A User Friendly Fed

The Daily Reckoning: Weekend Edition
September 9-10, 2006
Baltimore, Maryland
by Kate "Short Fuse" Incontrera


The markets react to everything: hurricanes, wars…and every word that comes out of the Fed Chairman’s mouth. Back when Greenspan was at the helm of the Federal Reserve, financial analysts would watch his every move like a hawk and read and reread every testimony to try and make out what he was really saying.

The Wall Street Journal has even gone so far as to break down a Fed press release by paragraph, pointing out words like "moderate" and "measured pace" that would trigger a market reaction.

Not much has changed in that aspect since Ben Bernanke took over the Fed, but back in May, Big Ben made a boo-boo. At the White House Correspondent’s Dinner, he told CNBC’s Maria Bartiromo that he felt his recent congressional testimony had been "misunderstood."

The FT reports: "The anchor said Mr. Bernanke had told her at the dinner that he had not intended the markets to infer that the Fed was nearly done raising rates.

"’I asked him whether the markets got it right after his testimony and he said, flatly, no,’ Ms. Bartiromo said. She was reporting live from the floor of the Chicago Mercantile Exchange and the resulting trading roar almost drowned out the rest of her remarks."

Whoops. Talk about a plan backfiring. Of course, the markets went nuts on her comments and you can bet Bernanke regretted his "lapse in judgment" – probably as soon as the words left his mouth.

But that incident didn’t make Bernanke want to further encrypt his comments – he told the Wall Street Journal this week that he hopes to make his testimonies more "transparent."

The WSJ writes: "The new chairman is trying to depersonalize the Fed by making its decision-making more democratic and easier to understand," adding that, "His plan is for the Fed to be more clear about its goals and expectations for inflation and economic growth so the markets don’t react so much to his every utterance."

Hmmm…fat chance. The U.S. markets are trained to not only go off of what comes out of the Fed Head’s mouth, but the employment numbers, the consumer price index and so on. The market reaction is a symptom of what Dr. Richebächer calls: Late Degenerate Capitalism. That’s when a capitalist economy is taken over by the financial markets. Economists no longer regard economic data as a measure of the health and wealth of the nation, but for what impact they might have on the markets.

And these numbers are so abused and manipulated, by the time they get to you, dear reader, they are barely recognizable. In Empire of Debt, Bill and Addison write:

"Economists, commentators, and policymakers take up these distorted figures and add their own twists. It is obvious to anyone who bothers to think about it than an economy that spends more than it earns is in decline. But try to find an economist willing to say so! They’ve all become like rich notables in the time of Trajan, doing the emperor’s work whether they are on his payroll or not. They will tell you the economy is expanding, but it is an expansion similar to what happens when a compulsive eater escapes from a fat farm. The longer he is on the loose, the worse off he becomes. It is an expansion of consumption, not wealth-producing, job-creating investment."

In short, it really doesn’t matter what Bernanke says, or how clearly he speaks – the "analysts" and "experts" will twist and turn it until it fits their agenda.

Short Fuse
The Daily Reckoning

P.S. As an empire nears its end, people believe what they need to believe – that the economy is growing at a health pace, that there is no end in sight for the real estate market and that all of these numbers and statistics that are released every month are right on the money. If you are one of the few people that want to look a little deeper and question all of this data and analysis coming at you (and if you are reading the DR, you probably are one of these people), then check out Empire of Debt. We won’t mince words – and you won’t need a secret decoder ring.

Empire of Debt

— Daily Reckoning Book Of The Week —

Empire of Debt: The Rise of an Epic Financial Crisis – Now a NY Times Best Seller!
by Bill Bonner and Addison Wiggin

"Watching the news is a bit like watching a bad opera," say best-selling authors Bill Bonner and Addison Wiggin. "You can tell from all the shrieking that something very important is supposed to be happening, but you don’t quite know what it is. What you’re missing is the plot."

After a generation of being spoon-fed reality by media, it’s understandable that Americans are confused about the state of their nation. In their newly released book, Empire of Debt, Bonner and Wiggin wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions.

Americans are rapidly facing a choice: recognize these dangerous delusions and take steps to avoid their collapse. Or remain ignorant of them and risk losing all of their wealth when the house of cards comes crashing down.

Daily Reckoning readers can purchase their copy of the book that The Economist called one of the top ten books that will "tell you what’s really going on" – at a discount – by clicking here:

"The Most Feared Book in Washington!"

THIS WEEK in THE DAILY RECKONING: Miss an issue of The Daily Reckoning this week? Never fear, we have them all for you, below…

Festering Dudgeon     09/08/06
by Bill Bonner

"A genuine hard landing for U.S. housing will send up dust all over the world. Most people can’t bear thinking about it…which is exactly why we like to write about it. "

From Know-How to Nowhere    09/07/06
by Addison Wiggin

"The U.S. economy is plagued by an array of growth inhibiting imbalances: the trade deficit, the federal budget deficit, household indebtedness, record-low national saving rates, and record-high consumer spending…"

Garbage Stocks are Leading the Market   09/06/06
by James Boric

"Instead of people hating small-cap stocks like they did in 2002, everyone loves them now. Most have made countless amounts of "easy money" over the last several years."

