Bernanke: "We Have Lost Control"

The Chicago Tribune, in a truly remarkable story with an anodyne title, “Economist recounts talk with Fed chairman” (hat tip reader Dwight who pointed to Michael Panzner) contains this stunner:

“Ben, you are playing a very unique role in world economic history,” {economist David[ Hale recalled telling Bernanke, an expert in the Great Depression. “You are the first central bank governor of the United States to preside over a recession with no decline in commodity prices.”

Bernanke could hypothetically limit inflation in commodities by raising interest rates, a policy that would restrict the flow of money but potentially lead to an avalanche of bank failures. At a financial conference in Florida on Tuesday, Hale, a Chicago-based economist for investment managers, hedge funds and multinational companies, paraphrased the Fed chairman’s response.

“We have lost control,” said Hale, quoting Bernanke. “We cannot stabilize the dollar. We cannot control commodity prices.”

I cannot stress how shocking this statement it is. The Federal Reserve, with a mere $900 billion dollar balance sheet, thought it could control, or even seriously manipulate, the currency and commodities markets? JP Morgan’s footings are nearly twice as large. The Fed simply is not a big enough actor to have that sort of impact.

The fact that the Fed chair knows so little about market that he ever harbored the delusion that he could control them means he is even less knowledgeable than I feared.

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38 comments

  1. Dave Raithel

    To be fair, I cannot tell where the paraphrasing stops and the quoting begins. The link back to the article reads:

    ‘Hale, a Chicago-based economist for investment managers, hedge funds and multinational companies, paraphrased the Fed chairman’s response.

    “We have lost control,” said Hale, quoting Bernanke. “We cannot stabilize the dollar. We cannot control commodity prices.”‘

    I don’t dispute that things are out of control. I heard on Market Report of people buying Treasury paper for no return… just so they’d have a safe place to put it while they figured what else to do, I guess. That surely indicates things are amiss. But might Bernanke have been given the job of shining a turd?

  2. Anonymous

    Yves,

    Excellent blog! I don’t know why it should surprise anyone that Bernanke admits that he’s lost control. He never had control of the situation from the beginning. It’s painfully clear from his statements since August of 2007 that he’s been behind the “8 ball”, as it were, from the beginning of this crisis. I actually feel sorry for him, because in about one year, he’s going to be out of a job and be known for being the man who broke the American economy, when we all know that Greenspan and de-regulation created this situation with too-low interest rates and the repeal of Glass-Steagall.

  3. Viv

    There’s just too much going on to keep track off.

    The credit markets, WaMu, Morgan, Goldman, AIG, moscow share slump, asian shares in freefall,TED spreads and LIBOR. House building permits tumbling, gold’s biggest spike in 28 years, t-bills at record lows. Phew!

    All this and we’re still in the early stages according to Roubini.

  4. Anonymous

    Yves,

    I liken you to the reporter witnessing the collapse and fiery consumption of the Hindenburg.

    You might help us all by standing back as observer and giving us some advice on where to put our money
    (I’m going with under the mattress, mixed currencies and gold coins).

  5. DaddieMac

    Boy Main Street will love this. Ben never had control, the market has always been bigger than the Federal Reserve, the FDIC and the treasury.

  6. aaron

    Well, Yves, doesn’t it seem like just yesterday when the Fed could magically influence the dollar and dampen inflation through surgical use of the interest and sage pronouncements on the financial system? As dave points out, this is paraphrase, and I have little doubt that bernanke knows as much about these markets as any of us. That the fed is smaller than JP Morgan is besides the point: it has more freedom as to using its money to help the economy, and also has certain powers that JP Morgan could mimic but couldn’t match.

    Surely you don’t mean to say that central banks everywhere, at any time, are useless?

  7. mickslam

    I agree with your point Dave, that bernake was most likely talking about the prior “control” they had, and not simply dictating prices.

  8. Yves Smith

    Dave,

    Good catch, and I will amend the post. Hale is sympathetic to Bernanke, so there is no reason to think the conversation was misrepresented, but better to be clear.

  9. Anonymous

    lets be honest.

    The real problems are greed, ponzi scammers, to much self interest, too little oversight, obscene and vulgar leverage, pompous asses, whimpy academics, an old fart that ran the Fed for too long , imbecilic homebuyers, hedge funds raiding stocks, overpaid nitwits everywhere, a pumped up standard of living not justified by production…… and thats just the preamble.

