Today In Bubble History

From the transcript of the Federal Reserve’s policy meeting on January 31, 2006:

"Needless to say, it’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. And if I might torture a simile, I would say, Mr. Chairman, that the situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot."

-Janet Yellen to Alan Greenspan. Yellen was president of the Federal Reserve Bank of San Francisco at the time. She was promoted by Obama to her current position of Vice Chair of the Board of Governors of the Federal Reserve for a four-year term ending October 4, 2014. She simultaneously began a 14-year term as a member of the Board that will expire January 31, 2024.


"In Alfalfan terms, I’m just a sprout in the crop of otherwise experienced men and women. But I’m sure they would agree with me, without getting too dramatic, about the appropriateness of Henry V’s remarks at Agincourt -- and I’ll rephrase them -- economists and bankers now asleep (remember these are bankers) shall think themselves accursed that they were not here. I consider myself privileged to have been here, Mr. Chairman. This isn’t Agincourt, but it’s important. I’ve served under two saxophone players now, and I would say without question, you’re a leader of the very best kind, and I thank you for your leadership."

-Richard Fisher to Alan Greenspan. Fisher was president of the Federal Reserve Bank of Dallas at the time, a position he still holds.


"I’d like the record to show that I think you’re pretty terrific, too. And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative."

-Tim Geithner to Alan Greenspan. Geithner was president of the Federal Reserve Bank of New York at the time, and was promoted by Obama to his current position of Treasury Secretary.

The Federal Reserve released this transcript a few weeks ago after keeping it from the public for six years. Transcripts from all subsequent years, including those containing the Fed's discussions during the Wall Street bailouts, remain secret.

Straight Outta Pyongyang

Yesterday the Federal Reserve released the transcripts of its 2006 Federal Open Market Committee meetings.

I didn’t think I could be surprised at this point by these bubble-era artifacts, but there really is a lot of maddening stuff. Binyamin Appelbaum hits some of the main points here. The WSJ has a meeting-by-meeting analysis here. Take your blood pressure medication first.

These transcripts are the latest proof that the Fed desperately needs not just more oversight and transparency, but real reform. A good start would be for Congress to subpoena all FOMC transcripts through 2010 and to change future releases to a one-year lag. These are tenured, unelected policymakers whose disastrous decisions -- often made with cultish deference and groupthink-inflected jokes and laughter, the new transcripts show -- destroyed retirements, impacted every American, and affected the course of U.S. history. The public must be able to judge their individual performance and basic competence in a timely fashion. That's impossible when the best record of that performance is kept under lock and key for five years.

And on the subject of basic competence, one can’t help but notice that many of the participants in those 2006 meetings are still at the Fed. Tim Geithner, whose obsequious tribute to Alan Greenspan in January 2006 would have been perfect for an invasion-eve meeting at Saddam’s palace of the Baghdad chapter of Toastmasters International, failed upward. These people are still running things.

To the extent it reflects increased awareness of and outrage over these issues, Ron Paul’s popularity is heartening (and he has the enthusiastic endorsement of this blog). One hopes he won’t settle for a primetime stemwinder on the Fed at the convention. He deserves – and this country urgently needs – much more than that.

Occupy Wall Street

I'm late on this, but in general I am sympathetic to OWS. And unlike some who claim otherwise, I think the goal is quite clear: to reverse a radical reordering of American society that has taken place in recent years (and in this sense OWS is essentially a conservative movement). I'm hesitant to give it an open-ended endorsement, because the nature of the movement makes it hard to predict the direction it may ultimately take and the measures it could resort to.

When OWS started, I wondered how effective it could be without at least some practical demands; a "greed is bad" platform is fine, though a tad open-ended in terms of resolution. But I've been surprised by the traction the movement has had. I do think if the goal is actual results, then it's important -- and time -- for OWS to issue some realistic, achievable demands under the largest ideological tent possible. A focus of this must be the Federal Reserve, the main instrument of the economic and social reordering against which OWS stands. Wouldn't it be natural to demand the resignation of an unelected official who is more responsible for the bubble and crash than any current policymaker? Someone who engineered massive covert bailouts while fully expecting the details of his actions to remain forever secret? Every Republican candidate for president has either criticized Bernanke or vowed to replace him. The Fed is a main focus of the Tea Party. Why not tap into that sentiment? In doing so, OWS could divide and conquer by forcing Republicans to either praise or denounce a platform supported by their most passionate grassroots members. I'm not the only one to see how effective -- or, depending on one's perspective, dangerous -- this could be (read the link for the Tea Party mention). More soon, hopefully, on why the protesters must focus on the Fed and what they should demand.

