Sundays CBS Ben Bernake Interview

[SharperDingaan]

 

 

htttp://www.theglobeandmail.com/servlet/story/RTGAM.20090315.wbernanke0315/BNStory/Business

 

Notables are the 'apparent governmental PR offensive', 'carefully hedged' very rare discussion in 'extraordinary times' with a media outlet, & a 'lack of political will'. AIG's 165M weekend bonus, & big banks won't fail on his watch though if neccessary the government should try to 'wind it down in a safe way'

 

We realize that to some extent Bernake needs to 'talk up his book', but any thoughts as to why he needs to have this 'rare' discussion with the public ?

 

It would seem to us that the Fed has reached a tipping point, beyond which the world is going to look very different (& for which there needs to be some political investment).

 

Perhaps a very good time to be hedged both ways ?

 

SD

 

 

[JAllen]

I think that they talked about why he granted an interview now as opposed to never before.  That because of the extraordinary times and large intervention by the FED that the interview was an effort in transparency for the "American People".  They even talked about how the interview was requested at least a year ago and the person that was asked, laughed when he heard the request. 

[Stove]

Last time a Fed Chairman was interviewed was Greenspan a week before the '87 crash.

[Guest dealraker]

I was somewhat relieved to see that Barnake is a man with roots in the real world.  I guess the thing that bothers me the most was his being blindsided by the housing bubble.  I knew Greenspan was a severely limited "real world experience" man who had absolutely no clue about business in general but Barnake now appears to me to have the skills to be a really good leader in his position and I just can't understand how it missed it.

 

I was a homebuilder for many years and we used to say, "When the contractors are buying new trucks it is time for a recession."  But then the homebuilders bought new trucks for 15 straight years!  I guess that's why we are having the this "size extra large" downturn.

 

 

[Hoodlum]

I was a homebuilder for many years and we used to say, "When the contractors are buying new trucks it is time for a recession."  But then the homebuilders bought new trucks for 15 straight years!  I guess that's why we are having the this "size extra large" downturn.

 

So true!!  My father in-law is a crane operator and he has been buying new vehicles it seems for ever now.  But for the first time in many years he had little work this winter.

[Guest JackRiver]

But that's not the best part of the interview.  The exchange where Bernanke talks about how the fed expands its balance sheet is priceless and it will serve many useful purposes for our country.  First, it shows that he's not BSing about being open.  For those of you who are less versed than even me on this subject, the fed literature has always been obscure in describing how they print money.  That is to say, the texts usually describe how the banking system prints money, but what is usually left out is the fact that the fed can, with the stoke of keys on a keyboard, create as much money as they want in their ledger accounts and the ledger accounts at the banks.  Just like that.  No need to borrow.  So Bernanke's comments, about how the fed can expand its balance sheet, suggest he's genuine when he says he believes in transparency.

 

The second reason I believe he did this is to send a reminding shot at the Chinese government.  To say, look it buddy, you're the one with the problem and not us.  You can threaten to do whatever you want with the 800 billion in government debt and trillions in dollar reserves, but If you do try to do something stupid, I can replace that amount of money in the time it takes me to type the numbers on my computer keyboard.  The Chinese and their currency manipulation is in large part what got us into this mess and they too will pay a large part of the price.  Their only exit is to buy other U.S. assets or consume our goods and services.  When they come to their senses they will realize that that is what they should do.  Their reserves are too large to do otherwise.  Besides, the debasement of a deficit nations currency is one of the penalties envisioned when our floating rate currency system was designed.  It's one of the natural corrections for continued surplus and/or continued deficit nations.  

 

A third reason for the openness that I can think of is a shot at those in the U.S. that are harboring this notion that the government will run out of money to combat the financial crisis.  Uh, no they wont.  If you are placing bets on that eventuality you are a moron.

 

Anyway, that's just some thoughts of my own about the Barnanke interview.

 

Yours

 

Jack River

 

 

[SharperDingaan]

 

Thanks for your responses.

 

We're inclined to think that he's going to make a deliberate example of somebody, & use it to establish historic precedent.

 

AIG would seem to have burnt its bridges, its execs appear to be aware of it, & the culture seems to be that with 170B of fed money invested they are too big to fail. ie: Moral hazard. 

 

We suspect there will be a forced tender for the rest of AIG (citing legal requirement), an immediate revocation of the approved bonus payments (firings & lawsuits accepted), a fairly rapid anti-trust breakup, & a forced asset divestiture to the worlds other major carriers. Popular on main street, but death to Wall Street.

 

- It would set a US precedent for nationalization, & stengthen the mechanism by which to force it.

- It would set a US precedent for forceable breakup, when a company becomes 'too big to fail'.

- It would establish US precedent as to when the fed can call the markets bluff.

- It would add a blanket national interest override to compensation contracts.

- Moral hazard will be contained, & there will be bodies to prove it.

- The super-regulator will have teeth.

 

He is also about the only person in the world who could do this - as it can only be done by someone openly transparent, who is very well schooled on the depression era, well versed on the streets 'culture', & who will never need to work on the street again.

 

It would seem likely that he would also go on to become the super-regulators founding chair, & most likely lead a re-write of the Investment Act of 1930.

