Listen to Bernanke at Your Own Peril

Ben Bernanke spoke today (Tuesday May 5th, 2009) and said some very encouraging things that were widely interpreted throughout the US media machine as a claim that the "the bottom is in."

Astute observers of past Bernanke statements will quickly recall the numerous other times he made either overly-optimistic or horribly off-the-mark statements that seem, in retrospect, to have been crafted to be soothing, instead of wise or accurate.

Bernanke said this today in front of the Joint Economic Committee:

"We are hopeful that the very sharp decline we saw beginning last fall through early this year will moderate considerably in the near term and we will see positive growth by the end of the year,"

"The recent data ... suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing."

There he goes again, speaking of positive growth, which is, of course, vastly preferred to that old enemy of modern economists, "negative growth."

Bernanke used some recent housing data (recently debunked here) as well as the unexpected surge in Personal Consumption Expenditures (also debunked here) to bolster his case that "the bottom is in."

However, the bulk of his claim rests with the apparent repair of the credit markets. In his prepared remarks, he said this:

Among the markets that have recently begun to function a bit better are the markets for short-term funding, including the interbank markets and the commercial paper market. In particular, concerns about credit risk in those markets appear to have receded somewhat, there is more lending at longer maturities, and interest rates have declined.

This is the most disingenuous and patently wrong statement out of many.  The entire repair in the credit markets, especially the ones he refers to, is entirely due to the active involvement of the Federal Reserve itself, in printing up more than a trillion dollars out of thin air to intercede in the free and fair functioning of these markets.

Brian Pretti of Contrary Investor brilliantly dissected these claims a few days ago (before they even appeared; kudos, Brian!) in his May monthly report (which you can find here until the next monthly report is loaded). I strongly recommend that you read the entire report, as it clearly demonstrates that, without massive intervention on the part of the Federal Reserve, the credit markets would have quite possibly disintegrated.  Here's what he said:

On Interbank Lending:

Maybe more than any other headline credit market indicator of the moment we believe Fed actions have distorted what used to be the prior “risk based” message of LIBOR. And that cuts right to the conceptual heart of government intervention. Just how the heck can the private sector assess risk and allocate capital correctly and efficiently when the Fed/Treasury/Administration is acting to help “misprice” assets and risk measures?

On Commercial Paper:

The message is clear. Commercial paper markets are not healing. Not only is total volume down as is seen in the chart above, so is new issuance this year. And at the same time, the percentage of total CP market paper held by the Fed has been growing in 2009. One more time, without the Fed finger in the CP dike, just what would this market look like? (Answer: You probably do not want to know.)

Instead of Bernanke attempting to speak of "concerns about credit risk in those markets appear to have receded somewhat," as if those concerns were somehow a legitimate reflection of market sentiments, I think he should have made the role of the Federal Reserve in making that happen more transparent. Why? Here's two views on that, both said better than I could:

The first is from "Mr. Practical" of Minyanville:

As more and more traders and investors view the recent rally through the eyes of technicals, we are closing in on the completion of the bear trap. Human beings are inductive: they see things and their preexisting views are reinforced by them. Rising prices beget rising prices until facts finally exact their toll. People assume others know what they're doing.

I came out of the airport terminal to grab a cab one night. The line was two hours long. The last person in line assumed the person in front of them knew what they were doing and resigned their fate with the rest. I decided to take a five minute walk to the next terminal, where I grabbed a cab immediately.

If people really did hard analysis on the current environment they would take a much different view. The Fed's balance sheet is not only irreparably massive, it is a mess with credit risk. When you hear people saying credit is improving, it can clearly be shown that the only areas of improvement are where the Fed has stepped in and become the market. The Fed has reduced transparency, not increased it.

The point is that the Fed and the government have been able to shift psychology, convince people that things are "stabilizing", but they have done so at a high cost. The risk has increased dramatically. Who knows where the rally stops, if it does? But the marginal buyer is taking higher and higher risk. The economy and the markets are a physical system, which hasn't changed for the better. Sure, you can get a low rate mortgage now but you better be able to put 20% down. That is reality.

And here again is Brian Pretti (from same link as above):

As we see it, the BIG bottom line message is that the Fed is creating the impression or perception of healing in pockets of the US credit market. For those not willing to or literally unable to understand what is happening behind the scenes, many a headline credit market perception is actually a misperception when a light is actually shown on the facts of these various market segments. Where the Fed is involved, the perception of healing or stabilization can be created. Where they are not involved (corporate markets), continued stress is still plainly visible.


