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My Confrontation With Ben Bernanke: The Question He Refused to Answer
by Dr. Mark Skousen, Contributing Editor
Tuesday, January 26, 2010: Issue #1183
“The Federal Reserve continues to work actively to prepare for the possibility of financial stress.” – Ben Bernanke, January 5, 2007
The Secret Service watched me warily as I approached Federal Reserve Chairman Ben Bernanke.
I didn’t waste any time. After introducing myself, I showed him a copy of the talk he gave at the American Economic Association (AEA) meetings in January, 2007. I circled all the times he used the words “panic,” “crisis,” and “stress” in his speech, entitled “Central Banking and Bank Supervision of the United States.”
A total of 36 occasions.
I asked him point-blank: “Did you know in advance that a financial crisis was headed our way?”
He looked nervous. I could tell he was uncomfortable with my question. He looked at me stoically and smiled. And he refused to answer…
But there was no doubt in my mind what the correct answer was. I think he was worried about his job if he said, “Yes.”
Bernanke Knew The Financial Crisis Was Coming
After hearing Bernanke’s AEA address three years ago, I wrote in this in the February 2007 issue of my investment newsletter, Forecasts and Strategies:
“Anyone reading between the lines could understand that Bernanke is worried about a financial storm ahead. In his speech, Bernanke used the terms ‘crisis,’ ‘panic,’ ‘threats,’ ’stress’ and similar words at least 36 times.
“Bernanke said the Fed has set up a ‘crisis center’ to handle potential global financial problems – to anticipate them and deal with them if they occur. What are the possibilities?
- A dollar crisis, like the one Paul Volcker suggested would happen in the next few years.
- A non-dollar currency crisis in Asia, Europe or Latin America (shades of the 1997 Asian currency crisis).
- A housing crash and foreclosure crisis.
- A major terrorist attack on a key financial center, such as New York, London or Tokyo.
- A sharp rise in inflation.
“I doubt the Fed will cut rates again unless there is an imminent financial crisis of some sort that will require more liquidity and lower rates.”
Just one year later, of course, Bernanke’s fears became reality when the financial panic of 2008 forced the Fed to cut interest rates to nearly zero and inject billions of new money into the economy to prop up the financial system.
Bernanke has since admitted that the crisis was “the worst in modern history.”
So what is Bernanke saying now?
Blowing Bubbles… Blowing Policy… And Blowing Smoke
After our somewhat awkward confrontation, I sat down to listen to Bernanke’s new speech – “Monetary Policy and the Housing Bubble.”
He stepped up to the podium in a state of denial, rejecting the common-sense notion that the Fed’s low interest rate policy in 2002-04 caused the housing bubble or the financial crisis. Bernanke said the housing boom was global and couldn’t be blamed on U.S. monetary policy.
He did, however, take some responsibility for the lack of proper banking standards that led to the housing crisis. According to Bernanke, the Fed’s moves to regulate the subprime mortgage market were “too little too late.”
Once Bernanke had finished his speech, he took questions. He probably didn’t want another from me, but I asked anyway…!
Three Ways to Play the Fed’s “ZIRP” Policy
Dr. Mark Skousen: “Mr. Bernanke… in your speech, you talked about interest rates and the price of money, but you said nothing about the supply of money. Will you comment on the fact that the adjusted monetary base [the Fed's checking account] is now growing at an 80% rate again? Does that suggest you fear another financial crisis or credit crunch soon?”
Ben Bernanke: “No, the rise in the monetary base is due entirely to the Fed’s recent purchase of mortgage securities that we agreed to buy.”
Dr. Mark Skousen: “I note that foreign central banks like Bank of India and Bank of China are now buying tons of gold. Is this a sign that foreigners are losing faith in the dollar-based world monetary system?”
Ben Bernanke: “The world financial system is sound.”
What struck me about Bernanke’s responses was his “What… me, worry?” attitude. He showed no concern about the constant loss in the value of the dollar on the foreign exchange markets, or the dramatic rise in the price of gold since he became chairman.
I came away with the following: Don’t count on the Fed chairman, or any other high government official, to admit mistakes or tell us what is really going on. No doubt many Americans share that view, too.
My advice: As long as the Fed’s Zero Interest Rate Policy (ZIRP) is in place, the following three scenarios will play out:
- The U.S. dollar will remain weak.
- Gold prices will rise.
- Foreign stocks will perform better than U.S. stocks.
And if you’re wondering how to combat this zero interest-rate policy, consider these three investments:
- SPDR Gold Shares (NYSE: GLD)
- iShares Silver Trust (NYSE: SLV)
- Templeton Emerging Markets Fund (NYSE: EMF)
Good trading – AEIOU,
Mark Skousen
Editor’s Note: Mark’s new book – The Making of Modern Economics: The Lives and Ideas of the Great Thinkers – just won the “Choice Book Award for Outstanding Academic Title for 2009.” In its summary, Choice wrote: “With a supreme, lively blend of economics and sociology of economics, Skousen has magnificently managed to put flesh, blood and DNA on the skeleton of economics in this survey of great economic thinkers. It’s must reading.”
