So Bernanke, You Want To Be Re-confirmed?

On what basis do you come before The Senate with this request?

We continue to see the alleged goal of "sustainable economic growth in an environment of price stability" in your Fedspeak, but the fact is that The Fed has never met that metric - not now, not ever.  Specifically:

"All money is debt" in modern monetary systems.  That is, it is borrowed into existence.  Since 1953 outstanding debt in the system has grown at a 8.78% compound annual rate, a 7.91% rate since 1990 and at an 8.50% rate since 2000.  Since you took office the rate has been 8.905%, the highest recorded of those four measurements.  Not only has The Fed failed to maintain price stability the instability has risen during your tenure - significantly.

How can you make a claim to adherence to your mandate when The Fed has in fact promoted and operated a monetary system that for the last fifty years has maintained a credit growth rate in excess of GDP growth, typically by 2-3%?  I present the following graphical representation of the mathematically-inevitable outcome of such a policy.  Since debt must be serviced and paid down with output, promotion and maintenance of such a policy will, with mathematical certainty, result in monetary system failure given a sufficient period of time.

Please explain why The Senate should confirm you when your policy, along with that of all previous Fed Chairmen, has been to permit and foster growth in credit that exceeds GDP - a policy that must, mathematically, eventually lead to monetary and fiscal collapse?

You claimed in a June 5th of 2007 speech that: "However, fundamental factors--including solid growth in incomes and relatively low mortgage rates--should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system." 

The facts, however, bear out that you either knew or should have known more than a year earlier that Goldman Sachs, among others, was issuing securitizations with "mortgages" that, on dollar value:

• 72.21% were taken for cash-out refinances and 12.28% were to refinance existing loans.  Only 15.52% of the principal balance was taken out to BUY a house.
• Of that 72.21% balance, the AVERAGE FICO of the person taking the cash-out refinance was 604 (!) - the lowest average of all categories.  (If that isn't special I don't know what it is - people with severely-impaired credit attempting to keep their head above water by cashing out alleged "equity" in their homes at usurious interest rates!)
• The vast majority of the loans had a lifetime maximum rate of 15% or higher, with 26% having a cap OVER 16%.  This in a time when "conventional" financing was at half that interest rate.  If that's not hard evidence of predatory behavior, what is?
• 46.85% of the principal balance was stated documentation.  That is, no verification of income or assets.

In other words, these were "debt-pyramid" loans being taken out by borrowers to either cash out of their homes to fund their lifestyles, were utterly impossible to be paid as agreed, or both.  A year later, FRBNY published a research paper on this topic in which your position as expressed less than a year prior was shown to be fallacious.

Explain the discrepancy between your statement and what primary dealers, whom you have supervisory authority over via the NY Fed Desk (indirectly), were and had been issuing for more than a year as of mid-2007.

On May 31st 2003 you said while speaking in Tokyo: One might argue that the legal objective of price stability should require not only a commitment to stabilize prices in the future but also a policy of actively reflating the economy, in order to restore the price level that prevailed prior to the prolonged period of deflation.  You went on to explain that you believed there was a mandate to recover not only bubble-produced previous asset prices but also the imputed additional inflation that "would have happened" over the intervening time period.

The US Federal Reserve has such a mandate.  Please clarify and extend your remark, particularly in the case where the prior inflated value of assets that has collapsed, in this case, specifically, houses and commercial Real Estate, were a direct and proximate consequence of both unsound and even fraudulent lending practices, forcing prices dramatically beyond equilibrium levels as a consequence of the classic inflationary mechanism of "too much money (credit) chasing too few goods."

This is particularly topical to the present circumstance given that the context of your remarks was provided with the backdrop of Japanese monetary policy.  Their nation (similar to ours) suffered a real estate valuation collapse when their real estate asset bubble popped - a bubble that, like our asset bubble, was generated as a consequence of ridiculously-loose lending standards and speculation.

Indeed, given the above question, where it becomes clear that the alleged "pre-bubble-bursting" price level was achieved as a consequence of creating a credit bubble of unimaginable size, fostered over the space of more than fifty years, it is clear that the claim of policy you made in that speech of 2003 would be in fact a commitment to pursue a mathematically-impossible goal - and one that would lead to the destruction of the currency and possibly political system of the nation.

Please defend the propriety of your comments given these facts and explain both your current position and any current commitment to actions you intend to take in this regard.

In the most-recent Fed Minutes (3-4 November 2009) it was said:   Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.

Please square this statement with the following chart, showing the presence of a monstrous dollar "carry trade" - a trade only profitable in the presence of zero interest rates, where the dollar can be borrowed (by primary dealers and other large banking interests) at zero or near-zero rates:

The white line is the dollar on a relative basis, while the chart is of the S&P 500.  The correlation since June has been nearly 100%.  Not coincidentally, the carry first appeared within weeks after The Fed lowered short-term interest rates to zero.

