On Bernanke’s Opaque Transparency


There are two things that I want to comment on Fed policy this evening: Transparency is overrated, and Bernanke does not understand savings.

Transparency is Overrated

Ever heard of the phrase “data overload?”  Greenspan would do that verbally in his testimony to Congress, providing them with more data than they needed, and occasionally contradictory so that each side could quote what they wanted.

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Well, the present transparency policy of the Fed is another version of data overload.  Give lots of data — some similar, some different.  Opinions, forecasts, policies — average people have a hard time with the nuances; even some professionals do.

After a certain point, the more data you reveal, the harder it gets to evaluate what is going on.  Far better to reveal to the public the core data that explains policy than to make them slog through big data releases.

Transparency is overrated.  Not sure which foolish economist thought of this one, but more data does not mean better decisions, or better public understanding.  Humans are not Vulcans (only logical), nor Ferengi (only greedy); we are complex, and that makes prediction of actions difficult.

Bernanke does not Understand Savings

Twice in his press conference yesterday, Bernanke showed that he was out of touch with average Americans.  He argued that average people could keep up with a 2% increase in the price level by investing in stocks and (presumably short-term) bonds.

(Speaking to The Bernank)

I’m sorry, Ben, but ya gotsta come down from the uneducated ivory tower and wallow in the mud wit da restov us.  There are three problems with what you said:

  • It’s hard to earn 2% (after-tax) consistently when the Fed funds rate is zero.
  • Only the top 20% of the wealthy have enough assets to keep themselves afloat using the asset markets.  Most people would like to do something to protect themselves from inflation, but lack the means to do so.
  • Average people do not invest, they save at financial intermediaries like banks, S&Ls, and life insurers.  Fed policy kills rates for savers.  They will not become investors, because they lack the knowledge to do so.

I am again sorry, Ben, because your policies discriminate against the poor, and the lower middle class.  Yes, the rich and the upper middle-class clever can escape the penalties stemming from your policies, but the lower-middle class and the poor can’t.

Think of it this way: your policies are making it more palatable for average people to buy gold, because the alternatives in savings are lousy.  If there is no income, why not grab safety from inflation?

Are you really trying to wrest the thorny crown of “worst Fed Chairman” from Arthur Burns?  If so, well done, you are achieving your goals.  Even Alan Greenspan did not do that, though he tried.

My advice to you is simple.  Raise the Fed funds rate to 1%, and stop the QE, and pseudo-QE.  At the zero bound, monetary policy has no punch, and the same for QE.  It affects asset markets; it does not affect goods markets.

Time to abandon useless theories about the Depression, and embrace the practical difficulties that we now face.  Ben, grow up and abandon your failed theories on the Great Depression.  And resign, if you can’t grow up.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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