And John Mackey, CEO of Whole Foods Market, says, “Mark’s book is fun to read on every page. I have read it three times and listened to it on tape on my summer hike. It deserves to stay in print for many decades. I love this book and have recommended it to dozens of my friends.”
To obtain a copy, just go here.
Also, be sure to check out today’s Wall Street Journal to read Dr. Mark Skousen’s letter to the editor on Ben Bernanke.
Investment U – Extra: The stock market hates uncertainty and change.
So it was no surprise that the stock market tumbled last week amid news that Ben Bernanke’s bid to be reappointed as Chairman of the Federal Reserve was struggling in the Senate.
However, the market picked up again yesterday as influential Senators eased doubts over his reappointment and the prospect of a major change at one of the nation’s top posts diminished. Bernanke’s first four-year term expires this Sunday and a Senate vote is expected this week. According to the Wall Street Journal, the current vote is 31-17 in favor of Bernanke’s reappointment.
- The Fed Raises the Discount Rate: What It Means For You
- Robert Shiller: A Chilling Prediction On Fed Rate Cuts
- The Fed Fund Rate Announcement & Interest Rate Decision
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8 Responses to “My Confrontation With Ben Bernanke: The Question He Refused to Answer”
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January 26th, 2010 at 3:11 pm
The problems as experienced in the last 2 years are not entirely of USA’s making. It takes 2 to tango and the real problem is the trade and fiscal imbalances in the global economic system. People talk of money supply etc as being the real central issue to problems created and the subsequent patchups, but it is the velocity of money especially within the Western economies which is the real pointer to issues as observed. We had a velocity boom and now we are experiencing the subsequent velocity crunch. My uninformed gut feeling is that the control of money velocity and the required mechanisms for control or moderation of velocity is what will change in economic thinking going forward.
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January 26th, 2010 at 3:40 pm
To date, I have seen no comments on HCSA’s, which allow one to save for future health expenses. I have recently discovered that, because of obscenely low interest rates, my balance accrues $.89/month in interest and is assessed $3/month in “service fees” by J. P. Morgan. For what? Something is wrong with this arrangement. Why are bank fees not regulated in concert with interest rates?
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January 26th, 2010 at 3:46 pm
Bernanke’s comments – re housing bubble is world wide – is not true in Canada we didn’t have prime mortgages. So no real bubble. Houses are selling well, our banks are sound, maybe he should come here for some education… but he won’t because feds don’t make mistakes.. ha ha
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January 26th, 2010 at 4:07 pm
Your recommendations can save lots of people’s fortune.
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January 26th, 2010 at 10:31 pm
very simple question. why doesn’t our congress DEMAND DEMAND DEMAND an audit of the Federal Reserve??? we have been…..and are……being “done in” by design.
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January 27th, 2010 at 11:21 am
The basis of your contentions are most certainly on target – with these following considerations:
“The Financial Storm in which we find ourselves – had to be clearly understood by many – most certainly – GOLDMAN SACHS; AIG; CITICORP; JP Morgan; BARNEY FRANK & CHRISTOPHER DODD (Congress) and as you have eluded many others.
Some couple of real issues appear to be:
a) No organized objective / long term plan in our Government – upon which to base and evaluate the effectiveness of their Laws / special interest grants / subsidies granted and the effects of policies on others lives throughout the world. We wait for the calamity of the errors to show in failure.
No accountabilities for one person or group for stupid judgments nor lack of understanding of Economic principles or impact of decisions made.
b) It would appear that until our elected law making body – update rules of play in both the House & Senate to include a qualification and accountability as a basis of doing their job the, the pushes and pulls in Economic cycle will remain the default field of play for the likes of “Goldman Sachs and the Energy Leaches with subsidies that are a serious drain on our resources.”
To leave the fate of our Country to definition (by default) of interests such as Energy Industry and Controlling brokerage interests is in and of itself a crime in which we all share the blame.
At best “I with the rest of my Countrymen – are simply puppets” which are used and discarded without the slightest conscience of the Masters we serve. Our allegiance is taken from us – by contempt!
The House and Senate must rise above the license they have created for themselves to do dumb things as a collective; they need to define a higher order of “policy” and / or “master plan” approved by those they serve – on which to base their future efforts of our Country behalf.
It’s scary to think there is so much freelancing going on with the future of our country.
The lack of order has imposed great harm on our own citizens counted in the millions! The most recent debacles are the product of a very small “few – with Goldman Sachs Clones well represented!”
This must change!!
Who can & will lead?
Who will follow?
What is to be done by the victims of recent history?
We are all “silently out of control!”
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January 27th, 2010 at 1:07 pm
Very thought-provoking. I guess I think the US economy is going to implode. We should be on the gold-standard. Nixon messed us up; the Fed is not cleaning up the mess. In fact, I think it is NOT doing what is was set up to do – support the dollar.
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January 28th, 2010 at 8:44 am
I do agree with the most of the conclusion in the article. But reasons are not valid.
1) Dollar will depriciate not because of casual attitude of benanke or any other official but because of balooning fiscal deficit and loss of faith on dollars future.The magnitude of this depreciation would be much less than expected.
2)Emerging markets will perform because of the good fundamentals, demographic advantage, and opportunity to grow.
3)The terrorism is anyway is on the rise and still US is best prepared to fight any contigencies.
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