Bernanke: The Bearded Assassin In Our Midst

By Andrew Gordon

Dear Reader,

A political assassination occurred this past Wednesday. And I’m not talking about the blast that killed former Afghan President, Burhanuddin Rabbani, in the streets of Kabul.

This cold-blooded crime took place right in the USA.

And the perpetrator came from the bowels of the US government. His name: Ben Bernanke.

It’s very simple. By giving us a convoluted fiscal cocktail dubbed “operation twist,” Bernanke has killed Obama’s chances of keeping his White House residence into 2013.

"It's the Economy, Stupid."

As the economy goes, so goes this presidential election.

I say this neither in mourning, nor in elation for the future, former president. This article isn’t about Obama. It’s about the enormous and very dangerous power of the Fed.

In what other country does a technocrat central banker have so much power? No other political system would put up with such a thing.

So it’s not surprising that I can’t find one country with a situation like America’s. And it’s not even close.
Do you think that the chief governor of India’s central bank, Dr. D. Subbarao, has that much power? Have you ever heard of him before? 

No, even though he makes collegial decisions on India’s interest rate, foreign exchange actions, monetary policies and a bunch of other things.

Can the head of the European Central Bank, Jean-Claude Trichet, topple prime ministers in Europe? No, he can’t.

His decision making is just too constrained. He has a single mandate to worry about – inflation. He doesn’t have nearly the range of choices that Ben Bernanke has.

Trinchet has one job and one job only: To control prices.

On the other hand, the Fed has three jobs: Protecting the stability and integrity of the financial system, keeping prices on an even keel, and promoting job growth.

The Fed's Most Enduring and Dangerous Myth

And it’s almost impossible to do all three jobs equally well. For example, juicing jobs could also bring inflation dangerously close to our doorstep. I’m not talking hypothetically here. This is precisely the issue that is causing much dissension inside the Federal Reserve.

When the Fed decides to give to lenders and not borrowers, it makes a political choice.  Again, this is not a fictional example, as you know all too well. And it still steams me.

Here’s why. The banks were reckless to give out those loans to those people who had no income. People who were also crazy to apply for the loans to begin with. But, at the end of the day, it falls on the banks. Anybody can apply for a loan. That wasn’t the problem.

The problem was that banks, exposing an insatiable and unquenchable greed for everybody to see, actually concocted new types of loans that required no-money-down, and that would also never, ever pay off the interest. In fact, they were called "negative-amortized loans." These same loans would have interest rates that ballooned (dramatically increased) a few years down the road, often times doubling the monthly payment a person would owe on a mortgage.

So these bankers, by devising and handing out these dangerous loans, got America into this mess.

Yet, it was these exact banks that got our taxpayer money, pleading that they were duped by borrowers who weren’t required to show any documentation of income. And if we didn't foot their bills (and bonuses) then our whole system would collapse.

At least these bankers were grateful and contrite, yes? At least they began immediately to show more responsibility and less greed, right?

Oh, they were more than grateful. They were so elated that they went out and bought themselves million-dollar homes. I mean it. Bank of America took 75% of its $20 billion bailout and gave it as bonuses to its biggest red inkers, the banksters at Merrill Lynch.

Editorial Note: Think this is bad? Wait until you see the evidence for the grandest hustle of all time. It's shocking.

But that was just the beginning of the Feds messy policies.

Currently, the Fed is holding down interest rates to zero percent. In effect, savers like you and me, the people who have dutifully paid our taxes as productive citizens, get the short end of the stick. In effect, Bernanke's interest rate policy is telling us “save if you like but you won’t make squat. Better that you just spend.”

Again, these are all political choices that the Fed makes.

The biggest myth in America is that the Fed is apolitical…

Or that it somehow hovers above Washington’s money-drenched policy-making machinery.

Ben is constantly giving testimony to Congress…regularly confers with the President…and makes headlines like he did on Wednesday with his new-fangled “operation twist.”

By the way, it’s called the “twist” because it aims to “twist” interest rates and narrow the gap between short- and long-term bonds.  It’s costing the Fed $400 billion to sell short-term Treasuries and use that money to buy maturities of 6-30 years. But the cost of borrowing is already low.

