Yosemite Sam Bernanke

Before I tell you about Ben Bernanke’s testimony today before Congress, which I was honored to cover for three hours with the estimable Fox Business news editor Ray Hennessey, anchors Cheryl Cassone, Tom Sullivan, Dagen McDowell and Stuart Varney, I need to give you some news.

Congress has postponed its hearing scheduled tomorrow with former Wall Street bankers testifying about the fat cat pay they got despite record bank writedowns. I wrote about this in my last blog, I’ll keep you posted on it when it happens, stay tuned.

Bernanke gave the same downbeat forecast on the economy today before the House Financial Services Committee as he did when he testified before Congress a couple of weeks ago with Treasury Secretary Henry Paulson and Securities and Exchange Commission chairman Chris Cox.

“The economic situation has become distinctly less favorable” since the summer, and the Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said.

All this augurs for more rate cuts come March 18th when the Fed meets again--expectations are for a 50 bp cut (watch too for a revision of GDP growth coming out tomorrow). A close read of the recent Fed minutes shows it doesn’t expect the economy to return to trend before 2011 at the earliest, so if the Fed does cut, it’s using up some ammo here.

Bernanke, though, applied novocaine to some nerve endings when he added that the subprime contagion has not gone viral, that non-financials’ are in “good financial condition, with strong profits, liquid balance sheets, and corporate leverage near historical lows.” He noted that “US exports should continue to expand at a healthy pace in coming quarters, providing some impetus to domestic economic activity and employment.”

The market was in the red before the hearing, but nudged higher after an announcement from the Office of Federal Housing Enterprise Oversight that it would let home-loan giants Fannie Mae and Freddie Mac buy more mortgages in securitizations, helping to break up the ice in a frozen credit market. Though Fannie Mae just reported a $3.6bn loss, it filed its first quarterly report in a timely manner with the SEC in a number of quarters, due to serious accounting problems (Freddie has had its share of bookkeeping problems too).

So OFHEO basically said, ok you’ve got your house in order, you can buy more mortgages and expand your portfolios—so long as you set aside much more in capital reserves (Fannie and Freddie have about $40bn in cap reserves against a $1.5tn book of business).

The highlight of the hearing was when Congress essentially asked why Yosemite Sam Bernanke hasn’t done more to crack down on predatory mortgage and credit card lenders that, to many, has turned the free market into a free-for-all.

Rep. Carolyn Maloney (D-NY), known for pointed questions that leave no wiggle room, asked why the Fed isn’t doing more to stop credit card companies from retroactively charging higher rates on existing balances. “More disclosure” was the only fix the Fed could offer, answered Bernanke. The government could do more, say many.

Rep. Maxine Waters (D-Calif.) in a similar vein asked what the Fed would do to protect borrowers trying to do workouts on loans they couldn’t afford. Can’t have the iron fist of the government interfering in the free market, essentially better disclosure, came the reply.

But to mortgages alone, it’s hard to have a Fed cop in every mortgage lender’s office, especially when bankers have no incentive to keep a tight rein on marginal borrowers because they’ve shoved those loans off the balance sheet via securitizations.

Securitizations though that are now coming back to bite them, because lenders can’t figure out which banker gets to call in those loans and who gets to seize those homes in foreclosure when borrowers go belly up, given that mortgages are so sliced and diced in securitizations, any lender could have a call on them.

Then the always entertaining Rep. Ron Paul, who chased after Bernanke’s statement that the Treasury, not the Fed, is the government’s megaphone for a strong dollar. I'm updating my earlier blog to acknowledge that many economists agree with Ron Paul, that the government should not be debasing the dollar, and his exchange was likely the highlight of the hearing. It's something I've talked to a number of economists about before, that is, economic historians have said that no country in Western civilization has survived by consistently debasing its currency. A debased dollar erodes paychecks, (see further thoughts at bottom), pricing power, you name it.

The weak dollar is a continuous drag on the economy, like the hyperactive tort bar and the big tangled pile of barbed wire that is the anti-growth tax code.

Paul is a smart man though he sometimes undercuts the strength of his arguments, as he seemed to do yesterday. He went off on tangents with a rather windy monetary/economics/free associative lesson, the logic of which was about as easy to follow as a gnat in a hurricane (he essentially wants a stronger dollar). If you can take the time to download and read his testimony, not his statement, you'll see what I mean.

A weak dollar will likely be the subject of much more debate, with Buzzsaw Ben applying electro-shock to the economy in the form of startlingly large rate cuts at one time, unlike “quarter-point Al” Greenspan who moved in numbing, tortoise-like 25-point increments.

Ben has really powered up the buzz saw, with the Fed cutting rates to 3% from 5.25% since mid-September, including an emergency three-quarter point rate cut announced on January 22 and a further half-point cut just eight days later.

But rate cuts make the dollar go down in value, the dollar is now at record lows against the euro (it now costs a $1.50 to buy a euro), and with oil priced in dollars, oil is going up, so inflation is coming a cropper, Bernanke acknowledged. Refreshingly candid talk from a central banker, given the studied, obtuse Greenspan who consciously spoke in hieroglyphics—mystery adds to his power, (Who knows. Who cares. Annoying.)

The Great Moderation, the big victory that central bankers’ can claim in their two-decade-long battle keeping inflation low, is now being undone by the Great Unwind, or the credit mess.

And that Unwind could undo fiscal stimulus, as inflation cuts the purchasing power of those $600 rebate checks. Not great, what with shrinking paychecks, and with people feeling less well off because the values of their homes have dropped.

The harder Bernanke works to cure the economy’s hangover, a hangover from the unlimited liquidity punch bowl of 2004, the more he feels the need to do "hair of the dog" medicine, or more rate cuts.

That hurts the dollar, adding to inflation. Strengthen the dollar first, get the tax code out of the way—the best non-inflationary liquidity for the economy right now is a cut in taxes and a cut in pork spending. But tax reform--and Social Security, healthcare reform, most major reforms, for that matter--remain entombed in Congress.

A sad footnote: To Chris Buckley, one of the most charming, smart, funny satirists of the day who I was honored to work with at Forbes Magazine--I am so deeply sorry, my friend, over the passing of your father William Buckley, coming so close to the loss of your beautiful mother Pat. I am honored to know you, you and your loved ones remain in my thoughts and prayers, always—and yes readers, I say my prayers every night, just so you know.