Bernanke | The Daily Capitalist

Why Bernanke and Geithner Aren’t Sleeping Well

By Jeff Harding

Fed Chairman Ben Bernanke warned Congress about the risks of Obama’s massive spending schemes:

Federal Reserve Chairman Ben Bernanke warned Congress and the White House that the U.S. economy will suffer if they don’t move soon to rein in the federal budget deficit, which the Fed chief blamed for helping to push long-term interest rates higher. …

Yields on long-term Treasury bonds have been rising despite the Fed’s efforts to push them down by purchasing Treasury securities. The Fed wants Treasury yields lower because they are a benchmark for many other private-sector interest rates — such as rates on mortgages or corporate bonds.

“Concerns about large federal deficits,” Mr. Bernanke said, are one cause of the unwanted rise in yields. The wider the deficits, the more the Treasury borrows and the higher rates go. Wider deficits also stir inflation fears, which also push Treasury yields up.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer run, we will have neither financial stability nor healthy economic growth,” Mr. Bernanke said in prepared testimony to the House Budget Committee.

The White House estimates the budget deficit will exceed $1.8 trillion this year and shrink to about $900 billion by 2011. That, the Fed chairman said, would push debt to 70% of gross domestic product by 2011 — which would be the highest level since the early 1950s — from 40% of GDP before the financial crisis began.

[Emphasis added]

Secretary of the Treasury Tim Geithner has been doing a dog and pony show in China at the same time. He said on June 2:

Speaking on the second day of a closely watched visit to Beijing, Tim Geithner said there was “a very sophisticated understanding” in China about why the US needs to run large budget deficits in the short term, although he repeated the pledge to sharply reduce deficits when the crisis is over.

“I sense a fair amount of confidence not just in the basic underlying strength of the US economy but in our capacity not just to solve this crisis, to get growth back on track, but to go back to living within our means,” Mr Geithner told reporters.

These two events are not coincidental.

On May 21 S&P threatened to cut Britain’s AAA sovereign rating because their debt level was approaching 100% of GDP. On the same day Geithner said:

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television. He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year. …

“The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down,” he said. “These early signs of stability are very important” although “this is still a very challenging period for businesses and families across the United States.”

I think now you know why Geithner took off for China the following week. China and Japan hold 23% of US debt. … Continue reading Why Bernanke and Geithner Aren’t Sleeping Well

Bernanke: A Stunning Revelation

By Jeff Harding

Fed Chairman Ben Bernanke gave a startling commencement address for the Boston College School of Law Class of 2009 this week. He admitted an apparent turnabout of his fundamental views of economics. No news media picked up the significance of what he was saying.

After the introductory and self-humbling remarks usually made by great men at these events, he made the following revelatory comment:

Instead, I’d like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality. As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy.

The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming.

Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.

[Emphasis added]

Let me translate this for you on two levels. On one level he is talking about his personal belief in the failure of economic prediction, and at another level, is the realization by him of the failure of the science of econometrics. No small thing.

Here’s what he says in a nutshell:

He has spent his life trying to predict economic behavior.
The tools used to predict the future have not been very successful.
The science of economic prediction cannot be based on mechanistic models suitable to measuring physical matter.
Our knowledge of human behavior will always be imperfect.
Therefore, human behavior is very, very difficult to predict.

This is a humble and revealing statement from a man who believed the Fed could prevent a depression by carefully applying the monetary tools of the Fed. … Continue reading Bernanke: A Stunning Revelation