Related, it's outrageous that the Obama administration and congressional Democrats claim any kinship with OWS. Obama reappointed Bernanke, and the White House twisted arms and made threats to get him confirmed in a Democrat-controlled Senate and to block the push for a full Fed audit. If you don't know who voted in favor of Bernanke's post-bailout reappointment, scroll to the bottom of this post -- some OWS-friendly Democrats hope you won't.

The situation in Egypt has changed in recent days, but after Mubarak's fall, I wrote about the conduct of the military and asked: "Is this type of moderation and restraint during a crisis part of our own national character?" While there are of course institutional differences in the U.S. between local law enforcement and the military, I fear we may have gotten a glimpse of the answer. The actions of some police -- don't miss this new video -- have been despicable and chilling. A few New York cops have done a great job of destroying what remained of the public's 9/11-forged goodwill. This thuggery must be turned back.

Finally, I can report that a few videos have been pinging up and down Manhattan's canyons. Two of them are below, and they have some of the right people nervous -- the first one for obvious reasons.

This Week In Bubble History

"Low interest rates mean that people, for example, have got the capacity to refinance their home. And probably some of you all have done that. That's helped our economy. The Azels, who I met with today, Kelly and Dan -- by the way, he's got a scratch handicap. [Laughter]. I told him I needed a lesson or two. He said that they were able to take their first home -- they're newly wed, and the first thing they do is they buy a home, thanks to low interest rates. It's a fantastic way to start off your marriage. They then were able to refinance, which meant they could do some remodeling on their home. They paid off the loan on their car.

"Low interest rates has helped the American citizens. It's helped them buy a home. It's helped them refinance if they own a home. It's put more money in circulation, which is good for job creation. Low interest rates makes it easier to buy a home. And homeownership is at near-record highs, and that's good because we need to be an ownership society in America. We want people owning their own home. If you own your own home, you have a vital stake in the future of this country.

"And even though homeownership is at near-record highs, we've got too many of our fellow citizens who happen to be minorities who don't own a home. Seventy-five percent of the Anglos in America own a home. The minority homeownership in America is below 50 percent. And it seems like to me we've got to do something about it. If it's good for America that people own a home, we want people from all walks of life owning their own home.

"And so I let out a goal. I said over the next decade, we want there to be 5.5 million new minority homeowners. That's why Mel is here. He helped set the goal. He is going to help implement the Federal policy I'm about to describe to you about how to meet that goal. Last year, we did a pretty good job. There's now 809,000 new minority homeowners in America. And that's positive for the country. It's good for the economy. It's also good for the spirit of our country that more people are owning a home.

"But here are some of the things that we intend to do, and we discussed today earlier. Sometimes people have trouble finding the downpayment for a home. It makes them nervous when they hear the downpayment. We need to have a down-payment fund to help people with downpayments if they qualify. The Congress -- the House passed my request for $200 million a year. It's stuck in the Senate. The Senate needs to act. If they're interested in closing the minority homeowner-ship gap, they need to act on the downpayment fund.

"A lot of times, there are people -- think about buying a home, and they don't like the complexity. They don't understand what it means and how to buy a home. It's obviously a big deal when somebody purchases a home, but it's confusing. People get nervous about it. And so we need more counseling and more education to make sure our fellow citizens know what it means to buy a home and can get comfortable with the idea of buying a home. And so we've doubled the amount of money available for community-based programs, faith-based programs to be able to brief their parishioners and/or their fellow citizens about the opportunities and the hope and what it takes to be able to purchase a home.

"And finally, one other thing we're doing -- amongst many, by the way -- is simplifying the process to buy a home. A lot of people thinking about buying a home and all of a sudden they take a look at the fine print, and it kind of makes you nervous when you see a thick pile of paper with fine print. You're not exactly sure what you're buying into. So not only do we need to have counseling and education, but we've got to make sure the forms are more simple so that people know what they're doing. No, we're going to close this gap for the good of America."

-George W. Bush, October 15, 2003 in Dinuba, California -- per capital income of $11,566, and the epitome of the state's eventual housing meltdown.

The transcript notes the crowd's laughter. The howls of disapproval from today's GSE/CRA-blaming Right must have been edited out.

Finally Coming Around?

Rick Perry's comments this week about the Federal Reserve confirmed that the Fed has made itself a legitimate campaign topic, but there were signs in recent months, including this interesting entry from Bill Kristol, that Republicans as a party would start to co-opt this issue. They had ceded it to Ron Paul and a few others because Fed rate policy has meant an ongoing bailout of the financial sector. It will be interesting to see if the trend continues because of electoral exigencies. Is the speculator/too-big-to-fail class, with its eyes on the 2012 prize, willing to sacrifice the Fed temporarily -- especially now that the Fed has publicly committed itself to bailout-level interest rates for the next two years?

