Dear Ben:
I don’t know if you read ZH. I bet you do. It would be disappointing to learn that you didn’t read some of the leading edge financial blogs. But if not, I bet at least one of your staffers does. If you’re any kind of manager, they won’t be afraid to bring this to your attention. Or perhaps Ron Paul’s staffers can shoot a copy over to your office. It’s a simple petition, really, in the traditional sense. I hope you will consider it.
I understand the conclusion you came to in 2008 and early 2009 after a career spent studying the Great Depression, and I also understand that you feel justified in using whatever channels are available to you as proxy helicopters to drop cash. And it works. You’ve essentially manipulated the US and world markets as though they were remote control funny-cars, bent to whatever short-term route you desire, though we have yet to see what the second and third-order effects are. I mean, beyond food riots, destabilization of the Middle East, gas prices that American citizens won’t ultimately be able to afford, agriculture prices that will play havoc with corporate margins and retail food prices, the US dollar losing its reserve-currency status… things like that.
Having managed money for a while, with all the implicit strategic and tactical decisions, I also understand thesis drift – where you make a decision based on a set of factors, but then continue the policy, or hold the position, based on new reasoning (excuses) that were not part of the original thought process, even after those factors change. An easy example is when a portfolio manager buys a position based on a chart, then, when the chart breaks and he has a small loss, convinces himself that there are other, fundamental factors (it’s cheap now), which support holding the position until it gets back to even. This usually leads to a larger loss. It’s not the sort of lesson you learn in a classroom.
And so it is with you. I understand how it started – the raw panic that you must have felt over some of those weekends in 2008, after belatedly becoming aware that most of the financial system teetered precariously above a fragile foundation of leverage, artifice, obfuscation, and outright fraud - and how emergency conditions justified extreme action in 2008, as distasteful as it must have been for an economist to allocate the capital of honest savers to those that had, in fact, proved to have been the biggest destroyers of capital. I even understand, though I disagree with, the reasoning beyond your latest tactical success / potential strategic disaster – QE-FOREVER.
And now, on the horizon, I see the thesis drift coming: ‘How,’ you ask yourself, ‘will the US possibly roll all these treasuries, to support the ridiculous politicians’ deficit spending, without me in there as an unnatural source of demand? And, if I don’t keep interfering, day by day and auction by auction, MY GOD, what will happen to the value of the enormous, leveraged debt portfolio that the Fed just purchased at a generational top tick, when the auctions struggle and rates begin to take the fast train up? WHAT HAVE I DONE??’ Late at night, when it’s just you, the ceiling, and the ghosts of the Princeton lunchroom, you must worry: ‘At a 5% 10 year, I’ll have one of the largest paper losses in the history of global finance, and, my own obfuscation aside, sooner or later people will clue in, realize they never pulled a lever for my manifesto, and put my head on a stick!’
But here’s the thing, Ben: the deficit spending that you pay lip service to arguing against, which your current policies support, AND THEREFORE FACILITATE, is a real problem. It’s out of control. There is no solution in sight. And, most importantly, there is no URGENCY for a solution to a problem that is, ultimately, existential in terms of capitalism and free markets because the market has stopped giving us any signal other than the delusion you wish to transmit. The barbarian hordes are on the hill above us, looking down and licking their lips, but you’ve put a mirage of QE –colored camouflage serenity in front of them, so that Americans can look past the spiked battle hammers and chain mail of the aggressor, and the rumblings from the beasts, seeing, instead, great payment terms on a new ninety eight inch flat-screen television. YOU are helping to paper over a problem which needs, instead, to be viewed in stark relief.
The danger needs to be FELT, Ben. It needs to have the same urgency as was owed that 353 plane radar cluster off the coast of Hawaii on December 7, 1941. Markets need to be telling us there is a problem, but, because of you, they can’t. Harnessed to your purpose, they’ve stopped serving the ones that they were meant for, allowing one of the most misguided policy trajectories in the history of mankind, to appear benign and without effect. YOU are forestalling a crisis with a thin veneer of paper-mache over an enormous hole in the path to a secure future, and allowing our elected leaders, who have failed in either understanding or effectively communicating the problems, to diddle and prevaricate. And, ultimately, your fix is not sustainable either, so what will you have saved us from, when it’s finally too late, and the engine’s still coughing, and we’re contemplating the trees instead of the runway?
