August 15, 2011
Realization
“The last duty of a Central Banker is to tell the public the truth.”
– Alan Blinder (former Vice Chairman of the Board of Governors of the Federal Reserve System on PBS’s Nightly Business Report, 1994)
Ah-Haaaah…
In the context of Mr. Blinder’s quote above – the past comments from current Federal Reserve Chairman Ben Bernanke below make a lot more sense to us… When we read them our initial instinct is to laugh out loud – but then again, considering Mr. Blinder’s comment above, they don’t seem quite so funny…
7/1/05 – Interview with CNBC
“Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”
10/20/05 – Testimony before the Joint Economic Committee
“House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.”
11/15/05 – Confirmation Hearing before Senate Banking Committee
SEN. SARBANES: Warren Buffet has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?
BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable… With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions.
2/15/06 — Hearing before the Committee on Financial Services
“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”
2/15/07 – Semiannual Monetary Policy Report to the Congress
“Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.”
3/28/07– Testimony before the Joint Economic Committee
“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”
5/17/07 – At the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition
“All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”
8/31/07 – At the Federal Reserve Bank of Kansas City’s Economic Symposium
“It is not the responsibility of the Federal Reserve–nor would it be appropriate–to protect lenders and investors from the consequences of their financial decisions.”
1/10/08 – Response to a Question after Speech in Washington, D.C.
“The Federal Reserve is not currently forecasting a recession.”
2/27/08 – Q&A after testimony to Senate Banking Committee
“I expect there will be some failures [referring to smaller regional banks]. Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.” (Bear Stearns collapsed a couple of weeks later).
6/10/08– Boston Federal Reserve’s 52nd annual economic conference
“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
7/16/08– Testimony before House Financial Services Committee
“[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing…”
Taking the Cake
On July 13 2011, the following exchange took place Congressman Ron Paul and Fed Chairman Bernanke in a U.S. House Financial Services Committee Meeting:
Rep. Paul: Do you think Gold is Money?
Bernanke: No….
Rep. Paul: It’s not money? Even if it was a precious metal for 6000 years somebody reversed that, eliminated that economic law?
Bernanke: Well…it’s an asset. Would you say treasury bills are money? I don‘t think they’re money either.
Rep. Paul: Why do Central Banks hold it?
Bernanke: It’s a form of reserves.
Rep. Paul: Why do central banks hold it? Why don’t they hold diamonds?
Bernanke: Tradition, long term tradition… (OK, we can’t help it – we laugh out loud here! Hard)!
Rep. Paul: Some People Still think it’s money….
Our View
It’s our opinion politicians in the U.S. and Europe have shown very little clue as how to handle the fiscal and monetary crisis they and the big banks largely created (other than by printing massive quantities of paper money/going further into debt). We believe the recent Congressional debt ceiling compromise comes nowhere close to dealing with the fiscal plight of the United States. With their recent downgrade of U.S. debt, Standard and Poor’s seems to be similarly unimpressed.
We believe Ron Paul’s got it right. Gold has been considered money for around 6000 years. And judging by the price of the ancient metal of kings – it looks to us like others may be considering it similarly.
It’s our opinion we are seeing the end of the Dollar as we know it. To us, it’s a matter of time before a gold-backed/based currency is once again used in the United States (and perhaps a large part of the world).
As the founder of the Austrian School of Economics, Ludwig von Mises said in the 1920’s:
“Just as the sound money policy of the gold standard went hand in hand with liberalism, free trade, capitalism and peace, so is inflation part and parcel of imperialism, militarism, protectionism, statism and socialism.”
We agree. And what interesting times we live in.
While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.
As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.
Sincerely,
Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com
Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.
