Friday, November 14, 2008

Is Jawboning Bernanke's Only Currency?

In 2002, when then Federal Reserve Governor Ben Bernanke made his famous speech, "Deflation: Making Sure "It" Doesn't Happen Again", was it just behavioral propaganda designed to give the future Chairman street credibility? Just as an organized crime boss builds his reputation through a mixture of legend, occasional brutality and folklore, the Chairman's own legend as the premier academic scholar of the Great Depression and folklore such as a helicopter dropping reflationist seems to have all been premeditated and selected for this very moment in history.

Will it work?

Never has before. I guess there's always a first. Just like the crime boss seems invincible until he's laying in a pool of his own blood, the Chairman is perceived as infallible until he's irrelevant. Look back no further than the previous Federal Reserve Chairman, Alan Greenspan, to see how far off the pedestal they can fall.

And again we keep hearing daily why it's "different this time". The Chairman is creative. The money supply is exploding. They have it under control. Bob Hoye, over at Institutional Advisors (an absolute must read realist) puts things in perspective:

"Those close to Mr. Bernanke believe he can handle any worrisome economic conditions given his academic pedigree. He scored 1590 out of a maximum of 1600 on his SATs, has an economic degree from Harvard, and a doctorate from MIT. He has taught at Princeton for 17 years."

- That was from the February 1, 2006 edition of the Financial Post, which included a comment from Robert Frank who wrote a textbook with Dr. Bernanke:

"I'll bet on Ben's ability to see what is coming around the next corner over just about anybody else."

Some perspective on power and monetary madness is provided in an observation made by Mayer Rothschild in 1836:

"Give me control of a nation's money, and I care not who makes the laws."

In 2002 there was an event to honor Milton Friedman, and Bernanke's address included:

"I would like to say to Milton and Rose: Regarding the Great Depression you're right, we [the Fed] did it [caused the depression]. We're very sorry. But thanks to you [Friedman] we won't do it again."

In so many words, Bernanke claimed that the Fed had learned its lessons. The problem is that those (including Friedman) who have claimed that the post-1929 contraction was caused by a policy blunder have been wrong.

With adequate research anyone would conclude that great contractions are caused by great financial manias."


Is it arrogance, or just in the world's best interest to posture, "We (the Fed) did it...we won't do it again"? By attempting to own it, will they prevent the next crisis? I believe we are currently experiencing the inflection point where jawboning's considerable limitations are revealed, or simply where the rubber meets the road.

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