Contesting the Accepted View of Bernanke
This was the week that was – Alan Greenspan stepped down from his chairmanship of the Federal Reserve and was replaced by Ben Bernanke. The earth did not stop spinning, nor did the markets crash (yet). But unlike most commentators who think that Bernanke has what it takes to keep U.S. monetary policy and the economy on an even keel, Bob Prechter sees problems for the captain of this ship of state. Here's an excerpt from Bob's November Elliott Wave Theorist:
Smooth Sailing for the Economy?
Like the entrenched belief in continued inflation, there is a widespread expectation of smooth sailing under Ben Bernanke. Summing up the prevailing view, an economist says, "Bernanke is universally admired and respected by people who have seen him on the inside of that institution. The bottom line is that this is excellent news for the Fed and for the economy."
A nationally known economist adds, "We need a Fed chairman who is steady, solid and sticks to basics. Ben Bernanke is the right person at the right time." This general conviction will set up the vast majority to be fooled and ruined. There is a vocal minority who views him as a potential disaster, but the only danger they see under his leadership is excessive inflation. With virtually everyone prepared for either good times or severe inflation, bad times and deflation will catch them all off guard.
Fools and Geniuses, They Are Not
It is not the case that Fed chairmen are either fools or geniuses, as their records appear to imply. They do, however, preside over eras that make them appear to be one or the other. I am firmly of the opinion that Ben Bernanke, well educated by Harvard and MIT though he is and fine fellow though he may be, is doomed to suffer a historically bad image as chairman of the Federal Reserve.If for some reason he leaves the post prematurely, his immediate successor(s) will suffer that fate. The trend in social mood will continue to determine the chairmen's degree of success, not the other way around.
As to Bernanke's qualifications, I must demur from the accepted view that he understands the economy and markets at some genius level. On August 31, 2005, Reuters issued this statement:
Bernanke said the bond market's reaction to the hurricane, pushing market-set interest rates lower, showed more concern about the potential hit to growth than to the risk of a broad inflation surge due to soaring energy prices. "I think that is a vote of confidence in the Federal Reserve," the former Fed governor said. "People are confident that inflation will be low despite these shocks to gasoline and oil prices. Looking forward...reconstruction is going to add jobs and growth to the economy," he added.
In four short sentences, Bernanke, in my humble opinion, expresses six erroneous ideas:
(1) The bond market did not react to the hurricane. There is no evidence that any market reacts to natural disasters. This idea is a myth that derives from the natural human tendency to default to mechanical models of social causality.
(2) Markets have never translated natural disasters into "concern about the potential hit to growth." You cannot pick out hurricanes, tornadoes, floods, city fires or blackouts on a chart of stocks, bonds, oil or anything else.
(3) The idea that any two-point move in the bond market is "a vote of confidence in the Federal Reserve" is ludicrous. One would then have to believe that every two-point setback during the year is a vote of non-confidence in the central bank.
(4) People are not "confident that inflation will be low." They are buying homes at a record pace, certain of price gains. Investors are bullish on oil, gold, silver, commodities and REITs. The public is convinced that gasoline prices will stay up.
(5) "Shocks to gasoline and oil prices" do not make inflation rise. Price rises due to shortages have nothing to do with inflation, much less do they have a causal inflationary role in general as Bernanke implies by the word "despite." Inflation is due to the expansion of money and/or credit, period.
(6) The destruction of any useful item, even a screwdriver, much less the mass destruction of infrastructure, does not "add jobs and growth to the economy." It detracts from the economy. The French economist Frederic Bastiat exposed this erroneous idea over a century and a half ago. (To learn more, just type "Bastiat, broken window fallacy" into Google search.)
Bernanke will surely reign in a bear market when every decision he makes will be seen as dumb. But as this example shows, maybe that perception won't be due entirely to declining social mood.
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