  10. Anonymous

    once again, hubris strikes again…..nothing's changed since ancient greece. seriously, there should be term limits/another Board asleep/something to prevent egomanical CEOs.

    KDB Offered to Buy Lehman Stake at $6.40 a Share (Update1)

    By Bomi Lim
    More Photos/Details

    Sept. 18 (Bloomberg) — Korea Development Bank had proposed to buy a stake in Lehman Brothers Holdings Inc. for $6.40 a share, valuing its offer at about 6 trillion won ($5.3 billion), Chief Executive Officer Min Euoo Sung said.

    Lehman, which filed for bankruptcy this week, wanted to sell its shares at $17.50, Min told lawmakers today in Seoul.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aUCpzDST65xE&refer=home

  11. Yves Smith

    mickslam,

    I have to disagree. Why would Bernanke talk about commodity prices, far outside the Fed’s purview? And Hale is sympathetic, not out do do a hatchet job or misrepresent him. “Control” is a very strong word, and I doubt Hale would have used it if Bernanke didn’t.

    Aaron,

    The size of a central bank’s balance sheet does matter. The Fed was far larger relative to the size of the financial system circa 1980. The fact that its total assets were roughly (I’m dong this from memory, but pretty sure it’s accurate) 2 1/2 times the size of the biggest bank gave it considerably more power as an actor.

    There is a propensity for people to want to cast observations as “either/or”. Saying the Fed has limits is not tantamount to saying the Fed is powerless. The post was about the Fed’s ability to influence commodity and currency prices, large markets outside of the Fed’s monetary policy arena.

    Paul Krugman said in March:

    And the usual problem with such intervention applies: the financial markets are so huge that even big interventions tend to look like a drop in the bucket. If foreign exchange intervention works, it’s usually because of the “slap in the face” effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses.

    And the problem now becomes obvious. This is now the third time Ben & co. have tried slapping the market in the face — and panic keeps coming back. So maybe the markets aren’t hysterical — maybe they’re just facing reality.

  12. Anonymous

    Since Greenspan made the following comment in a meeting in France on 09-26-05, I don’t find Bernanke’s statement particularly surprising. Once control of the deficit was lost, what other outcome could there be?

    ‘In an extraordinary revelation after a meeting between Thierry Breton and Mr Greenspan, M. Breton told reporters: “‘We have lost control,’ that was his [Mr Greenspan’s] expression.

    “The US has lost control of their budget at a time when racking up deficits has been authorised without any control [from Congress],” M. Breton said.’

    I also feel sorry for Mr Bernanke. I don’t think his prior experience prepared him in any way for his current job…In his first address to the pig men Ben made a comment, very telling, that he was glad that the big banks were not highly leveraged. His audiance laughed. In August of 07 Mr Bernanke had a cram course on derivatives to bring him up to speed. I wish him, and us, luck.

    River

    http://www.independent.co.uk/news/business/news/american-fury-over-greenspan-leak-508439.html

  13. Richmond Rambler

    RE: But might Bernanke have been given the job of shining a turd?

    When someone told director Stanley Kubrick “you can’t polish a turd,” he replied, “you can if you freeze it.” BB’s is thawing.

  14. Steve

    Bernanke simply could not have meant to say that the Fed recently lost control of commodity and FX levels, as the Trib article implies. An FX officer at the Fed told me over 20 years ago that the market was far too large to be forced in one direction or another—at best the CBs could tag a speculator and put a little fear into the markets—and there’s plenty of articles in the academic literature on the limits to CB intervention. Bernanke certainly know all this. And I don’t believe the Fed has ever thought that it could control commodity prices apart from the general pricing level. Anyway, what `we’ was Bernanke referring to? We the government, we the regulators, we the central bank, we the major central banks of the world, we as a sovereign state? I mean things are horrendous right now, but Bernanke is neither ignorant nor stupid.

  15. alan von altendorf

    Milton Friedman rightly taught that multiple competing privately bank-issued currencies, backed by hard reserves, were infinitely better than a monopoly fiat. So, yes, there’s a good case to be argued that central banks caused (and must always cause) bubbles.

    It’s too late and too crazy now to ask anyone to think, much less educate Americans on the virtue and prudence of free markets. US federal + state + local spending is more than 50% of GDP and public servants regulate every single business in the US, including and esp every lender and broker, so the popular outcry for more regs is basically more poison.

    End game, last act is fascism.

  16. Anonymous

    The rule is confirmed again, you can manipulate short term but you can’t affect the long term trend, the markets are to big such as the US consumers as a whole.