Absent the influence of the Fed, these markets are not yet recovering. Absent the Fed, the credit market patient is unable to get out of bed and walk on his/her own. Let’s just hope equity investors have it dead right in their happy anticipation in recent months. For if what they are discounting is correct, especially in financial sector issues, the US credit markets should very soon be involved in a Lazarus event – an immediate rising from the dead. But for now, it’s really the Fed holding up the credit markets, from which they cannot have a current exit plan by any stretch of the imagination.

The main issue here is that we got into this entire mess due to a massive misallocation of investment funds (mainly reflected in overbuilt residential and commercial real estate), caused by the miracle of "too cheap money" (thank you Greenspan!) and a mispricing of assets and risk.  Despite this, the Federal Reserve has decided that the cure involves vast floods of newly issued "too cheap money" and the willful mispricing of asset values.

In other words, it looks like a "double down" strategy.

I simply cannot imagine being more at odds with the current Federal Reserve policy. I think the solution involves letting the institutions that made the poor decisions take their lumps. Where bad investments were made, let there be pain.

Instead of trillions poured into various black holes of greed and fraud, I would strenuously support pouring those same trillions into productive investments in retooling our energy, transportation, and agricultural infrastructures.

Unfortunately, we are being told about as clearly as possible that Bernanke does not feel he can be transparent and honest in his remarks. We might speculate that he believes that "investors" and "the markets" would behave the wrong way if he was more forthcoming. Perhaps he's right. Who knows?

But one could be forgiven for wondering if perhaps the hole we are in is being dug just a little deeper because Bernanke lacks the mettle required to be an honest man.

While it might be tempting to buy the green shoots that Bernanke is selling, I am of the firm opinion that one does so at one's own peril.

This is a companion discussion topic for the original entry at

As always, thanks Chris, for your valuable insights.  I remember it was two years ago that Bernanke pronounced the mortgage crisis was now "contained."  And we know what has happened in the last two years.  Bernanke has repeatedly been wrong for two years (at least) yet few seem to notice or keep track.  Somewhere there must be a resource that diligently tracks what Bernanke has said sinced he was appointed to the Fed & compares it with the facts or what actually happened.   I would like to see a similar resource for President Obama’s remarks.  For example, I recall Obama’s recent remarks presenting himself as a cost cutter!  

Somehow I seriously doubt that these folks in Michigan are smiling, have anything to smile about or will be smiling. Reality: Michiganians mine bodies for cash to make ends meet

Me too.

Thank you Chris, I was hoping you would share your thoughts regarding what Ben had to say today.  Thank you for the continuing education, your post of the past week as always, hit the nail on the head.  Thank you for explaining all in a clear, concise manner. 

The lessons from Lowesville regarding facts, beliefs and opinions are invaluable.   Ben’s words today another example of why.  You are a wonderful teacher!


 cmartenson wrote:



Instead of trillions poured into various black holes of greed and fraud, I would strenuously support those same trillions being poured into productive investments in retooling our energy, transportation and agricultural infrastructures.


Me too.

Thank you Chris, I was hoping you would share your thoughts regarding what Ben had to say today.  Thank you for the continuing education, your post of the past week as always, hit the nail on the head.  Thank you for explaining all in a clear, concise manner. 

The lessons from Lowesville regarding facts, beliefs and opinions are invaluable.   Ben’s words today another example of why.  You are a wonderful teacher!






Egh, even the mob knows what to do with their money…



Mafia link to Sicily wind farms probed
By Guy Dinmore in Palermo, Italy
Published: May 4 2009 19:01 | Last updated: May 5 2009 07:13
Anti-Mafia magistrates in Sicily have opened a sweeping investigation into the wind power sector where local officials, entrepreneurs and crime gangs are suspected of collusion in the construction of lucrative wind farms before their eventual sale to multinational companies.

Italian and EU subsidies for the building of wind farms and the world’s highest guaranteed rates, €180 ($240, £160) per kwh, for the electricity they produce have turned southern Italy into a highly attractive market exploited by organised crime.