 

May we all wish this man the greatest of success.

 

SD

 

 

 

 

 

 

 

 

 

[scorpioncapital]

What's this thing about political will to fight the depression? I understand it to mean that unless we allow things like the AIG bonuses to occur, regardless of how much we hate it (I.e. the political will is to reverse it) the recession could go on a long time. I.e. we need the help of the criminals to get us out but the will of the people to allow this is very small.

[Viking]

Sharper, good question... Why do the interview and why now?

 

I was surprised at how angry he said he was at AIG. Obama is reportedly looking into the bonus payments. In this environment, how does AIG keep its good people?

 

I was also surprised he said he expects the economy to bottom this year and recovery to start next year. If things do not play out this way he has set himself up big time (look at how people are quoted from back in the 20's and how silly they sounded after the fact).

 

It is interesting that he is not from Wall Street, leading one to conclude that perhaps he is less biased than most everyone else. Perhaps he is trying to build his credibility directly with the American people so he has the 'political capital' to play hardball with Wall Street interests as this crisis enters its next phase...

[arbitragr]

I wouldn't want his job, that's for sure.

[omagh]

The funny thing about the AIG CEO (Ed Liddy) letter is the premise that AIG is a "going concern" that needs "good people".  Why isn't AIG explicitly being put into run-off?  Clearly, the governance failed, it can't pay its counter-parties without government aid, and it's a bankrupt entity.  Effectively, it has debtor-in-possession financing from the government.  The government's role should be to bring stability to the market and to shut AIG down by selling off the viable parts and running off the remainder of the toxic contracts.  The government is engaging in "moral hazard" and unintended consequences with its handling of AIG.  This is going to go on for years....

 

-O

 

 

I was surprised at how angry he said he was at AIG. Obama is reportedly looking into the bonus payments. In this environment, how does AIG keep its good people?

[bg]

Bernanke has repeatedly shown himself to understand economics only through the lens of monetary policy. 

Notice he did not stop and discuss what impact his expanding the Feds balance sheet will have on lending. 

Why would anyone lend long term with the Fed Chairman repeatedly promising to print money?  What happens when Bernanke threatens to print -- money leaves our capital markets.  There is almost zero long term lending.  Bob Brinker on his radio program told his audience not to buy any bonds with longer than three months duration!  This is having a VERY negative impact on our economy.  Bernanke can print money - yes - but he cannot force people to lend.  With no credit uptake the monetary creation goes nowhere.  There is no velocity of money.  He is doing more harm than good.  We have literally reached the point where credit markets are virtually closed except for government agency paper.  Money must circulate for it to have an impact on the economy.  If he prints too much then yields skyrocket -- what impact will that have on the Federal Governments ability to roll its paper, what yield will they be forced to pay?  What happens to the value of housing stock and commercial re if long term rates head towards 8-12%?  They plunge furthering the crises.  Americans are trusting a man who told them subprime is contained, our financial system is sound, and America will not have a recession.  Go look at his past predictions -- he is the strike out king.  Yet he is held up as a infallible. 

 

Liquidity will return when prices are low enough for intelligent people to take a risk with nominal (normal) rates of leverage and earn a decent return.  We are reaching that point it seems in stocks.  Housing seems to be bottoming (the prices at least) in the areas I watch, even Las Vegas.  Employers will be willing to add staff at a low enough wage.  The government wants to accomplish the opposite.  It wants higher wages (increased union activity) inflated RE values, and higher regulatory costs.  They will prolong the agony not end it.  Inflation is not a magic bullet.  What he proposes to do is harmful to Americans. 

 

Inflation is caused by lending (credit formation), and lending is a function of return ie. productivity.  For nearly a decade many intelligent people have watched on the sidelines as leverage was added to goose returns -- funny money drove out the smart money.  The smart money is returning.  He is essentially trying to prevent the dumb money from losing their money.  But this is how and when bottoms are formed.

 

This clip shows how bottoms are formed.  This man is willing to buy hotels at a 15-18% unleveraged return.  Over the last few years they were priced at leverage ratios of 15/85.  Of course he will be able to reduce room rents (lower prices to increase demand) which will hurt his remaining over leveraged competitors.  The same thing happened with the dot com  bust, the oil bust, RTC RE, etc. 

 

http://www.cnbc.com/id/15840232?video=1046179272&play=1

 

 

 

 

 

 

[JAllen]

The long term, widespread impact of expectations of inflation will have very positive effects on our economy.  It is the expectation of lower prices which is so disastrous.

[bg]

The most dynamic area of our economy is silicone valley.  There has been long term expectation of increased quality at lower prices.  It has not been disastrous to that sector of our economy.

 

 

 

[Guest ericopoly]

The most dynamic area of our economy is silicone valley.  There has been long term expectation of increased quality at lower prices.  It has not been disastrous to that sector of our economy.

 

 

 

How about all the debt that is collectively owed?  It gets bigger and bigger in real terms with deflation.  It's sort of a problem, you see.

 

 

[SharperDingaan]

 

bg

 

What happens if the tipping point is a move from being re-active to pro-active ?