    Have you seen the latest TIC data? OMG

    How’bout the oversea markets tonight?

    Even the long term traders/analysts/pundits have never ever seen events like we are living through in real time now.

  17. Jojo

    Many might also be surprised by the following reported exchange in the NY Times between Bernanke and Barney Franks!
    ====================
    September 18, 2008
    A New Role for the Fed: Investor of Last Resort

    “The Fed is very stretched, and that’s why they’ve asked the Treasury to go ahead with these proposals,” said Lou Crandall, chief economist at Wrightson ICAP and a longtime analyst of the Fed’s market operations. “You don’t want the market wondering whether the Fed has enough reserves to handle the next supplicant.”

    Indeed, the role of the Fed chairman, Ben S. Bernanke, almost seemed to unnerve a leading House Democrat.

    “He can make any loan he wants under any terms to any entity or individual in America that he thinks is economically justified,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee.

    “I asked the chairman if he had $85 billion to bestow in this way. He said ‘I have $800 billion ”

    “No one in a democracy unelected should have $800 billion to dispense as he sees fit,” Mr. Frank said.

    I’ve got $800 billion to spend, says Bernanke!

  18. Yves Smith

    I still believe the use of the word “control” shows cognitive dissonance. Bernanke and his colleagues may know on an intellectual level that the forces at work are bigger than they are, but still think their job is to control outcomes, not on a day-to-day basis, but to keep them within certain parameters.

    Look at the Fed’s mission statement:

    Today, the Federal Reserve’s duties fall into four general areas:

    conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

    supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

    maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

    providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

    The statement was updated as of September 14, but when I first came across it, I think it was dated as of 2003 or 2005 and had “financial stability” as a duty. That’s not in any of the legislation passed by Congress. The Fed’s duties are price stability, full employment, and soundness of the banking system.

    So the Fed has fallen victim to mission creep. Its self-assigned expanded role has given it responsibility with only partial ability to execute.

    Again, I keep coming back to the fact that Bernanke discussed commodity prices as something that the Fed (or whoever “we” was) could or at some oiont had controlled. Commodity prices are so far afield of the Fed’s duties that the fact that he could say anything even remotely like “We have lost control…..We cannot control commodity prices” shows something seriously amiss.

  19. Anonymous

    Paul Volker said almost a year ago that “the Fed has lost control”. What did he mean? Volker stamped out inflation with sky high interest rates. He regained control of an economy that was out of anyone’s control.

    What we are witnessing today is far worse. The Fed can and has had a stabilizing effect on markets. This go round, instead of acting at the first hint of trouble, they waited until it was obvious that we were in trouble. Don’t forget Alan Greenspan’s famous statement, just as he was retiring, “Now we are in a state of fear”. If he was afraid, the rest of us should have been shaking in our boots.

    Bernanke has simply been tinkering with the economy and is now too busy putting out fires to come up with a solid solution. It is one thing to be an academic, it is quite another to be a leader.

  20. SilverDollar

    Yves said,

    “Commodity prices are so far afield of the Fed’s duties that the fact that he could say anything even remotely like “We have lost control…..We cannot control commodity prices” shows something seriously amiss.”

    Yves, I wonder if what’s “amiss” is that Bernanke doesn’t really know what his job is. He’s been single-handedly thrust into the position of saving a financial system that we Americans broke. I actually feel for the guy, but the problem, as Mish correctly states, is the Fed itself and fractional reserve lending.

  21. doc holiday

    Re: “he is even less knowledgeable than I feared.”

    If you think Ben is a little slow, think about how realistic it is that Warsh is actually retarded and that the only reason he was placed in a position of power was political nepotism — and now we have a Fed (just as one example) filled with ignorant people that are inexperienced in economics but very welcome at cocktail parties and social gatherings of like-minded gadflies that have mush to say about nothing. Oh do go on Mr. Warsh, where did you get that wonderful tie and who does your hair… Oh really and your stylist does Mark Foley, along with that stunning Mr. Browns hair,oh, he looked so nice during that Katrina storm…. SNARK