So, it’s like adding an extra layer to a seven-layer cake and hoping that sales will skyrocket as a result. Good luck with that.

Greenspan's Unforgivable Sin

In a way this is nothing new. President Nixon ripped into Fed Chief Arthur Burns to keep interest rates low. How do we know? The famous “Nixon tapes” captured it. It was good electoral policy but bad for the economy. Stagflation crippled our economy in the 1970s.

On top of a bad economy, we also had a militaristic Soviet Union to worry about. I should know. The CIA had me checking out some aspects of Russia’s military capabilities. I told them that in the specific area I was doing my top-secret “research” on, the US was falling behind. The 70s was a difficult decade all around.

Moving forward to the 90s, President George Bush Sr. blamed Fed Chief Alan Greenspan for his loss to Clinton. Greenspan lowered the Fed interest rate by 2.75 percentage points. That’s not an insubstantial amount. But it wasn’t enough, as far as President Bush was concerned.

So let’s examine the historical record a little more systematically. Since 1960 we’ve had 13 presidential elections. In seven of them the Fed has lowered rates as elections approached. In the other six it has raised rates.

Of course, what we don’t know and can’t know is the political agendas at the time.  Was easing pursued to help the incumbent? Was tightening enacted to help kick a sitting President out of office?

But, according to Bloomberg, based on inflation and employment statistics following these moves, it looks like the Fed was right in 9 out of 13 elections.

Again, it doesn’t prove the Fed is all about the economy and not about playing power politics. You can end up being right and have an agenda too. In fact, that’s the very definition of how the political game is played.

Now the last two times the Fed eased, QE1 and QE2, it led to stock market rallies together with commodity rallies on one side of the ledger. On the other side of the ledger it created the conditions where the dollar weakened and consumers spent less.

Wall Street investors, banks, and commodity speculators were the big winners.

This Time Around the Landscape Looks Different

Banks need a far bigger boost than an “operation twist” to get back on track.

Commodities have virtually given back all their price gains in the past few months. The fundamentals of most commodities are seen as so poor that I doubt speculators will be eager to bid them up.

And the stock market? There’s just too much going against it this time around to expect a major rally. China has been doing much of the heavy lifting recently and the latest data points to a further slowdown of their economy.

Europe is a mess, as you all know. And we have our problems here too.

If it does nothing else, "operation twist" will keep a lid on interest rates. For investors desiring income, there's only one solution: Invest in dividend-paying companies. Many are cash rich and hiking their dividends. Among the companies in the stock market, they will attract the most buying interest, fortifying themselves against any major fall.

It's now one of the very view good places where investors can place their money. It didn't have to be like this. It was within the Fed’s power to pursue another cycle of quantitative easing, a big and ambitious QE3. No doubt Wall Street will be begging for it. The White House will also be putting pressure on the Fed to do more, just like Nixon and Bush Sr. did in the past.

In fact, the Fed will be subject to all manner of political maneuvering. Why? In case you’ve missed my point let me say it once more…

The Fed will "crown the king" in the 2012 election.

Many people in the Republican Party don’t trust the power of the Fed. Indeed, it’s not just strange but dangerous that an unelected government institution like the Fed should wield so much power.

Now that the Fed has done its part in killing Obama’s chances for re-election, it’s fair to ask: Can it resurrect his chances?

The scary answer is "yes." There’s plenty of time for the Fed to do something bigger and more impactful, and by doing so give the current President at least a slugger’s chance of victory.

This is no small oddity in our political system. The Fed has done nothing wrong in the technical sense. It has broken no laws. It has not strayed from its three-pronged mandate. Its current “operation twist” move may be lame, but it’s not overtly political.

But whatever moves the Fed makes between now and the presidential election will help determine who our next President is. In fact, it could be the main determinant.

Even the Fed’s non-moves and non-decisions (for example, to stand pat) will be scrutinized for their political implications.

The Fed, as Kingmaker, is not how our political system is supposed to work. We need it fixed, and the sooner the better. Nothing personal, Ben.

Yours in Confidence,

Andrew Gordon

Editor-in-Chief & Co-Founder

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