February 27, 2008 3:03PM
Yosemite Sam Bernanke
By Elizabeth MacDonald
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.
February 27th, 2008 at 6:55 pm
If you can’t understand the simple logic of the Australian free-market economists you should be reporting on economics. Ron Paul’s logic is clear and evident as he prodded Bernanke: how can we solve the problems of inflation, with tactics that increase inflation? Basically, no one, but Paul who follows the Austrian school wants to interpret our economy this way, but he makes perfect sense. If you increase the money supply, the dollar is devalued and prices rise. This makes you poorer. If you go about soling this problem by spending/printing more money and further increasing the money supply the problem only gets worse. When our economy collapses because of this policy I am interested to see how the MSM will fail to mention Paul’s warnings.
February 27th, 2008 at 6:56 pm
I think Ron Paul is saying that he, along with many American citizens, want the system changed. It’s that simple. Your mind is locked in analyzing the current system. If you want to talk about different economic theories then you should read and study that before you go writing articles on the subject.
February 27th, 2008 at 7:00 pm
I understand that the traders cheered again as Ron Paul took down Bernanke. They cheered him on the last time Paul confronted Bernanke aswell.
They understand what’s at stake with our dollar, its too bad that no one else does, certainly none of the other presidential candidates. They wouldn’t understand economics if they studied it for then next 20 years. Paul has spent most of life becoming an expert in the field.
February 27th, 2008 at 7:11 pm
Paul asked Berananke how he can justify debasing our dollar. What was so hard to understand about that? BTW how does the average American barely making it from paycheck to paycheck profit from a weak dollar. Please don’t lecture me on exports. We hardly make anything in this country to begin with and profits from what ever limited exports we do have don’t make it any farther than the pockets of the Board of Directors.
February 27th, 2008 at 7:32 pm
Well,this might have been a better reporting of what happened during the hearing if Ron Paul’s “rather windy” questioning was not dismissed. Still, your report is consistent with FOX policy, and one can only conclude that your boss was happy with your report.
February 27th, 2008 at 8:41 pm
Sheesh, how dumb do you have to be to not understand what Ron Paul was saying. It couldn’t be layed out any more clearly. Pay a little more attention, you’re supposed to be a reporter. If you want any credibility as a reporter you don’t just throw your hands up in the air and say: “Oh, that’s way over my head!!”. Fox News - What a joke!!
Let me spell it out for you in layman’s terms. Your dollars are losing value every day as a direct result of the Fed’s monetary policy of expanding the money supply. That means you are getting poorer every day because inflation measures like the CPI excluding food and energy understate the impact of inflation on prices. This is basic stuff. Wake up dummies!!
February 27th, 2008 at 9:54 pm
Paul was right to focus on the broader issues. Economic problems are not just credit card problems and loan judgment errors. At issue here is the general role of the Fed, the Treasury and Congress, that is, the issue is monetary policy. Historically, attempts by the Fed to run the economy have made things worse. How can things be better?
For a long time, Ron Paul has called for the abolishment of the Fed and the reestablishing of Gold in currency. That is an up-hill climb and recently Paul has been describing something more politic and (if I understand right) gentler for all people concerned. Paul has set out a plan for competition in currency. If it works, it works, if not, there was no harm. It looks like genus.
The first step will immediately mitigate inflation. HR5427 will make it easier to move funds into and out of gold quickly and without penalty or undue paperwork.
A lot more is needed to implement the competitive currency idea, though.
Paul is right in his statements before the committee. Congress should not participate in manipulation of interest just as it should not participate in the manipulation of any prices.
Does it need to be repeated that there is harm in expanding the monetary supply? The inflation is higher than some models expect, taxing the usual victims (the poor with assets in cash) and hurting even more. Also, the cascading from the source to the rest of the economy benefits those close to government and hurts those distant. A harm we forget is that the hidden inflation tax encourages Congress to spend even more.
I hope people do listen to Ron Paul.
February 28th, 2008 at 12:09 am
Paul’s comments hard to follow? Give me a break, is there anyone else who articulates the deliberate devaluation of the dollar as well as Paul in government? The answer is no, becuase nobody else talks about it, in the government or the media.
February 28th, 2008 at 1:12 am
I watched the three representatives mentioned in your article above on C-Span today. Ron Paul clearly articulated his points equally as the other two reps mentioned above. Yet you are reporting Ron’s comments using the defaming words “entertaining”, “chased”, “tangents”, “rather windy”, “gnat in a hurricane”. Are you incapable of producing quality professional journalist reporting and not articulating your personal dislike of a representative? Try sticking to reporting content not commentary. Your opinion of someone belongs in the opinion section not a congressional hearing report.
February 28th, 2008 at 1:23 pm
The key is to have fiscal responsiblity instilled in you at an early age. Recently, through hard work and savings, I was able to buy the house I grew up in. Money does not come easy, and it shouldn’t. Elizabeth - you are so smart - keep up the good work!
February 28th, 2008 at 1:36 pm
Tim from Minnesota, your comments are rather myopic. Try taking a deep breath, this one is a most capable jounalist and does not deserve the hostility.
February 28th, 2008 at 2:53 pm
The key is to have fiscal responsibility instilled at an early age. Recently,through hard work and savings, I was able to buy the house I grew up in. Money does not come easy, and it shouldn’t. Elizabeth - you are so smart - keep up the good work!
