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Is Ben Bernanke a Grand and Wonderful Wizard?

Posted by Larry Doyle on July 21st, 2009 10:53 AM |

“There’s no place like home.”

Just as Dorothy in The Wizard of Oz merely wanted to return to the peace and comfort of her home in Kansas, aren’t we all hoping to ‘get home?’

What is home and how do we get there? Home is a sense of economic stability and future prosperity achieved by ‘following the yellow brick road.’ If it were only that easy.

Many believe The Wizard of Oz is not simply a whimsical child’s story. Having been written in the late 1800s, does the story represent a populist message? A progressive message? Is the yellow brick road a symbol of the ‘gold standard?’ I will defer to literary historians who are far more schooled than me on these topics.

What about ‘the grand and wonderful wizard’ Ben Bernanke? Are we merely supposed to disregard that ‘man behind the curtain?’ Well, folks, we’re not in Kansas anymore and if we are ever going to ‘get home’ then we had better start promoting an increased level of transparency and accountability along the way.

I am not here to impugn Mr. Bernanke. I do not question his character or his intentions. In fact, I think he is a far better Fed chair than his predecessor Alan Greenspan. However, is Ben Bernanke and the Federal Reserve all-knowing and all-powerful? I think not. Is the economic future of the United States of America so dependent on one man and one institution to determine an accurate and timely path for monetary easing and tightening? Whether we like it or not, our economic system is totally dependent on the Fed. Read what the ‘wonderful wizard’ thinks about The Fed’s Exit Strategy in today’s WSJ.

The risks involved in our dependence upon the Fed are far too great. What needs to be done?

The Federal Reserve must be audited. What is on the Fed’s books? What are all of the assets and the liabilities? What are the Fed’s short term and long term risks? The need for transparency in our economy has never been greater. The least transparent entity within our economic sphere is the Federal Reserve.

Two hundred and seventy five Congressmen have signed a bill, HR 1207 and S 604, sponsored by Congressman Ron Paul (R-TX) requiring an audit of the Federal Reserve. This bill is currently in the House Financial Services Committee, a very critical stage. I beseech anybody who loves our country to solicit your representatives to support this bill. Instructions for doing so are in the above link.

Do we have the brains, the heart, the courage?


For a fuller understanding of the inner workings of the Federal Reserve, please review:

The All Powerful Federal Reserve
June 12, 2009

The All Powerful Federal Reserve: Part II
June 12, 2009

Don’t Call the Fed Independent
June 17, 2009

Fed Independence and the Constitution
June 24, 2009

Bernanke Conundrum

Posted by Larry Doyle on June 8th, 2009 7:27 AM |

Overnight markets indicate that Treasury prices are lower and interest rates subsequently higher (remember the inverse relationship between bond prices and interest rates). 2yr Treasury notes are trading at 1.33% and 10yr Treasury notes are trading at 3.85% (both are .03% higher from Friday’s close).

If interest rates are higher, clearly that move must be an indication that economic activity is improving and equity markets should be higher overnight, correct? In “normal” economic times, perhaps that line of reasoning would hold water, but in the Uncle Sam economy, we need to go deeper.

Equity futures indicate our stock markets will open lower by approximately 1%. What’s going on? Welcome to the Bernanke conundrum! What is the riddle wrapped inside our economic enigma? How can Fed chair Ben Bernanke nurse our economy back to health while at the same time maintaining the necessary fiscal independence, integrity, and discipline of robust Fed policy?

Big Ben has used aggressive measures to backstop a wide swath of our markets. In the process, he has created a fair amount of stability but with an effective government guarantee “insurance” policy as the cost of stability. Some of these policies have lessened in size as certain sectors have normalized. However, the major Fed programs remain in place. What are these?

1. quantitative easing: commitment to buy $1.3 trillion in total of Treasury and mortgage-backed securities in an attempt to keep these rates down. Then why are rates rising? More on this in a second.