Freaks of the Resource Sector    09/05/06
by Doug Casey

"Surprisingly, however, scam artists are not an investor’s biggest worry. Far more dangerous – and numerous – are the "competent" professionals who swell the middle of the industry’s bell curve."

Moose and Squirrel Economics   09/04/06
by The Mogambo Guru

"Things just do not make sense to me anymore, and it is that bewildering confusion and ‘fear of the unknown’ that brings out the paranoid and panicky side of me"

FLOTSAM AND JETSAM: In keeping with the Fed theme we have going on in today’s DR, below is an essay taken from Empire of Debt on the inner-workings of the Open Market Committee. Read on…

Maestro’s Performance
by Bill Bonner and Addison Wiggin

In February 2005, Alan Greenspan gave a speech in honor of the first modern economist – Adam Smith. The Fed chairman journeyed to Fife College, in Kirkcaldy, Fife, Scotland, where Smith was born in 1723. There, he commented on Smith’s work: "Most of Smith’s free market paradigm remains applicable to this day," said he.

In particular, the world seems to have discovered that independent buyers and sellers are better at delivering the goods than government planners.

This would have come as a shock to George Orwell. Writing at the beginning of World War II, Orwell expressed the belief of millions: "I began this book to the tune of German bombs…What this war has demonstrated is that private capitalism – that is, an economic system in which land, factories, mines and transports are owned privately and operated solely for profit – does not work. It cannot deliver the goods."

Orwell was wrong. Capitalism delivered the goods better than socialism, a fact that even nearsighted journalists and central bankers were eventually able to see. But even after the fall of the Berlin Wall, continued America’s most celebrated central banker, there was "no eulogy for central planning."

Adam Smith had proposed a useful metaphor to help explain how a system of private, individual decision making – which must have looked chaotic to a top-down observer – actually functioned to the betterment of all. A rise in the price of pigs, for example, sends a signal to the hog raisers to produce more. Thus, the market is guided by an "invisible hand" to produce exactly as much of a thing as people really want and can really afford.

Quick-witted readers will already be gurgling with indignation. Markets work best without the heavy hand of regulation, Greenspan acknowledged. But he seemed to exempt, conveniently, the credit markets. The maestro’s speech hit a false note; rather like President Bush’s approach to evangelical democracy, it seemed to miss the point. Instead of letting lenders of credit and demanders of it be guided by an "invisible hand," for years the Fed chief ‘s boney paws have drawn them together. Mr. Greenspan’s "Open Market Committee," not the open market, has largely determined the rate at which lenders will lend, short term, and at which borrowers will borrow.

Why is it that what is good for the goose of lumber markets, stock markets, grain markets, laptop computer markets, and almost every other market under Heaven is not good enough for the gander of the credit market?

The answer is not one of logic, but of convenience. Most of the time, political leaders prefer easier credit terms than buyers and sellers would determine on their own. In setting its key rate, the Open Market Committee is likely to set a rate that is to the politicians’ liking.

New Yorker columnist James Surowiecki’s book, The Wisdom of Crowds, makes the point that two heads are better than one. Groups of people can be smarter than individuals. A market, theoretically, can do a better job of finding the right price for a thing. A market is supposed to aggregate the private opinions and independent judgments of thousands of individuals. Generally it succeeds. But on occasion, the market slips into crowd-like behavior – whipped to excess by the financial media or the financial industry.

And sometimes, the whole market is deceived by its own central planners. Rather than allow lenders and borrowers to decide for themselves what rates they would accept, the central planners at the U.S. Federal Reserve decided for them. How they can know exactly what lending rate such a large and infinitely complex economy needs has never been explained.

But, historically, from the Fed’s lowest rate to its highest, there are about 1,200 basis points. On those odds alone, they have almost certainly chosen the wrong one. What’s more, Fed rates are not chosen on the basis of science or of logic, but of convenience. There are times – indeed most of the time – when political leaders prefer easier credit terms than buyers and sellers determine on their own. In setting its key rate, the Open Market Committee tends to set a rate much more to the politicians’ liking than the one offered by Mr. Market. A lower rate, that is. But as Schumpeter points out, any stimulus in excess of actual savings is a fraud.

This artificially low rate gives the illusion that there is more money available than there really is. Hardly anyone ever complains. Consumers feel they have more money to spend than they really have. Producers sense a demand that really isn’t there. Undeserving politicians get reelected.
And conniving central bankers are reappointed.

The "information content" of the Fed’s low rate misleads everyone. They proceed happily on the long, slow process of ruining themselves, unaware that they are responding to an imposter. Only much later does the deception become a problem.

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

The Most Feared Book in Washington!

The Daily Reckoning