February 28th, 2008 at 3:28 pm
Elizabeth MacDonald has the Bernanke testimony and in particular his exchange with Ron Paul dead on, she’s exactly right. You Ron Paul fanatics are worse than the Lyndon Larouchies. Anyone who watched it, read Paul’s comments and anyone with half a brain saw Ron Paul was nearly incoherent, disjointed and all over the map. And what a bunch of jerks you all are to attack her personally. Emac is agreeing with you anyway about Ron Paul being right, read the blog again, I’ve watched and read her for some time now saying the devaluation of the dollar is toxic to the economy. What is wrong with you thin-skinned maniacs? She’s a pretty renowned business journalist. Go back to your Facebook pages and talk among your pea-brained selves.
February 28th, 2008 at 6:42 pm
I think you can also glean from this that Congress is thinking about the credit card industry and that its in serious need of a crack down. Because it is in my opinion. I’ve done some work with Unfaircreditcardfees.com and the amount of reform they need before they will need before they are anywhere close to where they should be is ridiculous.
I’m actually that its at least entering the dialog, because things like interchange fees have been hitting us all hard without anything being done for so long. And by us I mean regular consumers and businesses alike. American Banker wrote it up also recently, so maybe something is coming soon.
February 29th, 2008 at 3:36 pm
Hey Stephen, just a little correction for you. That’s Austrian free market economics not Australian.
February 29th, 2008 at 4:31 pm
Emac you are a genius, I love your blog, I read it every day, and you are so right about Ron Paul, you called it accurately. Looks like you’re getting flamed by fanatics here, pretty unhinged. But I’ve been following you for a while, ever since you wrote for the Wall Street Journal (and saved us all a ton of money with accounting scams coverage) you’ve got a big big fan base down here on Wall Street just so you know. You’re brilliant. Keep up the fantastic work. Thank you so much.
March 1st, 2008 at 12:59 am
@”Paul is a smart man though he sometimes undercuts the strength of his arguments, as he seemed to do yesterday.”
Hello… Earth to Mars.. Ron Paul precisely in a sound logic that because prices are merely the reflection of the Dollar then debasing the value of the dollar will create inflation. At this, Ron Paul added that the PPI and CPI numbers are supporting his argument too. One must note well the inconsistency of statement made by Bernanke, especially in the 18 July 2007 where he said at minute 5:29 of this video: http://www.youtube.com/watch?v=_8pLpI5rzKI - that the dollar would not go down. Ron Paul is not only logical but factual about the M3 statistics which the Fed have no answer to.
Please be more schooled in Economics especially Austrian Economics and also be more objective in you analysis. The title of this article must be Ron Paul slaps Bernanke.
March 1st, 2008 at 4:27 pm
Oh girl, where did you learn economics? My 15 year cousin is better than you. Thank God I am Canadian. If Ron Paul was running for PM in Canada, he would win easily. I do not know what is wrong with American Media. Do you really know anything about economics??? Jesus Christ..
March 2nd, 2008 at 12:44 pm
Thank you so much Liz MacDonald for another brilliant blog. This is so good, I watched the hearings you nailed it. Love your insights, you’re the best. Hey all you ron paul nut jobs what is wrong with you! Guys where did you learn to read? EMac is saying exactly what Ron Paul says. You all sound totally crazy and insane. Way to go Liz you’re terrific.
March 2nd, 2008 at 12:49 pm
Thank you very much EMac for your great coverage of the hearing. You nailed it accurately about Paul, awesome. Love your work, have been a big fan of yours for years, you saved me a lot of money. As for the other idiots who can’t read what you wrote, Guys how dumb and myopic r all of you? You sound like such a bunch of idiots. As for that moron in Canada Jasbinder go take a course in reading, Emac is agreeing with what Ron Paul says. Jasbinder, more like Jas-blinder. What a jerk, go back to your phonics book. And do stay north of the border, we have enough idiots down here.
March 2nd, 2008 at 12:53 pm
Thank you thank you Liz MacDonald. I am an economist, I teach at my local college, I watched the hearing, you are the only reporter out there who accurately portrayed what was said. I’m reading the comments from some here and am totally baffled. Did they even read what you wrote? It’s like, these Ron Paul cultists are so fanatical, they blind themselves to what you wrote and to the truth of it all. Crazy stuff. I’m so sorry these jerks are blindsiding you. Notice none of them write their names.
March 2nd, 2008 at 1:03 pm
Hey Jasbinder I am a PhD economist, I watched the hearing, Liz MacDonald has the hearing accurate, in fact, this is the best coverage I’ve seen so far. Ron Paul was nearly incoherent, and also MacDonald is agreeing with what he’s saying. Stay north of the border, you clearly can’t read. Thank you Emac for a great blog, I love your stuff. These guys here can’t read. Or listen.
March 2nd, 2008 at 1:06 pm
THANK YOU LIZ MACDONALD! you are so so good, fantastic really, this is a great blog. we watched most of the hearing at our trading desks down here, you reported what most everybody missed. way to go, great stuff–man these ron paul crazies are something aren’t they? you’re doing your country a great service by just running a blog letting them weigh in and expose themselves for the maniacs they are. they obviously can’t read, given how you write in what i think is support of what Ron Paul says. way to go!