2. commitment to provide necessary liquidity as needed to support the “wards of the state” including Freddie Mac, Fannie Mae, GM, AIG, Citigroup.

These programs in conjunction with the massive deficit spending programs undertaken by the Obama administration have ballooned our expected funding needs in calendar 2009 to upwards of $3 trillion, a fourfold increase over prior years.

In my opinion, interest rates are moving up much less on any real signs of economic improvement than on these funding needs and very real signs of a monetary printing press malfunction. What’s that? With the Fed Funds rate at 0-.25%, the Fed is literally flooding the economy with cash. Where is that cash going? Is it flowing through to the economy? Not really.

The cash is pouring into the banking system to cushion and support financial institutions from the ongoing losses connected to rising defaults on credit cards, residential mortgages, commercial real estate, and corporate loans.

The market is now very clearly sending a signal to Bernanke, Geithner, Obama and team that if they want to continue their programs as designed (and they do and will), the price, that is the rate of interest, is going up. Why?

The market is very concerned that the flood of liquidity will lead to inflation if not rampant inflation and potentially hyperinflation. How does Bernanke head that off?

Withdraw the very liquidity that he has found so necessary to pour into the financial system. How does he do that?Two ways.

1. increase the Fed Funds rate: that is, make borrowing more expensive.

2. reverse the quantitative easing program so that the Fed actually sells Treasury and mortgage-backed securities into the market and takes liquidity out in the process. What are the impacts of both those maneuvers? Higher interest rates.

In fact, interest rates are moving higher already in anticipation of Bernanke being forced to make these moves. Can Bernanke “thread this needle?” What will happen if interest rates move higher?

Slow the economy, especially housing given higher mortgage rates, and lower earnings especially for financial institutions. To wit, our equity markets are lower overnight.

Nobody said this was going to be easy.


The Stakes Are Raised

Posted by Larry Doyle on May 28th, 2009 7:46 AM |

The move higher in rates and lower in the U.S. dollar is nothing more than the market response to Ben Bernanke, Tim Geithner, and ultimately Barack Obama for the cards that they have already shown.

Managing one’s personal business and finances is anything but a game, but the manner in which Wall Street and Washington address economic and financial issues incorporates many aspects of “game theory.” As such, we need to adapt our own thought process and financial management accordingly.

Our leaders in Washington have shown many cards, including:

1. $780 billion Stimulus

2. proposed $3.5 trillion budget

3. multiple trillions in backstops to the financial industry (Sense on Cents’ link to Subsidyscope provides a wealth of info)

4. a trillion dollar plus commitment to quantitative easing targeted over a 6 month time horizon.

Be mindful that the “Washington wizards” are at the “table” and “playing the game” with borrowed funds. Each of us is also in the “game” whether we know it or not. We, along with foreign participants, are funding the window from which the wizards have to get the cash to stay in the game. The move higher in interest rates on the long end of our yield curve is nothing more than market participants (investors) “raising” the stakes on the “wizards.” (more…)

Did Big Ben Bernanke and Heavy Hank Paulson Break The Law in Buying Ken Lewis’ Silence?

Posted by Larry Doyle on April 28th, 2009 12:15 PM |

The intrigue involved in Bank of America’s takeover of Merrill Lynch goes well beyond standard Wall Street negotiations. Did Fed chair Ben Bernanke and then Treasury Secretary Hank Paulson break the law in the process of pressuring BofA CEO Ken Lewis to complete this bank merger? Bloomberg’s Jonathan Weil has easily distinguished himself amongst all journalists in aggressively addressing this topic. Weil pulls no punches in writing One Nation, Under Banks With Justice For No One.

Lewis, as CEO of Bank of America, possessed material non-public information about Merrill Lynch and was obligated by law to release that information to his shareholders. Lewis unequivocally maintains Bernanke and Paulson pressured him not to release that information which would have potentially derailed the merger. Why didn’t Lewis get Bernanke’s and Paulson’s position in writing? Did Lewis ask for it in writing?  Did Paulson and Bernanke knowingly avoid  a legal quagmire by not contractually committing in writing to increased government support for Lewis’ acquiescence?

