Fateful Words from Ben Bernanke?

I didn’t watch Fed Chief Ben Bernanke’s appearance before the Senate Budget Committee yesterday, but there was an interesting exchange with Sen. Pat Toomey (R-PA) recounted in this Wall Street Journal story($) on the subject of the central bank creating market distortions that they may not be able to counter if and when sentiment changes.

At issue is the Fed’s continuing policy of bond-buying. While the central bank has stopped expanding its balance sheet with new asset purchases, it is engaged in a plan to sell short-dated Treasury bonds and replace them with a like amount of long-dated government debt. The result? Ten-year Treasury borrowing rates are around historic lows, and with them, mortgage rates.

For Bernanke, this is by design, not accident. He told Toomey a significant aim of the Fed is to gobble up enough risk-free Treasury debt so that investors are forced into riskier investments that will in principle generate better levels of growth.

“We don’t want to go too far,” Bernanke told the committee. He said the Fed was “very attentive” to signs that its stimulus was in the process of generating imbalances, and added the central bank had “greatly expanded” its surveillance of financial markets, in a bid not too be caught off guard.

“The effects of Fed policy, independent of all the other factors, on Treasury rates [are] modest,” Bernanke said. The bigger problem is investor confidence in future government borrowing. “Rates will rise eventually, and if investors were to lose confidence in U.S. federal fiscal policy, there is nothing the Fed can do to stop those rates from rising”.

If memory serves, it was Ken Rogoff (of This Time is Different fame) who observed that, throughout history, there is virtually no warning for when the bond market turns on a nation’s sovereign debt (so much for the Fed’s “attentiveness”) and, when combined with Bernanke’s warning above that there’s little they’ll be able to do under those circumstances, this sets the stage for one monster U.S. sovereign credit crisis somewhere down the road.







Confidence (and Credit Card Usage) Soar

The big question now is that of sustainability – what happens in the months ahead – but, since the crisis over the debt-ceiling increase was (temporarily) solved last summer and the jobless rate began to turn down, we ‘Mericans have become an optimistic bunch and this Gallup survey provides the latest confirmation.

And optimistic ‘Mericans tend to borrow and spend, more of that being confirmed in yesterday’s report on consumer credit that showed another monthly gain for outstanding credit card balances after declining steadily for years after the 2008 financial creisis and recession. Jake has details on that in this item at EconomPicData.

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What’s Another Day in the Greek Debt Saga?

The Greek government is again trying the patience of their creditors, namely, the European Commission, European Central Bank, and IMF, as Prime Minister Lucas Papademos announced at least another day’s delay in securing government approval for the latest Greek bailout deal, required to forestall a messy sovereign default next month.

An agreement has been “imminent” for two weeks now on what are believed to be “very large haircuts” on Greek debt  that seem to get bigger with each day that goes by without a deal in what, so far, appears to be a very successful “Blazing Saddles” style of negotiating.

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The Rise of Central Bank Balance Sheets

Referenced in this Cumberland Advisors commentary by David Kotok on the subject of central banks and gold was the graphic below depicting how the balance sheets of major central banks around the world have changed since the world changed back in 2008.

If you were to extend the chart to the left, you’d see that bank assets rose modestly for decades while the many economic/financial imbalances were being built up as the end of “The Great Moderation” signaled the beginning of “The Great Central Bank Intervention”.

In all, there are a dozen or so more images in this depressingly good collection of charts(.pdf) at Cumberland that will make you wonder anew where this is all headed.

The Euro Crisis in Economist Covers

I haven’t done one of these animated .gifs in quite a while, but it seemed worth the effort to put together these Economist covers on the euro crisis, particularly when considering the treatment they provide for Germany’s Ms. Merkel, highlighted by that very first one.

Note that you’ll have to read fast because you can’t slow this down, despite the appearance of those little buttons in the lower right. If you’d like to view these at your own pace, just scroll to the bottom of this Economist story about Greece and the euro.

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Roach: “Zero Bound Until 2025″

Not surprisingly, Morgan Stanley’s Stephen Roach doesn’t think much of the idea of perpetual ZIRP (Zero Interest Rate Policy) as part of an ongoing policy by the Fed and he talks to Bloomberg’s Tom Keene on this subject and others while in Davos, Switzerland.

Roach says that, along with many other Western central bankers, Fed Chief Ben Bernanke is “betting the ranch on open-ended QE and zero interest rates” that, throughout history, have only been used as emergency measures, not long-term policy.

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