  22. Richard Kline

    So Yves, I’m _not_ surprised to hear that this was Ben B.’s perspective; it was assuredly Alan Greenspan’s view of himself and his position in the world economy. —And not entirely wrong. Sure, the Fed _by itself_ has only so much weight, although the ability to steer the lean on the world’s reserve currency is far more of an influence than the Fed’s own balance sheet. But Greenspand, quite clearly, ACTIVELY COLLUDED with all the major iBanks on his moves: He did exactly what they wanted, and so they all played it ‘his’ way. And the iBanks had a serious chokehold on the shadow banking system by virtue of finding them credit and being the chokepoint on the hedgies dealies. So the iBanks _and_ the Fed together came much, much closer to controlling the financial system. Not control, as in absolute discretionary power, but control as in, knowing what’s up first, putting their weight in the right place, rolling the show their way, and gaming the system to crush non-compliers. I do not personally doubt that the Fed had info from the big Is about commodity moves, and we have discussed before the Fed’s gaming the equity markets. _This_ was what Greenspans’ real game was about to me, colluding with the major players to amp his/their plays. And that wasn’t simply an illusory control.

    —And Ben Bernanke is right that the situation has now spun out of the grip of that set of players, who thus by definition have lost the ‘control’ that they had. That was bound to be the end of the kind of collusion I would posit, so I don’t regret it at all. But we are all getting collateral damage in consequence, in all senses of the phrase. If we don’t get fascism out of it, the learning experience will be salutory: the outcome on that is, to me, too close to call. . . . There are things _worse_ than market crashes. It was the hyper-out of the 20s in Deutschland, and the financial crash of the 40s in Argentina which both paved the wave for terror and execration. Hmmm.

  23. Blissex

    «The size of a central bank’s balance sheet does matter.»

    It does matter but it matters a lot less than regulation, at least domestically.

    Even a central bank with a small balance sheet can leverage their regulatory powers into very large changes in the (domestic) markets.

  24. Blissex

    «He’s been single-handedly thrust into the position of saving a financial system that we Americans broke.»

    That’s because of the ideology of his party: the Republican faith is that the government is always the problem, never the solution. More practically, the government is already running a colossal deficit because of the borrow-and-spend policies of the Republicans.

    So they are using the Fed as a fig-leaf, as a frontman, to pretend that problems that are fiscal in nature can be solved with monetary policy.

    Because the faith says that the only fiscal moves one can do are cutting taxes and spend more on wars and corporate welfare.

    The Republicans hope that they can use the Fed to kick the can down the road and that if Obama gets elected and has to use the government budget to fix the problems then they can attack him for wasting public money and corporate welfare.

  25. Anonymous

    I can’t stress how absurd this post is, for a number of reasons.

    The first few commenters begin to touch on them. You really can’t believe the man is so stupid as to not appreciate the limitations of the idea of “control”?

    Give him a little credit, and maybe a little less to your own personal experience in life and the markets. And you can do better than cheap shots sourced from Panzner.

  26. Anonymous

    “We have lost control,” said Hale, quoting Bernanke. “We cannot stabilize the dollar. We cannot control commodity prices.”

    I’ve met David Hale and feel sure that he would be conscientious about quoting Bernanke accurately.

    But surely “stabilizing the dollar” and “controlling commodity prices” are well down on the Fed’s list of priorities, in the midst of toppling financial institutions.

    After all, even as crude oil has bubbled higher for the past seven years, the Fed has dismissed its significance by using core PCE and core CPI to say, “That don’t matter.” NOW they’re suddenly concerned about commodity prices? Concerned about them rising or falling? If they didn’t matter on the way up, why do they matter on the way down?

    And has the U.S. EVER cared about the external value of the dollar, whose holders it has shafted over and over through the years?

    In other words, unless Bernanke’s remark was taken out of context, he’s lost his grip on the order of priorities. When your house is on fire, you don’t worry about fixing that leaky faucet.

    The larger issue, which has concerned me for years, is that a $900 billion entity is (as Yves says) not remotely big enough to rule the markets. I asserted when Bernanke came on board that he would be remembered for growing the Fed’s balance sheet at a fantastic rate, perhaps $100 or $200 billion a year.

    Well, it’s already happening, but big chunks of the various term facilities are being treated as off balance sheet. It’s not clear to me that this accounting convention is valid.

    Bernanke is playing with fire, because a real meltdown would bring a fierce surge of populist political anger. If he escapes lynching, Bernanke may well see the Federal Reserve nationalized and made a directly-ruled creature of Congress. If so …

    Rock on, gold! Dollars to dimes, in the blink of eye!

  27. Anonymous

    Bernanke was put into a bad position by Greenspan. I remember when he took over the Fed, the Economist had a cartoon depicting Greenspan and Bernanke in a track relay. The baton Greenspan was handing to Bernanke was labeled “economy” and was a stick of dynamite.