Weil provides a clear expose of this situation. I commend him! He writes:

The spectacle of Ben Bernanke and Henry Paulson running roughshod over Kenneth Lewis and his minions at Bank of America Corp. raises a pivotal question for all Americans: Is the U.S. a nation of laws, or a nation of banks?

Let’s start by examining the facts disclosed last week in a letter by New York Attorney General Andrew Cuomo while taking pains to present the actions of each player in this drama in the fairest possible light. (more…)

Kangaroo Court . . . MUST READ!!

Posted by Larry Doyle on March 19th, 2009 4:20 PM |

The kangaroo court on Capitol Hill just passed a bill to tax bonus payments at a 90% rate for employees (with family incomes in excess of $250,000) of AIG and other firms that received $5 billion or more in government bailouts.  In my opinion, kangaroo-courtthis piece of legislation is a poorly constructed means of recapturing government funds.

I have previously stated that firms which were truly bailed out by the government should be subject to strict government compensation controls. A number of firms – such as Northern Trust, JP Morgan, Wells Fargo, and Goldman Sachs – were compelled to take government funds. If employees of these firms are subject to this tax, it will be a travesty and injustice of unprecedented proportions. I believe that Congress is unknowingly escalating class warfare amidst a facade and charade of protecting the public. I believe we will see public outrage from employees at these firms (JP Morgan, Northern Trust, Goldman, Wells Fargo) that can only be rivaled by our forefathers back in the 1770s. This tax is another means of promoting the income redistribution upon which Obama ran his campaign. Taxation without representation is tyranny!!!  (more…)

FROM THE ARCHIVES: The Wall Street Model Is Broken…and Won’t Soon Be Fixed!!

Posted by Larry Doyle on March 5th, 2009 6:37 PM |

Some of my favorite movies are The Sting, Rocky, and Papillon.  I could watch those films a few times a year and appreciate the plot, character development, and climax.

In that same vein, for newer readers here at Sense on Cents, I want to highlight a piece I wrote on November 12, 2008.  I believe this piece is as clear cut an historical explanation as I have seen to highlight the background of the debacle on Wall Street which precipitated this economic disaster. I also find it interesting as to my comments about potential market reaction to an aggressive tax/spend program under President Obama and a Democratic Congress. 

I hope you find this article informative and enlightening: (more…)

Going “All In”

Posted by Larry Doyle on February 26th, 2009 10:59 AM |

The government yesterday released the specifics of the Bank Stress Test to be undertaken by the 19 major banking institutions in our country. Those details in conjunction with the testimony provided this week by Treasury Secretary Geithner and Fed chair Bernanke provide a very clear signal as to the government’s approach to our economic problems. In my estimation they are clearly indicating they are going “all in!”

Before we get to the market reactions, allow me to share insights from a highly regarded bank analyst and then comment myself. 

Most analysts and economists view the government’s worst case scenarios under the bank test as not much more severe than what many already expect. I’m an optimist by nature but live by the mantra of hope for the best, prepare for the worst. The market will discount the government’s worst case. (more…)

The Fed Speaks

Posted by Larry Doyle on February 18th, 2009 2:53 PM |

Fed chairman Ben Bernanke spoke at the National Press Club this afternoon and offered revisions for the Fed’s economic statistics for 2009. What do the numbers mean? Here’s a recap:

— the Fed expects GDP for 2009 to end up between -.5% to -1.3%, revised from -.2% to +1.1%.  The Fed obviously is expecting a contraction in our economy for all of 2009 and further added it does not see much of a pickup in 2010.

— the Fed is setting a long term inflation target of 2% but does not expect to see a pickup in inflationary pressures for a protracted period. 

— increasing its expectation for the unemployment rate in 4th quarter of 2009 to 8.5% to 8.8%.