Maybe there's an important distinction to be made between grassroots/Tea party Republicans and Fed/financial industry-friendly ones. Here is the latter's response to Rick Perry's remarks. It's long been obvious that when it comes to criticism or even oversight of the Fed, there is a supra -- or perhaps more appropriately, sub -- political element for which party identification is irrelevant.

The Fed's recent announcement of zero percent rates for the next two years was chilling, less for the danger aptly noted by Kristol's correspondent than for the desperation-driven geopolitical moves that boxed-in policy necessitates -- "days, not weeks" at a minimum.

Almost Comical Now

"In part, the recent weaker-than-expected economic performance appears to have been the result of several factors that are likely to be temporary...the most recent projections by members of the Federal Reserve Board and presidents of the Federal Reserve Banks, prepared in conjunction with the Federal Open Market Committee meeting in late June, reflected their assessment that the pace of the economic recovery will pick up in coming quarters. Specifically, participants' projections for the increase in real GDP have a central tendency of 2.7 to 2.9 percent for 2011, inclusive of the weak first half, and 3.3 to 3.7 percent in 2012--projections that, if realized, would constitute a notably better performance than we have seen so far this year. FOMC participants continued to see the economic recovery strengthening over the medium term..."

-Ben Bernanke, congressional testimony, July 13. One month ago.

Pathological

The eyes of all were turned to the Reichsbank. The pressure exercised on it became more and more insistent and the increase of issues, from the central bank, appeared as a remedy.

The authorities therefore had not the courage to resist the pressure of those who demanded ever greater quantities of paper money, and to face boldly the crisis which would be, undeniably, the result of a stoppage of the issue of notes. They preferred to continue the convenient method of continually increasing the issues of notes, thus making the continuation of business possible, but at the same time prolonging the pathological state of the German economy.

-Costantino Bresciani-Turroni, The Economics of Inflation, 1931


More here (don't miss the last two paragraphs). For reappointing someone who should go down in history as one of Washington's most destructive and inept policymakers ever, Obama deserves stock market wipeouts and the heat he's getting on the economy -- along with the electoral consequences.

Turned Into Chumps

Robert Wenzel (via TAC):

Instead of long-term conservative planners ruling the roost, it is the Age of the Hustlers. An acquaintance of mine, a lawyer, with some friends, doctors and such, put together some money during the boom and bought huge vacation properties on the coastline of South Carolina. The properties are mostly intended as investment properties that are rented out by the week. After the real estate market crashed, this lawyer, though all the investors in his group had plenty of cash, decided it was time to spin the banksters for a major reduction in the mortgage payment. So he called a meeting of the partners and advised them that they should stop making the mortgage payments. Some raised concerns about damage to their credit ratings but the lawyer explained how he would handle the negotiations and why it wouldn't damage their credit ratings and so the group stopped paying the mortgage. After some months of this, the bank finally agreed to a major reduction in the mortgage payment. The hustlers won. They pulled a mini-Goldman Sachs play, of a sort, and came out on top. The world is becoming much more of this hustlers game. The conservative folk, who survive by playing it straight, see rules change and bend before their eyes. They are the ones that get stuck. It is almost impossible to make sound long-term plans when Fed Chairman Bernanke plays the long-term like a fiddle, sometimes hitting high notes by lowering interest rates and at other times low notes by raising interest rates.

The old and unworldly had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience were punished by starvation and death, but rapid appraisal of new situations and speed of reaction were rewarded with sudden, vast riches.

-Sebastian Haffner on the early 20's Weimar economy in Defying Hitler

Don't Blink

I drove by the Cos Cob Gulf station (across from Dunkin Donuts) and noticed its price for regular was $4.29. That was a painful sight but after dropping off a shipment at Packages Plus and going back the other way – elapsed time, 7 minutes? – I saw that the price was now $4.41. Owie.

-Blogger in Connecticut


So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."

-George Goodman, Paper Money

Ego Trip

A man who has been accustomed to rely on it [the value of the currency] cannot help feeling its degradation as his own. He has identified himself with it for too long and his confidence in it has been like his confidence in himself. Not only is everything visibly shaken during an inflation, nothing remaining certain or unchanged even for an hour, but also each man, as a person, becomes less.

The natural tendency afterwards is to find something which is worth even less than oneself...It is not enough to take over an old contempt and to maintain it at the same level. What is wanted is a dynamic process of humiliation. Something must be treated in such a way that it becomes worth less and less, as the unit of money did during the inflation. And this process must be continued until its object is reduced to a state of utter worthlessness. Then one can throw it away like paper, or repulp it.