    That said, he can’t control everything. The past year has shown us they worry more about systemic risk, but I think there’s a part of them that follows what the markets say and they sometimes give in to Wall Street (Jim Cramer tirades).

    “So the Fed has fallen victim to mission creep. Its self-assigned expanded role has given it responsibility with only partial ability to execute.”

    Messiah complex.

  28. SPECTRE of Deflation

    So several months ago Ben said this, but we learn of the conversation in the last couple of days? If the FED Chairman made this statement, I would guess it would be important news, but we know that Ben supposedly made this Earth Shattering statement months ago. I think Hale is more full of Shit than a stuffed Christmas Turkey.

  29. Anonymous

    Yves, it’s reasonable to agree or disagree with anything Bernanke has done, but for you to suggest that he is basically stupid and does not understand markets just makes you sound foolish and arrogant. It actually weakens your critique of him because the assumption he knows little about markets is so utterly lacking in credibility that any conclusions drawn from such an assumption are immediately suspect. I’d wager his knowledge is a good bit more than yours, even though I strongly disagree with some of his decisions. Say he lacks judgment if you must, but lacks knowledge? It’s just not so.

  30. VoiceFromTheWilderness

    The comment indeed speaks volumes. Another closely related point that it revealed, even under the assumption that the exact quote is somewhat garbled: Bernanke is even trying to influence commodity prices? That might make sense if inflation were tied to commodity prices but even a cursory knowledge of the inflation statistics shows that they are strongly coupled to non-commodity factors: housing, hedonic adjustments for computer prices etc. Further the Feds favored ‘core CPI’ strips out… oil and food. Aren’t those um, commodities?

    Another classic example of complete double think from our Republican ‘ideologues’

  31. Matthew Dubuque

    Matthew Dubuque

    The key point is that David Hale (who was mistaken at key points in 1982 and 1987) “PARAPHRASED” Bernanke. That’s what the article says.

    I’ve read more than 30 papers on monetary policy by Bernanke (far more than this unknown reporter and likely more than David Hale) and it’s obvious from even a cursory reading of them that Bernanke understands the limited role of the Fed. This is not rocket science.

    Let’s hear the actual tape. Obviously there were lots of other reporters there and no other reporter commented on what would have been a truly stupid and shocking statement, had it occurred.

    Let’s hear the tape, before we rely on some third hand report that “Paraphrases” Bernanke’s comment.

    Matthew Dubuque

  32. groucho

    Whatever the reality of active, covert manipulation, the world’s central banks do indeed control the Gold Price, as former Federal Reserve governor Wayne Angell put it in 1993.

    “The price of gold is pretty well determined by us…But the major impact on the price of gold is the opportunity cost of holding the US dollar…We can hold the price of gold very easily; all we have to do is to cause the opportunity cost in terms of interest rates and US Treasury bills to make it unprofitable to own gold.”

    price fixing is at the core of the FED’s “central planning” job duties.

  33. Walt Pohl

    groucho, that’s not what that quote means. That quote just means that if T-Bills are a better deal than gold, people will hold T-Bills instead of gold.

  34. groucho

    Bernanke is well aware of the information content of the gold price. To NOT be able to counteract it the way Volker did is the crux of “LOST CONTROL”

    from Adrian Ash:

    “Allegations that the world’s major central banks actively work together to suppress the price of gold were only given credence in 2004 when Paul Volcker – chairman of the US Federal Reserve at gold’s all-time top – said in his memoirs that “letting gold go to $850 per ounce was a mistake” during the last great bull market in gold bullion.

    At one of the policy meetings led by Volcker in late 1979, his Federal Reserve committee noted the threat of “speculative activity” in the Gold Market. It was spilling over into other commodity prices. One official at the US Treasury called the gold rush “a symptom of growing concern about world-wide inflation.”

    “We had to deal with inflation,” as Volcker said in a PBS interview of Sept. 2000. “There was a kind of great speculative pressure.

    “It was the years when everybody wanted to buy collectibles from New York. The market was booming, and other markets of real things were booming – because people had got the feeling that things were inflating and there was no way you could stop it.”

    But besides waving a gun at anxious gold owners, there seemed only one other route to stopping speculators profiting from – or rather, defending themselves against – the demise of the Dollar.

    Fix it up with higher interest rates. The Volcker Fed took US interest rates to 19%…and put the real cost of Dollars above 9% after adjusting for inflation. The Gold Price sank almost in half inside 12 months.”

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