Green energy tangled in web of shady deals - May-04

Sicily: a land of wind ‘but no rules’ - May-04

Sicilian mayor tilts against wind farms - May-04

Sicilian project aims to save the world - Mar-18

Analysis: Suit-and-tie criminals step into Italy’s loans vacuum - May-03

Roberto Scarpinato, a veteran anti-Mafia prosecutor in the regional capital Palermo, told the Financial Times that his investigation, which began last week, was focused on the three large provinces of Palermo, Trapani and Agrigento.

An earlier investigation into a case near Trapani in western Sicily resulted in eight arrests in February, leading to accusations of a suspected nexus between a leading Mafia family that offered money and votes in exchange for permits to construct wind farms.

“Operation Wind” revealed Mafia promises to local officials in Mazara del Vallo of money and votes in exchange for help in approving wind farm projects.

The Mafia suspects were alleged to be linked to Matteo Messina “Diabolik” Denaro, a fugitive clan boss on ltaly’s most wanted list.

Prosecutors suspect the hand of the Mafia in fixing permits and building wind farms that are then sold on to Italian and eventually foreign companies.

In an effort to assert its control over the sector, the Mafia is suspected of destroying two wind towers that were in storage in the port of Trapani after their delivery by ship from northern Europe, local officials told the FT.

“It is a refined system of connections to business and politicians. A handful of people control the wind sector. Many companies exist but it is the same people behind them,” said Mr Scarpinato, whose investigations have focused on the evolution of the Mafia into a modern business organisation.

Sicily’s Cosa Nostrais evolving and finding new business opportunities, including the renewable energy sector, by exploiting its historic grip over territory, construction and ability to corrupt local officials.

Several wind farms built by companies suspected of being linked to the Mafia have not functioned for one or two years, in some cases because of shoddy construction. “This is the amazing thing, that developers got public money to build wind farms which did not produce electricity,” the prosecutor said.

The regional governments in Sicily, as well as Calabria and Basilicata on the mainland, have suspended the authorisation of new wind farms in part because of suspected criminal involvement and confusion over the real ownership of the ventures.

Most, if not all, of Sicily’s wind farms began as projects by local developers, some of whom speculated in a secondary market for permits. Once built, the majority were sold on through Italian intermediaries to multinationals. International Power of the UK is the largest wind power operator in Italy. Others include Italy’s Enel and Germany’s Eon through its purchase of part of Endesa of Spain in 2007. France’s EDF also has assets. While the international companies knew the identity of their Sicilian developers, there is no evidence they were aware of Mafia involvement.

Although Italy is lagging badly in meeting its EU 2020 emissions targets, the renewable energy sector is growing strongly and attracting considerable foreign investment. International Power became the single largest operator in 2007 with its purchase of the Maestrale portfolio of mostly Italian wind farms, including five in Sicily, for €1.8bn

Here’s one for Obama: The Obameter: Tracking Barack Obama’s Campaign Promises

Thanks for the latest, Chris.  
I heard a biz report on news radio this a.m. on my way to my business and they basically ran the spin about the March/April home buying numbers being better than the numbers have been in "nearly a year" (i.e., since last year’s standard March-April bump).  I had to smile.  It was exactly what you pointed out a few reports back.  

As a guy who understood precious little about markets/the economy/etc. until about 2 months ago (except for having a deep, disquieting feeling of "This can’t keep on…it’s got to fall down at some point!"), moments of illumination like that are gratifying.

Speaking of driving to work…I’m looking forward to your next podcast.  >coughcough<

Viva – Sager

It is obvious that the Fed is manipulating the market.  That is 100% clear.
What is not the slightest bit clear to me is this:  How long and how effectively the Fed manipulate the market?

Chris gets a gold star for his post, but if someone can answer the real question they get a twenty gold stars.

My sense is that the answer is unknowable.

Chris - I’m gonna go out on a limb here and assume your going to add today’s testimony by Mr. Bernanke to your ‘Pompous Prognosticators’ graph, version 2009?
Would you also like to add Larry "Mr. Goldilocks" Kudlow to your pompous prognosticators? His opening monologue says it all. There’s a sucker born everyday.

Hello JoeManC:
I hope it was a merry lunch (i.e. lots of alcohol) that produced that video and not raw brain power. Schiff looks like the only financially sober one there! 

A(H1N1) Over? 1231 is tonight’s number, 1 more death in Texas, Marsh heard they might leave schools open since they think it is less severe. Should be interesting. My take, maybe, could be an interesting wave 2 and 3 if it gets that far. I fail to see how something not in the news means it is over.

Housing. Recovered?! Not to mention there are 27 million homeowners underwater, one negative event and I think that spells default.