— the Fed has seen no indication of stability in residential housing markets in January 2009.

— some Fed governors have increased concerns about defaults and foreclosures in the commercial real estate markets.

— the Fed believes long term growth potential for GDP is 2.5% to 2.7%.

— the Fed realizes that at some point it will need to contract the growth in its balance sheet to mitigate chances of increased inflation.

What does all this mean?

In summary, the Fed is publicly acknowledging that the economic recession will be longer, deeper, and more painful. They are also offering that they are determined not to let deflation or the threat of deflation impede the economy.

I see no reason to rush into adding risk assets (equities or speculative credits) on the heels of this report. It is actually very interesting to see that some high profile individuals and institutions have actually been selling assets:

T. Boone Pickens
Pickens Reduces Energy Investments, Holdings Fall 97%

Warren Buffet
Berkshire Reduces J&J Stake, Turns to Fixed-Income

Harvard University
Harvard Retreated From U.S. Stocks as Market Tumbled


When Big Ben Speaks….

Posted by Larry Doyle on January 14th, 2009 9:40 PM |

Against the backdrop of the frozen tundra, numerous members of the storied Pittsburgh Steelers franchise have reached

Chairman of Federal Reserve, Ben Bernanke

Chairman of Federal Reserve, Ben Bernanke

legendary status. Included in this family are such greats as Jack Lambert, Mean Joe Greene, Terry Bradshaw, Rocky Bleier, Franco Harris, John Stallworth, Lynn Swann, Chuck Noll, and the longtime owner Art Rooney. For lovers of the NFL, these men are true giants. The current Steelers franchise is led by budding legend and All-Pro quarterback Ben Roethlisberger. When “Big Ben” leads, Pittsburgh follows. You can discuss this “Big Ben” tonight and every Wednesday night at 9PM on “No Topic Taboo . . . Everything Else with Jay.”

With all due respect to Mr. Roethlisberger, though, there are two other “Big Bens” that crossed paths just yesterday and hold much greater sway and impact in world affairs. I speak of Ben Bernanke and the famous London clock tower.

While the NFL is a great diversion, we ultimately return to the real world and need to deal with the realities it presents. Fed chairman, “Big Ben” Bernanke, presented chilling testimony yesterday in the shadows of the famous clock tower at the London School of Economics.

Understand that every message delivered by a Fed chairman is very carefully scripted. In years past, the Fed was much less transparent than it is today. That said, the Fed chairman speaks carefully so as not to unsettle markets but also to provide an outline as to future policy. In so doing, the general public is often hard pressed to decipher what he is saying and what it means. The general media typically does not capture the nuances and subtleties offered by the Fed. To that end, our work here at No Quarter looks to fill that void.


IT’S EASY TO FIND FAULT…especially if you’re clueless!!

Posted by Larry Doyle on December 11th, 2008 10:10 AM |

Given the pressure applied by the general public on elected officials who passed the $700bln dollar TARP (Treasury Asset Repurchase Program) it is not surprising that those very elected officials are now openly critical of Treasury. Nothing like casting a few aspersions to keep the crowd back home somewhat at bay. This statement is not to say that Treasury has not fumbled in certain aspects of this program. That said, as I  have tried to highlight, there are so many holes to fill that one single, albeit massive, “tourniquet” is not going to cover an entire body riddled with life threatening wounds.

Read how  “Watchdogs Chide Treasury on Bailout“…

For Congress to think that the economy would see near “immediate” positive reaction to the injection of capital into the system is both naive and ignorant. I am going to guess that most Congressmen failed Economics 101.

IMO Treasury should not have played “whack a mole” but should have proactively highlighted the areas of need throughout the system. In properly managing expectations it is always better to be as comprehensive as possible and simultaneously “under-promise and over-deliver”. Paulson and Bernanke along with Paulson’s boy wonder, Neel Kashkari, have played way too much defense and not enough offense. The risk they ran in this regard, though, is that they may have “spooked” the markets and “scared” the public. (more…)

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