The size of this "Carry Trade" is currently estimated at more than $500 billion outstanding.  During this time the dollar has lost more than 15% of its value against other major currencies - a direct devaluation of every American's purchasing power.  During this same time oil has more than doubled in price as have other essential commodities.

Historically, there has never been a carry trade that has unwound in an "orderly" fashion.  The Yen Carry unwind featured prominently last year in the stock and credit market crashes.  It is entirely reasonable to expect that when the dollar carry trade unwinds it will inflict direct economic loss of at least $50 billion, with 10 or even 100 times as much damage to the economy in knock-on effects from asset value destruction.  That the unwind will occur, and this damage will occur, is axiomatic - we can debate only timing, not the event itself, as a carry trade is an inherently unstable condition and is mathematically impossible to sustain on a permanent basis.  Further, the asset classes into which the carried funds flow (or spill over into) become bubble-like and inflated in value - claimed "value" that is in the fullness of time proved to be false.

Indeed, the little mini-meltdown over Thanksgiving may be the only warning that the market serves up before things get truly ugly.  How far will this little meltdown - or a big one if we refuse to heed it - go?  There's no good way to know, but this much I am absolutely certain of: the longer we continue to distort foreign exchange markets with zero interest rate games with the intention of fueling "carry trades" as a means of pumping asset values, the greater the risk of a catastrophic reversal.

On "as-reported" earnings the S&P 500's current 12-month trailing P/E stands at nearly 60.  Historical average P/Es run closer to 15.  Even with the disastrous 4th quarter of last year removed, the P/E is well over 20.

An increase in short-term interest rates to as little as 2% would make the carry trade unprofitable and halt it immediately, while remaining extremely accommodative in terms of monetary policy.  Yet The Fed continues to commit to "extraordinarily low rates for an extended period of time", intentionally fostering enormous distortions in the currency markets and risk assets.

Additionally, China has disclosed that it has taken as much as a $350 billion loss on its holdings since March, and believes it may take another $220 billion should the dollar fall a further 10%.  Under what possible scenario do you see China continuing to buy our debt when your actions, along with Treasury's, intentionally wipe out half a trillion dollars of value in the assets purchased from us?

Further, exactly how much "excessive risk-taking" do you need to see before you act when the current P/E on the S&P 500 is considerably higher than the market's P/E was when Alan Greenspan gave his famous "irrational exuberance" speech?

The US Federal Reserve has a "dual mandate" of maximum employment in an envornment of price stability.  As shown in the below chart, The Market Ticker Ponzi Finance Indicator, The Fed has in fact promoted a policy of intentional over-expansion of credit:

The Ponzi Finance Indicator is simply the arithmetic difference in percent change between the expansion of credit and expansion of GDP, both on a year-over-year basis to remove seasonal adjustments.

Due to the mathematical realities that govern the behavior of all compound functions (whether they be compound interest, compound growth, or compound debt accumulation) any time there is a difference in growth rates between two compound functions over time the larger will "run away" from the former.  This is governed by the immutable laws of mathematics.

When one maintains a negative divergence between the compound rate of debt growth and compound rate of GDP growth, as The United States has since 1953 on balance, and continually, with only one short single-year exception since 1981, the mathematical certainty of debt coverage insufficiency will occur. 

Due to the mathematical realities of monetary systems that are debt-based - that is, where "money" is borrowed into existence at interest, it is inevitable that debt-liquidation must periodically occur, bankrupting both borrowers and lenders.

Your actions, along with those of Greenspan before you, have been consistent with bankrupting borrowers who make imprudent decisions.  But you have consistently, along with Mr. Greenspan, tried to protect lenders who have made imprudent decisions.  This is not only unjust it is mathematically unsustainable and, if it continues, will, as a matter of mathematical certainty, lead to monetary (and likely political) collapse.  You simply must be held to account for your actions in this regard, given the mathematical realities that underlie all debt-based monetary systems.

I will not presume to debate the wisdom of a debt-based monetary system in this missive, since the subject of this Ticker is not whether The Federal Reserve should exist as an entity charged with the issuance and management of the nation's money supply.  That is a screed for another time.

Rather, this Ticker is focused on your performance as Chairman of said body, along with your performance as a member of the FOMC prior to your appointment.

As Chairman, it is my contention that you have an absolute obligation to the truth - a truth that is driven by mathematical facts, not the fancy of banksters who infest both Wall and "K" Streets, promoting knowing lies related to the sustainability of that which is mathematically impossible.

In that regard you, as with your predecessor, are in my opinion unfit to hold your position - or indeed any position - within The Federal Reserve, and The Senate must vote to NOT confirm you for a second term.