 

He will have to go proactive at some point, & AIG has inadvertantly made itself the perfect target. All he need do is take the $ that AIG are now trying to give back & do a tender offer at $1/share

 

[bg]

"How about all the debt that is collectively owed?  It gets bigger and bigger in real terms with deflation.  It's sort of a problem, you see."

 

You should differentiate between healthy deflation (silicone valley) and unhealthy (bubble liquidation).

 

No one wants to do that.  A bubble is very destructive.  Hugely.  Especially to the people who got caught up in it. 

 

Just curious, and I really don't have the answer for this, what is the impact of RISING INTEREST RATES ON THAT DEBT?

 

Let us say for example that I owed 10 Trillion dollars and was financing this amount of money via short term access to the credit markets.  What happens if inflation expectations increase wildly and I am forced to refinance that credit at 8%?  Do you believe an increase in inflation expectations will have zero impact on the risk free rate? 

 

Or what happens to the value of an 800,000 dollar house if suddenly the ten year tbill bubble pops and shoots to 8%?  Did the value of the home go up or down?  Did the value of that outstanding debt increase or decrease?

 

How about the value of a major commercial real estate portfolio.  If suddenly they are forced to access credit at 12%?  What impact does that inflation have on the value of that building?

 

What about consumption -- if prices rise in aggregate and my wages do not increase will that activity have the effect of increasing or decreasing aggregate demand?  If you power bill suddenly goes up to $400 dollars a month would you increase or decrease discretionary spending?

 

The prevailing thought seems to be 'just inflate' (cause) while ignoring effect (rising interest rates). 

 

It's not so simple you see. 

 

 

[Guest ericopoly]

"How about all the debt that is collectively owed?  It gets bigger and bigger in real terms with deflation.  It's sort of a problem, you see."

 

You should differentiate between healthy deflation (silicone valley) and unhealthy (bubble liquidation).

 

No one wants to do that.  A bubble is very destructive.  Hugely.  Especially to the people who got caught up in it. 

 

Just curious, and I really don't have the answer for this, what is the impact of RISING INTEREST RATES ON THAT DEBT?

 

Let us say for example that I owed 10 Trillion dollars and was financing this amount of money via short term access to the credit markets.  What happens if inflation expectations increase wildly and I am forced to refinance that credit at 8%?  Do you believe an increase in inflation expectations will have zero impact on the risk free rate? 

 

Or what happens to the value of an 800,000 dollar house if suddenly the ten year tbill bubble pops and shoots to 8%?  Did the value of the home go up or down?  Did the value of that outstanding debt increase or decrease?

 

How about the value of a major commercial real estate portfolio.  If suddenly they are forced to access credit at 12%?  What impact does that inflation have on the value of that building?

 

What about consumption -- if prices rise in aggregate and my wages do not increase will that activity have the effect of increasing or decreasing aggregate demand?  If you power bill suddenly goes up to $400 dollars a month would you increase or decrease discretionary spending?

 

The prevailing thought seems to be 'just inflate' (cause) while ignoring effect (rising interest rates). 

 

It's not so simple you see. 

 

 

 

It is quite simple if you don't come back with hyperinflationary counterexamples.  The history of the past 20 years is what people are conditioned for, not deflaiton. Deflation will be very disruptive.

 

 

 

 

 

[Guest ericopoly]

The most dynamic area of our economy is silicone valley.  There has been long term expectation of increased quality at lower prices.  It has not been disastrous to that sector of our economy.

 

I think though that when we think of generalized deflation, we need to be concerned about how other industries will survive.  Tech has done well due to productivity improvements and volume gains.  So what if prices have fallen, they've done so because the goods can be produced much cheaper (companies like Intel are still wildly profitable despite tech workers having some of the best pay increases the past 20 years).

 

Now, suppose you are an infrastructure company like BAM and you are going to build something like a hydroelectric dam or a toll bridge.  Are you going to thrive and prosper if prices fall and continue to do so? 

 

The other thing about the tech example is that falling prices in tech did not have negative ripple effects across the economy -- in fact, exactly the opposite occured.  Better, faster, cheaper tech improved productivity across multiple industries.  Generalized deflation will not have that effect. 

 

 

Buffett points out in last week's interview (as a few of us have here on this board) that Japan has a declining population, and so there is no demographic trend to push on housing demand.  Things are different in the US (sorry Prem), because we have a growing population that will soak up the excess supply we currently have.

[KFRCanuk]

The Fed is now printing more money.

 

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/18/AR2009031802283.html?hpid=topnews

"The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.

 

The decision by the Fed to buy government bonds and mortgage-related securities is designed to lower borrowing costs for home mortgages and other types of loans, thereby stimulating economic activity. The central bank, effectively, will print more money to pay for the purchases."

 

I find it interesting Bernake mentioned this possibility in the 60 Minutes piece. He was pre-announcing things.

 

Now will the bank of Canada do the same thing to keep the CAD down?

[Stove]

He's been talking about doing it for months, and thinking about doing it for years.

[Guest JackRiver]

He's been talking about doing it for months, and thinking about doing it for years.

 

 

Strange huh?

 

Yours

 

Jack River