Unemployment, underemployment etc - running at almost 20%.

Man, that anchor can take me to one of those happy lunches any day of the week!

Take care



Egh, even the mob knows what to do with their money…[/quote]

I’m going to have to borrow (steal) this quote and article for another thread…

"how effectively?" – It’s never effective.  During deflationary periods like we’re in now, the manipulation does long-term damage, though it can save people from the initial shock effect and even starvation that could result from total immediate collapse.  But in deflation people know in their guts, they see the layoffs, the real estate crashing, corporate bankruptcies…they instinctively know the Fed is smoking something, even though they’ll lose confidence and let themselves be swayed by the media. But during normal growth periods, 2-5% inflation, it appears effective…to everyone. The market agreed Greenspan eliminated the business cycle during his reign of steady "growth."  So people thought it was very effective.  But it was only an illusion of growth based on inflation so it was just postponing the reality of business and life…ups and downs.  Only Austrian economists pointed out the illusion over the years. Everybody else thought they were cuckoo.  Austrians knew the reckoning would come.  

"how long?" – During inflationary/normal times, the illusion can last a long time…20 some years in the latest case.  But during deflationary periods, which result from the long facade of steady inflation, the Fed can only sustain the illusion of reflation for several months.  The current illusion has been in effect since mid-March.  It will be over before the end of 2009 in my view (yeah I’m leaving myself a lot of wiggle room…if you wanted a specific date then I don’t get the gold stars!) when the market collapse deepens substantially due to commercial real estate bust, corporate earnings, layoffs, bank failures, etc.  

Let me play devil’s advocate:

Why can’t the Fed keep its finger in the dike forever and grow as many more fingers as it needs to plug as many additional holes as appear? 

Lemony, because real economic value comes only from production (generates a return on capital) and the resulting supply/demand commerce, not monetary games being played by central planners.  Eventually reality wins.  
Also because the Fed doesn’t have enough fingers and is WAY smaller than the dike.  It is dwarfed by the collective power of the bond market, the productive supply-side of the economy, and 5 billion people engaging in or not engaging in commerce.  

 Thanks so very much Chris, for the incredible piece on today’s "Bernanke B.S".   We were with some friends in our neighborhood this evening (a little wine & cheese) and several of them were commenting on how things are looking up.  Two in particular were saying how Lou Dobbs was talking about his own great record of being right about no recession/depression for the past year.  All I could say was "If you depend on Lou Dobbs for your financial/economic information, I feel very sorry for you."  We are so thankful that we have you, Chris,  and many others who make intelligent comments on this site, to give us good information to think about.  Otherwise, we’d just be stupid sitting ducks.  (Well, we may be anyway, but we’ve been doing a lot, over the past 1 1/2 years, to prepare for the worst, while hoping for the best.)  Thanks to finding you, and the CC.

This story in the FT reports an otherwise unreported tightening move by the Fed as they pass some risk back onto the private investors in TALF.  Interesting.  Perhaps this is a demonstration of Volcker’s influence.  Perhaps this is to keep Asian investors in treasuries confident that the Fed isn’t going overboard. Perhaps it’s just Bernanke and team actually believing their delusion that the bottom is in.  Whatever the reason, I don’t think this is an insignificant thing…a small move like this by the Fed is interpreted in big ways by market makers…it shows them that the Fed’s bias has slightly shifted from full easing/acceleration to tightening/moderation.  I think it’s the first harbinger of institutional selling that will eventually come and kickoff the next phase of the market collapse.

 Mid-Morning Recap: Markets Sink on Bernanke Testimony, ISM Services Improves
but the gains were quickly erased once testimony from Fed Chairman Ben Bernanke was released shortly after.

This quote about sums up my feelings, this came in an article I was reading yesterday…
Happy days are here again! Enjoy them while they last…
"Optimism builds," says a headline in the Financial Times.
As predicted, the world markets are enjoying a bounce. People who had no idea there was anything wrong with the world financial system two years ago, now say the problem has been fixed.
Who fixed it? The people who had no idea what was wrong with it, of course.
What did they fix it with? The same thing that caused the problem they didn’t see - debt.
Who makes sure it won’t break again? The people who didn’t notice the wheels coming off the last time.

And that my friends, summarizes most of what is going on today!


  Well, after listening to the 2:16 point of this I’m in stiches.

memorrison, here is a link to the article you quoted: