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The Fed Calls the Shots
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For all the arrows aimed at Tim Geithner right now, it's really Ben Bernanke's arsenal of tricks that can manipulate the economy—and his surprise move this week was just a warm-up.
Between the wall-to-wall AIG outrage this past week, plus leaks of the coming details from Tim Geitner’s latest bank bailout, you can be forgiven if you haven’t paused to reflect on what Fed Chairman Ben Bernanke did the other day. But in a week when all the other economic news was grist for either rage or tears, gentle Ben actually offered something creative, and even hopeful.
Bernanke’s goal was to disabuse people of the widely held view that when interest rates have already been lowered to near zero, the Fed has “run out of ammunition.”
Why do I say this? Ever since the financial crisis broke, I’ve been an advocate of what I call Spaghetti Economics—as in, if we throw trillions of dollars against the wall, enough will stick, however imperfectly, to avoid anything like a 1930s-style calamity. The fact that the pasta has been flying wildly for months—even via the much-maligned TARP—is the chief source of my optimism amid the mess. It’s a stark contrast to the period after the 1929 crash, after all, when monetary and fiscal policy ended up being insanely contractionary. That’s why the nitpicking over the stimulus bill always struck me as irrelevant—yes, there were some silly projects here and there, but its chief virtue was its outsize spaghetti factor. Yet comparatively speaking, Congress is a pasta piker. History will record that the spaghetti tosser-in-chief during this crisis was none other than Bernanke. And the latest trillion he threw this week to buy long-term Treasury bonds and other mortgage-related assets reminds us why we’re lucky to have a determined chef practicing Spaghetti Economics in the kitchen.
The Financial Times said Tuesday that “the plan to buy Treasuries caught investors off guard.” But not for those who’ve read Bernanke’s playbook. If you’re trying to follow the chairman’s thinking, the essential text is a speech he gave as a Fed governor back in November 2002 on the risks of deflation. Bernanke’s goal in the talk was to disabuse people of the widely held view that when interest rates have already been lowered to near zero, the Fed has “run out of ammunition” when it comes to boosting aggregate demand.
“To stimulate aggregate spending when short-term interest rates have reached zero,” Bernanke told the National Economists Club, “the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys... One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure—that is, rates on government bonds of longer maturities.”
This is precisely what happened Wednesday, when the Fed said it would start buying hundreds of billions of dollars' worth of longer-term Treasury bonds, sending long-term interest rates immediately lower. The other debt the Fed is buying up falls into categories Bernanke talked about back then as well, in language too abstruse to detain us here. But trust me, he’s being creative.
The point is this: Like any public official caught in an epic crisis, Bernanke has surely made mistakes. But he came to this moment, thanks to his longtime study of the Depression, almost providentially prepared to be unconventional and bold. I picture Bernanke with a list in his drawer of 25 big things he can do to stave off disaster. My hunch is he’s only run through the first eight or nine—which means there’s lots more pasta on the shelf in case we need it. What he’s thrown already has had a huge impact in stopping things from going from Very Bad to Even Worse.
There is one problem, however (besides potential inflation, which is a worry for another day). It hit me when I tried to explain what was happening to my daughter, who’s in sixth grade. She got the spaghetti analogy just fine. But it’s hard to explain to an 11 year old (and to adults, really) why, in a democracy, the man with the most influence over whether we get through this mess relatively intact is someone who was elected by no one, who few Americans know anything about, and who basically answers to his own judgment about how best to muscle us through.
Matt Miller, a senior fellow at the Center for American Progress, is the author of The Tyranny of Dead Ideas: Letting Go of the Old Ways of Thinking to Unleash a New Prosperity. He hosts “Left, Right & Center,” public radio’s popular weekly political roundtable, and blogs at mattmilleronline.com.
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Seems like everything is catching "...investors off guard." Thank goodness we have decent performers in other industries or we would really be toast. ALL the other businesses and industries where penalties, bankruptcy, failure, consequences and often times criminal action happens when you f*** up, unlike the financial industry Ponzers and the buffoons that regulate them.
yes....
BENNY THE BULLSHITTER is one of many frauds that run our finanical system.Its time to weed out greed and fraud in our treasury department
Matt: You wrote "why in a democracy the man with the most influence over whether we get through this mess relatively intact is someone who was elected by no one, who few Americans know anything about, and who basically answers to his own judgment about how best to muscle us through." Bernanke couldn't do what he's done if he were an elected official. Read Fareed Zakaria's "The Future of Freedom."
Maybe I should have put Bernanke in my song?
http://www.youtube.com/watch?v=_6DIktq3KIs
Maybe I need a new song. Skanky is an easy rhyme with Bernanke.
Yes, Bernanke did a good spaghetti thing. But, the fact that he did it -- and felt he had to do it, tells us that we are in a lot more trouble than we know.
I can't help thinking that if AIG goes down (rumors from an anonymous AIG insider that the company is "cooking its books") then the economy will be in a death spiral. Yikes! We should probably make sure that AIG fails its stress test, not a big stretch at all, and nationalize it immediately. All the spaghetti in the world won't help if that company implodes.
debbieqd, What actually happens if AIG or Goldman or Citi or any of them completely melts down? Everybody but tyhe people who got us into this mess is already losing their job or in fear of losing it.
Really, isn't all that would happen is a few Wall Street types might jump out of their office windows? Or maybe not even that -- these people have no shame or remorse.
I say nationalize the banks, AIG, and anyone else who got bail out money. Any executive who wants to keep his job has to agree to do 200 hours a year of community service, prefe3rably on a soup line or in a homeless shelter.
Then, as we regroup, make sure everyone has health care, food to eat and a roof over their heads -- everyone everywhere. That would make the planet a better place.
everybody is cooking their books.....including the treasury and the fed.......time for action......the streets should be filled with marchers.....wake up or else there will be generations of penury
queensplate- I totally agree with you. It seems like everyone who can get away with cooking their books, is! While the rest of the country pays the price for their actions! The govt, top exec's, wall street, etc. don't give a damn about our problems or really how to fix this sh**! Right now it is all about covering up what they have done & protecting their behinds!
Think about it.... we probably only really know 10% of what is actually been going on for years! The scariest thought is what the hell is around the corner that we don't know about yet? This story is just the scapegoat for now to keep us busy while they shift stuff around so that we don't pay attention to the other crap going on!
Wake up people & start taking action!!!! We have to for our children's sakes!
What I like about the Fed (Bernanke and his board) is that it doesn't dish out money like a bewildered Congress but LOANS it to troubled institutions against their viable assets, repayable (in better times to come) with interest--about 8%, I believe. The Federal Reserve understands the problems and the solutions and definitely is on the right track. When in doubt, ask Klugman for confirmation.
Ooops! I didn't mean "Klugman" (as actor Jack Klugman) . . . should have been KRUGMAN, who does a syndicated column.
Hi All,
Greetings and Salutation!
I watched the movie version of "Chicago" the other night. Today, I think about this AIG fiasco and remember Richard Gere's well done rendition of "Razzle Dazzle 'em" in that movie. The sly lawyer as he diverts attention from what is fact to what is emotion. In the instance of this AIG fiasco, diverting attention to bonuses paid executives and away from the truth.
Any really, really, good swindle or scam uses that "Razzle Dazzle 'em" rule. One must have a focus of attention somewhere other than upon the fraud itself. The shenanigans at AIG bring to mind a movie called "Paper Moon".
Destiny teams a little girl and a middle-aged man up as con artists. The man pays for some items in a story with a large bill. Behind him in line, the little girl pays for something with a small bill. When the girl sees her change, she balks, claiming that she had given the clerk the larger bill. Her distressed cry that the larger bill is a birthday gift with a birthday inscription on it, inciting emotions. Found in the cash drawer is a larger bill with the inscription the girl claims. The girl "earns" the larger bill via her deception.
AIG is much the same con, right down to the little girl taking the fraud into a simpler swindle. A couple of more obvious short-changing maneuvers to increase her take or maybe just to show off her flair for the con game. In the AIG situation, these would be bonuses unnecessary yet still, bonuses useful in diverting attention toward facts to attention toward emotions.
It can be a bit more complicated but the primary things that occurred up to and including the bailouts is the same.
There are many faucets to this fraud. However, the base fraud is a matter of giving a small bill and pretending it is the large bill. The deregulation of laws, which had created borders betwixt Wall Street, the Banks, and the Insurance companies, that allowed great fraud to be committed.
Long ago and far away, something called "buying on margin" came to be. This entailed a situation whereby a person could post X dollars of collateral and the stock market company would give an equal amount of credit. Thereby, one could have $100.00 in collateral and buy $200.00 in stock. This is termed "leveraging" and was fine when regulations were in place.
The advent of such things as "options" for "hedging" will greatly increase this leveraging situation to create a "win-win" situation for the smart investor (or better said, "Sly" investor). The stock market always somewhat of a gamble, one could now "bet" that a stock would fall in value and make the big bucks. Even if one did not actually own the actual shares of that stock, one could control hundreds of thousands of dollars in stock with only a few hundreds of marginal dollars.
Marginal dollars are the big bill that the little girl did not really give the store clerk; it never existed. However, the real big bill, which the store clerk gave back to the little girl, did exist. In effect, it was money used to "bail out" the clerk and the store due to emotional circumstances.
One day it hit the news that a company called "Lehman Brothers" had taken the big dive and the world would collapse unless the government did not step in to help. The sky was falling, as it were. The big cats including the FED knew that Lehman would collapse if someone did not purchase it (and revise the books) or the FED did not step in with help. The stack of cards to build the house was going to come down.
The FED knew long before Lehman Brothers failed that it would happen. Instead of bracing (or bailing out) Lehman Brothers, the Fed let Lehman Brothers fail. The auspice incongruously put out that Lehman would fall by itself and create only a pothole on Wall Street. This is incongruent because anyone familiar with the system would know that Lehman would take others with it.
Lehman failed and AIG became responsible for the billions in insurance it sold against such a failure. The government fooled to step in with billions and no oversight. The insurance that AIG had sold and could not cover, billions in insurance to protect investors that they not lose their investment AND not lose the monies that did not exist; stocks and options bought on MARGIN. What a quandary, what a great fraud is the scam perpetrated on an unsuspecting people.
AIG had insured billions of dollars that did not exist. Until the FED marched in and turned those dollars into real cash, the clerk handing the poor little child her take and her bonus for her short change game. The executives earned those bonuses because they pulled the biggest heist in history. In addition, they are taking the people's eye off the proverbial ball and probably giving AIG plenty of time for a probable shredding enterprise.
Find the insured and one will find the trail of fraud or one can play with the millions in bonuses and ignore the billions in fraud.
Loveya,
Duane Kuehn
Thank you.
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