-Elias Canetti, Crowds and Power

Doom Loop

The Fed's Dennis Lockhart made some news this week:

Fed's Lockhart: Oil shock could lead to QE3 If oil prices continue to climb, it could force the Federal Reserve to make a new round of asset purchases, according to Atlanta Fed President Dennis Lockhart. Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn't think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb. "If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation," Lockhart said at the conference.

From my article in the September 1, 2009 issue of The American Conservative:

The problem is that employment and other output-gap components can remain intractably weak in the face of rising prices. For Bernanke, however, rising prices are subordinate to the output gap. This can create a cycle in which commodity inflation saps money from the broader economy and causes deflation, which the Fed in turn fights with ever easier money.

One sign a nation is gripped by economic madness (see Fergusson's When Money Dies) is when perverse logic like Lockhart's comes to be seen as not only acceptable but sensible -- and most people forget they ever thought otherwise.

You Know Nothing Of My Work

John Taylor gets his Marshall McLuhan on. This situation might be almost as amusing as the theater line scene in the film, except we just learned that the largest monetary experiment in history is based at least partly on a flawed understanding of a fundamental policy rule.

As the consequences of this incompetence and zealotry hit the public at the gas pump and grocery store, one wonders how much longer Congress can remain complicit before it imposes the accountability Taylor advocates in the last paragraph of his post.

Sweep Of History

I had an overwhelming desire to have been strolling through Cairo last night with a pretty Egyptian lass as my guide. Didn't happen, so a few armchair comments:

1. As an admittedly lay observer, I was struck by the strength of Egypt's basic social fabric. Egyptians as a whole seem highly educated, informed, and tech-savvy. Combine this with an apparently innate or at least newfound national resilience, determination and unity, and you've got potent potential for the future. One wonders what the country could have achieved during the last three decades without the yoke of oppression and parasitic, institutionalized corruption. Might this underlying national potential -- not concerns about longstanding peace treaties or the Muslim Brotherhood -- really be what's got some people worried?

2. Obama nailed it yesterday when he made comparisons to Gandhi and MLK. This was peaceful protest's finest hour, and it will stand in human history as an example of what's possible through nonviolence. It made our own self-styled revolutionaries -- with their moronic exhortations to "reload" and "aim" and their references to Second Amendment remedies -- look like hysterical dilettantes.

3. I was amazed by the Egyptian military as an institution. Silly sideshows like the Oath Keepers aside, is this type of moderation and restraint during a crisis part of our own national character? There is important though imperfect precedent: Kent State, Anacostia Flats in 1932, Waco. Somehow, even with the combustible mix of national rage and a dominant military, Egyptians managed to do better. Let's hope we don't get the chance to find out if we've learned anything from them.

Not Interested in Charlie Sheen's Stomach Ache

So I've been watching Al Jazeera's streaming coverage of Egypt, and reading posts like this and scary reports like this:

Fed's Hoenig says QE3 "may get discussed" The Federal Reserve could debate extending its bond-buying program beyond June if U.S. economic data prove weaker than policymakers expect, Kansas City Fed President Thomas Hoenig said. Another round of bond buying "may get discussed" if the numbers look "disappointing," Hoenig told Market News International in an interview published on Tuesday.

And that's the Fed's most strident hawk.

I haven't posted much about the Fed and Bernanke recently. The current situation -- an unelected zealot conjuring up billions every day and inflating yet another asset market bubble, apparently immune from any effective checks on his conduct and with no consequences for his past incompetence and complicity -- is too disheartening. But I wonder if there is any debate or even understanding within the Fed of the global consequences of its current policy, which is contributing to unrest in the Middle East and elsewhere via rising food and commodity prices.

A few months ago I had drinks with a congressional staffer, and we talked about the symbiotic relationship between Congress and the Fed. It's a tacit understanding: politicians need the Fed to effectively finance projects in their home districts and create trickle-down tax receipts (have you heard any elected officials express concern about the current stock market bubble?). In return, the Fed expects minimal oversight and criticism.

This arrangement is nothing new, but the economic consequences have never been more obvious. Except for a small group that includes Ron and Rand Paul, DeMint, Vitter and a few others, there really is no desire in DC to rein in the Fed before it crashes the system yet again and takes a lot of the world with it. As I said: disheartening.

For The Time Capsule

The opening chapter of Tom Friedman's next book. Note the Homeland Security-scripted announcement on the loudspeaker in the video...perfect in more ways than one.