As a highly regarded economist you must understand that recessions have a cyclical purpose. The lows in the business cycle force capital out of poor decisions and into better uses. The lulls are what convince people that risk is real, and that it must, therefore, be accounted for, even when things feel good. The lows are what teach us that 50x leverage is not a good policy - not when you’re an investment bank, not when you’re a hedge fund, not when you’re The Fed. Not EVER! The lows are when failed policies, and failed policy-makers, are seen for what they are. Families adjust, companies adjust, leadership adjusts, and, ultimately, nations adjust. What, do you think, would have been the result of papering over the policies of a Carter or a Nixon? What if we had just shot enough money into the system that they could destroy our economy, or the lawful fabric of our democracy, without being able to see and respond to the critical warnings that free markets give? The result, Ben, would have been no solution. No re-examination of our democratic principles. No Volcker. No Reagan. No fresh image of the city on the hill. Perhaps no post-cold-war boom.
The inevitable history of nations is that they fail, but not always due to the ill-intentioned acts of a despot or conquering army. They can also fail amidst the well-meaning attempts of empathetic illusionists and well meaning technocrats, who have everyone’s best interests at heart, but must bend the rules of logic and law this one time, and then another, due to circumstances that only they can see clearly enough; circumstances that must be dealt with through policy and procedure that no citizenry, given full understanding of its complexities or ultimate effects, would accept.
Things aren’t working, Ben. In your mind, what’s evidently called for is extra-normal production from the machine that you know how to operate. But that’s not really what we need. What we need is for failing policies to fail. We need blathering idiots to be voted out of office. We need America to wake up to the unfolding tragedy in front of them and feel the raw desperation that is a necessary precursor to change - not the shallow, manipulative change of a narcissistic wordsmith, but the deep fundamental change that requires fear as a catalyst, and that sets up generations of capitalist and democratic success. We need Americans to look up on the hill and say, MY GOD, I think that creature with horns on his helmet has a sword, and he’s pointing it at my children. Maybe I should confront him.
But first, Ben, you have to move the mirage. And get out of the line of fire.
And another reader is kind enough to share his comparable comment to the Fed, submitted on August 3, 2010, together with the Fed's response, which in retrospect, and in light of the Fed's recently announced third mandate looks simply hilarious and painfully disingenuous.
Dear Chairman Bernanke and Fed Board:
I am a centrist voter who supported President Obama but who also believes strongly in the need for fiscal responsibility. While I am not a financial expert, I do have an economics degree and understand fiscal and monetary policy issues better than most citizens.
Yesterday, on Monday, Aug 2nd, I watched the stock market go up over 2% despite a month of bad economic news. Today, there was even more bad news -- existing home sales, factory orders, consumer spending and personal incomes -- and yet the market is down only marginally. In any normal world, the market responds to fundamentals.
Yet, in the United States today it does not. The only reason the stock market (and other asset prices, e.g. housing) are supported at current levels is the perceived near certainty of further Federal Reserve intervention (aka "quantitative easing"). Speculation of further quantitative easing is clearly evident in the financial press (CNBC, WSJ, Bloomberg, etc.), and was exacerbated by Mr. Bullard last week. The Federal Reserve should not -- and ultimately cannot -- prevent markets from reaching equilibrium. This means asset prices must fall to match both declining personal and national incomes, which are the natural consequences of globalization (and misguided US trade policy) on US GDP relative to the rest of the world.
Therefore, the Fed should not manipulate markets in an attempt to make up for: 1) misguided deregulation (i.e. abandonment of Glass-Steagall during the Clinton Admin, made worse under the Bush Admin) 2) irresponsible, bubble-inducing easy money policies by the Fed under Greenspan 3) fiscal irresponsibility by the Congress 4) globalization While quantitative easing may have been necessary in late 2008-early 2009 to stabilize the economy, I am writing to implore you to please stop any discussion of further easing. Please have the courage to follow former Fed Chairman Volcker''s example and let the economy go through a difficult adjustment period so it can have a REAL recovery.
respectfully
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And the Fed's reponse:
Dear Mr. [redacted]:
Thank you for your most recent correspondence to Chairman Bernanke and the Board members.
The Chairman and Board members receive a great number of letters daily. As public figures with many daily responsibilities, they are unable to reply to all of those letters personally or to acknowledge receipt of each correspondence. However, they appreciate receiving observations and advice that bear on the Federal Reserve's responsibilities, particularly from people who have concerns about how the economy is functioning.
Also please know that the Federal Reserve's monetary policy actions are not aimed at correcting or influencing any particular market. The goal of monetary policy is to foster conditions conducive to sustaining sound, noninflationary economic growth over time and policymakers must make decisions that provide the greatest benefit overall.
Again, thank you for taking the time to share your views.
Sincerely,
JPD
Board Staff
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