Explaining Southern California's economy

Ben Bernanke tells Congress that we need negative interest rates

Bernanke Testifies Before House Financial Services Committee

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WASHINGTON, DC - FEBRUARY 29: Federal Reserve Bank Board Chairman Ben Bernanke testifies before the House Financial Services Committee on Capitol Hill February 29, 2012 in Washington, DC. Bernanke was testifying about the Fed's Semiannual Monetary Policy Report. (Photo by Chip Somodevilla/Getty Images)

Federal Reserve Chairman Ben Bernanke testified this morning in front of the House Financial Services Committee. Reuters has a nice, brisk summary of his main responses to questioning from members of Congress. There were two very interesting exchanges, resulting in some cryptic replies from Big Ben. Here's the first, on interest rates, which the Fed wants to keep as low as possible through 2014:

It is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can't go below zero. We have an economy where demand falls far short of the capacity of the economy to produce. We have an economy where the amount of investment in durable goods spending is far less than the capacity of the economy to produce. That suggests that interest rates in some sense should be lower rather than higher. We can't make interest rates lower, of course. (They) only can go down to zero. And again I would argue that a healthy economy with good returns is the best way to get returns to savers.

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Where's the inflation? It's Ron Paul versus Ben Bernanke PART II

Ron Paul Continues Iowa Campaign Tour

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LE MARS, IA - DECEMBER 30: Republican presidential hopeful U.S. Rep Ron Paul (R-TX) speaks during a town hall meeting at the Le Mars Convention Center on December 30, 2011 in Le Mars, Iowa.

Last week, I wrote about how there's no significant inflation in the U.S. economy and that critics of the Federal Reserve's policies, chiefly Ron Paul, should admit that they were wrong and find something else to complain about. Such as Fed Chairman Ben Bernanke's inability to address the central bank's other mandate, maximum employment. With an unemployment rate at 8.3 percent, we're far from it.

The response from the commenters was swift, copious — and merciless! I got 120 comments, by far the most ever for a DeBord Report post, and all the one's that I didn't write myself disagreed with everything I had to say. Well, one didn't entirely disagree. This person just said I was as off-the-mark as Kenneth Rogoff and Paul Krugman and shouldn't be blamed.

I'll hasten to say at this point that I'm really fine with with this. I actually like being vigorously attacked, and I think that a good blogger brings the comment stream into the process. And so I'm doing that now (the comments are unedited, by the way).

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Where's the inflation? It's Ron Paul versus Ben Bernanke

There's probably no more dogged critic of the Federal Reserve than Ron Paul, the Texas Republican congressman who's also running — and running, and running — for President. Paul had a halfway decent showing in the most recent primaries and caucuses. And there's a school of political thought that figures his staunch base and need to spend very little money to stay in the race will keep him hanging around long after more legitimate contenders had dropped out. Plus, he has an heir in his son Rand Paul, a Kentucky Senator. 

Ron Paul is the most economic of the current crop of Republican presidential candiates. There are times when his entire campaign seems based not on solving domestic problems, nor pursuing America's foreign policy, but on getting rid of the twin evils of paper money and the Federal Reserve. A lot of people find Paul sort of daffy. See the video I've embedded above, in which he meanders through a host of very Ron Paulist conspiracy theories, laconically foiled by the Fed Chairman, Ben Bernanke.

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The Federal Reserve is a hedge fund that pays its employees NOTHING!

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Federal Reserve Bank Board Chairman Ben Bernanke delivers remarks at the Fed Sept. 15, 2011 in Washington, DC.

The New York Times' Steven Davidoff — the Deal Professor — argues that the Federal Reserve is actually the world's most successful hedge fund. But it's not like any other hedge fund. It creates its own money and doesn't care about profits (hedge funds borrow lots of other people's money and are OBSESSED with profits). It also pays its employees squat for making about $77 billion in 2011. 

By the usual hedge fund rule of "2 and 20" — a 2 percent management fee plus 20 percent of the profits — the Fed's staff should be dividing up more than $14 billion on profits, exclusive of whatever it might charge to run $3 trillion in assets (2 percent of that would be $60 billion).

Here's Davidoff:

I call the Fed a hedge fund because it is operating like one, leveraging its balance sheet to earn huge profits. The main difference between a hedge fund and the Fed is that the Fed effectively creates its own money, so it doesn’t have any borrowing costs, meaning yet more profits. Remarkably, the Fed’s profits are also an afterthought. The Fed is trying to stabilize and increase the United States economy in the wake of the financial crisis, and its profits are a nice byproduct.

Still, these earnings blow away any other hedge fund profits.

The Fed employees who manage this operation receive a federal salary for their efforts. The money is well above the pay of the average American but still relatively modest compared with those in the financial industry. The top salary class at the Federal Reserve has a maximum of $205,570 a year. Ben S. Bernanke, the chairman of the Federal Reserve, earns $199,700 a year, while the other members of the Federal Reserve board earn $179,700.

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The Fed: No longer a temple of secrets

Mercer 1163

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Secretary of the Treasury Timothy F. Geithner (L) and William C. Dudley (R), President and Chief Executive Officer of the Federal Reserve Bank of New York, listen to Federal Reserve Chairman Ben S. Bernanke (C) speak during a hearing of the House Financial Services Committee on Capitol Hill March 24, 2009 in Washington, D.C.

As Bloomberg reports, the Federal Reserve is trying to change its image. And the chief image-changer is none other than Chairman Ben Bernanke:

Bernanke, who took office in February 2006, has pushed the Fed toward greater openness at a faster pace than any of his predecessors. He holds press conferences four times a year and has aired his views on monetary policy and the financial crisis in television interviews.

The 58-year former Princeton University professor has also traveled to town hall meetings in locales such as El Paso, Texas. In addition, the FOMC publishes its forecasts four times a year, compared with two under former Fed chairman Alan Greenspan.

This is absolutely the right thing to do. Most Americans have no earthly idea what the Fed does, so Bernanke's new push for transparency isn't just good for the institution, it's good for the public. 

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