Three Reasons Why Ben Bernanke Should Not Be Confirmed as Fed Reserve Chairman

Chris Whalen does his usual good job of cutting through the fog of crisis to get to the bottom line of how Ben, Larry and Timmy have failed to discharge their responsibilities adequately.

This does not speak to motives for their failure. Are they merely the pampered products of the government and educational sectors, inadequately prepared for high positions, untempered by the push and pull of private industry and the commercial world? What some might call the new useful idiots of state corporatism?

Is the Obama Administration the product of the Clinton wing of the Democratic party and the Chicago political machine, or just the Children's Crusade, a reform movement movie staffed by the casting agency of Spineless and Clueless?

Political corruption has been in vogue for the past twenty years or so in the US. As others have suggested, this is just a further example of the regulatory capture that ensnares the administrators and thinkers of big government, education and media with promises of grants, lobbying donations, and fat consulting positions to reward their cooperation with the corporate elite.

Whatever the cause, it is quite obvious to anyone who is looking at the big picture, the system as a whole, that prolonging the status quo is no sustainable solution, and is just painting a thin coat of whitewash over pervasive rot.

The banks must be restrained, and the financial system reformed, and balance restored to the economy, before there can be any sustainable recovery.

Institutional Risk Analytics
Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP
7 December 2009

To us, the confirmation hearings last week before the Senate Banking Committee only reaffirm in our minds that Benjamin Shalom Bernanke does not deserve a second term as Chairman of the Board of Governors of the Federal Reserve System. Including our comments on Bank of America (BAC) featured by Alan Abelson this week in Barron's, we have three reasons for this view:

First is the law. The bailout of American International Group (AIG) was clearly a violation of the Federal Reserve Act, both in terms of the "loans" made to the insolvent insurer and the hideous process whereby the loans were approved, after the fact, by Chairman Bernanke and the Fed Board. The loans were not adequately collateralized. This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims on AIG itself for equity stakes in two insolvent insurance underwriting units. What more need be said?...

The second strike against Chairman Bernanke is leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had "no leverage." Again, this goes back to the issue of why the loan to AIG was made at all.

Having made the first error,Bernanke and other Fed officials seek to use it as justification for further acts of idiocy. Chairman Dodd look incredulous and replied "you are the Chairman of the Federal Reserve," to which Bernanke replied that he did not want to abuse his "supervisory powers." Dodd replied "apparently not" in seeming disgust....

The third reason that the Senate should vote no on Chairman Bernanke's second four-year term as Fed Chairman is independence. While Bernanke publicly frets about the Fed losing its political independence as a result of greater congressional scrutiny of its operations, the central bank shows no independence or ability to supervise the largest banks for which it has legal responsibility. And Chairman Bernanke has the unmitigated gall to ask the Congress to increase the Fed's supervisory responsibilities....

No, It Is Not Entirely Different This Time - But It is More Insidious

There are some differences and they are significant.

The US is not on a gold standard, so the devaluation of the dollar does not have to occur in a stepwise function with an official restatement of value. This time the Fed can simply monetize debt and provide more dollars as it wills. That is fiat.

The US is not a net exporter to the world, as it was then. This is why Smoot-Hawley was harmful to the US recovery. The major nations of the world, such as Germany, Italy, and Japan, became engaged in their own domestic industrial recovery including rearmament. Today the US is the consumer for the world's exporting nations. And it also owns the reserve currency.

The New Deal was a bottom up Jobs Program. The Deal this time is a new version of trickle down. The second wave down in the Great Depression caught many of the professionals who had made millions shorting the initial market declines, or at least survived the Great Crash by selling early. The next wave down in the current credit collapse is going to boil the middle class, a few degrees at a time.



Geither: None Would Have Survived - Rolfe Winkler

US Dollar (DX) Daily Chart

The dollar rallied today on slightly higher interest rates, and hopes that the Fed will be able to raise short term rates more quickly than expected next year. The August Fed Funds futures ticked up a bit, raising the probability to 40% of a raise in the second half of 2010.

It is going to be interesting to see how Ben achieves this change in policy beyond the jawboning. Raising the interest paid on Excess Reserves is one way to do it, without actually draining funds directly from the real economy.

There is sort of a cocky smugness at the Fed that they believe they have inflation all figured out, given the Volcker experience. Just keep raising rates until you break it, and run a bluff on expectations as you go. We'll see how easy it is when the time comes.



As for the dollar, this appears to be a technical reversal of the low end of the downtrending channel, at least for now. Bucky has its work cut out for it. Without structural reform, the economy cannot build a recovery on low paying temporary jobs.

Timmy and Obama were on the airwaves today, touting programs to create jobs for next year. This will take money, and a resolve in the Congress that we do not yet see. Programs must be accompanied by reforms, or this is just The Credit Bubble, Part Trois.

Net Asset Values of Certain Precious Metal Funds and ETFs

Gold and Silver took some pretty stiff corrections as the jobs data provided a very temporary rally in stocks, but higher rates to the bonds, and with that some strength to the US dollar.

So far all this is well within our expectations. We bought back some of the trading positions which we sold on 2 December around 1225 when gold hit 1166 today, but will wait now to see if this support holds.

Later: Fresh update on the chart. Very quick move down to support levels. I will consider adding to the small position we bought back if gold can hit the 50 percent retracement level around 1150 on the daily.

Last: It did hit 1150 and I did execute some buys. The mining positions are hedged with SDS and TWM, but the bullion is a straight up buy.