Neville Chamberlain, British Prime Minister from 1937 to 1940: "He was merely a stupid old man doing his best according to his very dim lights. It is difficult otherwise to explain the contradictions of his policy, his failure to grasp any of the courses that were open to him. Like the mass of the people, he did not want to pay the price either of peace or of war. " At another point: "Tossed to and fro between their incomes and their principles, it was impossible that men like Chamberlain should do anything but make the worst of both worlds."

This is an apt summation of the desiccated American hierarchy today. It is withering into dust.

Chamberlain had trusted Hitler, as had his predecessor, Stanley Baldwin. As prime minister, Baldwin had suppressed information about Hitler's rearmament, sleeping, as was his wish, the deep, deep sleep of England. Orwell wrote: "One could not even dignify [Baldwin] with the name of stuffed shirt. He was simply a hole in the air." Baldwin did everything he could to prevent any disruption to the exact relations that existed among the social and political institutions of the day.

Winston Churchill, not in office but a nuisance to the established order, knew the proportions of Nazi rearmament and gave speeches in Parliament with uncomfortable details. Baldwin's cabinet voted to ban "independent views" from the BBC. Sir John Reith, dictator of the BBC, prevented Churchill from speaking. CNBC does much the same today, as does the print media.

Geoffrey Dawson, editor of The Times of London, suppressed Churchill's views as well as those from Times reporters whose dispatches from Europe might upset Hitler. In 1935, Dawson wrote, "I do my utmost, night after night, to keep out of the paper anything that might hurt their [Nazi] susceptibilities." He wrote this letter because he could not understand the Fuhrer's ingratitude after, in the words of William Manchester, "five years of jumping through Hitler's hoops."

Dawson was not a Nazi but a dense, frightened old man who wanted the world to stand still. We can see the same combinations of dis-enlightenment that keep the American public in the dark today. An example is the coordination among government agencies (their data dissemination propaganda) and the Federal Reserve's contorted views as expressed through the country's news collection agencies.

The Associated Press released the following on October 14, 2010, a day ahead of Bernanke's speech:

Wholesale prices tame beyond volatile food, energy

(AP) "Wholesale inflation stayed tame last month outside of a sharp rise in food and energy prices. Moderate price inflation allows the Federal Reserve to keep the short-term interest rate it controls at a record low of nearly zero, where it has been since December 2008."

With that, the AP assured its access to the Fed chairman.

In 1952, Bernard Iddings Bell wrote Crowd Culture, in which he discussed a wartime incident: "When Russia was Hitler's ally in World War II, the American people were told by the papers, and believed, that the Russians were little short of fiends. Suddenly Russia changed sides.... [S]he became our ally. At a dinner in New York at that time, I sat next to a high-up officer of one of the great news-collecting agencies. 'I suppose,' I ventured, 'now that the Muscovites are on our side, the American people will have to be indoctrinated so as to stop thinking of them as devils and begin to regard them as noble fellows.' 'Of course,' he replied. 'We know what our job is in respect to that. We in the working press will bring about a complete and almost unanimous volte face in the belief of the Common Man about the Russians. We shall do it in three weeks.' He was right about it. The papers, fed by the news agencies, did just that."

On March 29, 1943, Life magazine published a "Special Issue USSR." On the front cover is a portrait of Uncle Joe Stalin, beaming downward, as if the dictator is looking upon his 3-year-old nephew who just counted to 10 for the first time. Over 100 pages of the issue describe the Soviet Union's wholesome leaders and their obliging peasantry.

Among the wholesome leaders is Vladimir Ilyich Ulyanov (Lenin), with a similar, avuncular portrait, as if he's looking at the same nephew who just counted to 20. The article, "The Father of Modern Russia," starts off "Perhaps the greatest man of modern times was Vladimir IIyich Ulyanov." It goes uphill - or downhill - from there, depending on one's view.

Flipping through the issue, the article "Collective Farms Feed the Nation" is worth a look. Pictures of the peasants are inspiring. They were a happy lot. The story starts off: "Although Russia was always overwhelmingly an agricultural country, most Russians used to go hungry." Later in article: "Whatever the cost of farm collectivization, in terms of human life and individual liberty, the historic fact is it worked." The cost of farm collectivization included several million Ukrainians who had been starved to death in the early-1930s.

"Collective Farms" could be written by an economist - then or now - without irony or conscience. Such a contortion of reality would do wonders for a rising academic or Federal Reserve staffer.

Orwell was harsh in his criticism of the intelligentsia, whose loyalties were as fickle as their abstractions. He did not confuse the term, intelligentsia, with intelligence. It was a collection of layabouts who, in a "desire for psychological escape" indulge in "chauvinistic sentiments that would be totally impossible if you recognized them for what they were." Such a person is "capable of the most flagrant dishonesty, but also - since he is conscious of serving something bigger than himself - unshakably certain of being right."

In their world: "Material facts are suppressed, dates altered, quotations removed from their context and doctored to alter their meaning." Communism was an outpost for many of the intelligentsia in the 1930s. John Reed, author of Ten Days That Shook the World, (about the Russian Revolution), had willed the publication rights of his book to the British Communist Party. Reed died in 1920. The British Communist Party did exactly what Moscow wanted: it published an edition that excised Leon Trotsky's role in the revolution and deleted an introduction by Lenin.

Orwell wrote: "Events which, it is felt, ought not to have happened are left unmentioned, and ultimately denied." British Communists were badly shaken by the Russo-Nazi pact (Molotov-Ribbentrop) in 1939, an eventuality not difficult to forecast by a party whose subservience to Moscow should have animated its consciousness towards Russian self-interest.

Bernanke, the Fed, and the other weary institutions fall within Orwell's description of Chamberlain and his circle: "What is to be expected of them is not treachery or physical cowardice, but stupidity, unconscious sabotage, an infallible instinct for doing the wrong thing. They are not wicked, or not altogether wicked; they are merely unteachable. Only when their money and power are gone will the younger among them begin to grasp what century they are living in."

Of Bernanke today, he is a combination of both the establishment and the regimented intelligentsia that has acquired power. Orwell wrote of the intelligentsia: "Clearly there was only one escape for them - into stupidity. They could keep society in its existing shape only by being unable to grasp that any improvement was necessary" After a time, which looks like it will be after Bernanke and his comrades have done their worst, a leader, looking at the world as it is, may state:

"Difficulties began to build up in the economy in the 1970s, with the rates of economic growth declining visibly.... A lag ensued in the material base of science and education, health protection, culture and everyday services. Though efforts have been made of late, we have not succeeded in fully remedying the situation. There are serious the improvement of the people's standard of living."

Thus spoke Mikhail Gorbachev in his 1986 speech to the 27th Communist Party Congress when he effectively declared the institutions which had colluded to bankrupt the nation's economy and spirit were dead.