26 January 2012 – The Aleph Blog

On Opaque Transparency

Posted on 26 January 2012 by David Merkel

There are two things that I want to comment on Fed policy this evening: Transparency is overrated, and Bernanke does not understand savings.

Transparency is Overrated

Ever heard of the phrase “data overload?”? Greenspan would do that verbally in his testimony to Congress, providing them with more data than they needed, and occasionally contradictory so that each side could quote what they wanted.

Well, the present transparency policy of the Fed is another version of data overload.? Give lots of data — some similar, some different.? Opinions, forecasts, policies — average people have a hard time with the nuances; even some professionals do.

After a certain point, the more data you reveal, the harder it gets to evaluate what is going on.? Far better to reveal to the public the core data that explains policy than to make them slog through big data releases.

Transparency is overrated.? Not sure which foolish economist thought of this one, but more data does not mean better decisions, or better public understanding.? Humans are not Vulcans (only logical), nor Ferengi (only greedy); we are complex, and that makes prediction of actions difficult.

Bernanke does not Understand Savings

Twice in his press conference yesterday, Bernanke showed that he was out of touch with average Americans.? He argued that average people could keep up with a 2% increase in the price level by investing in stocks and (presumably short-term) bonds.

(Speaking to The Bernank)

I’m sorry, Ben, but ya gotsta come down from the uneducated ivory tower and wallow in the mud wit da restov us.? There are three problems with what you said:

It’s hard to earn 2% (after-tax) consistently when the Fed funds rate is zero.
Only the top 20% of the wealthy have enough assets to keep themselves afloat using the asset markets.? Most people would like to do something to protect themselves from inflation, but lack the means to do so.
Average people do not invest, they save at financial intermediaries like banks, S&Ls, and life insurers.? Fed policy kills rates for savers.? They will not become investors, because they lack the knowledge to do so.

I am again sorry, Ben, because your policies discriminate against the poor, and the lower middle class.? Yes, the rich and the upper middle-class clever can escape the penalties stemming from your policies, but the lower-middle class and the poor can’t.

Think of it this way: your policies are making it more palatable for average people to buy gold, because the alternatives in savings are lousy.? If there is no income, why not grab safety from inflation?

Are you really trying to wrest the thorny crown of “worst Fed Chairman” from Arthur Burns?? If so, well done, you are achieving your goals.? Even Alan Greenspan did not do that, though he tried.

My advice to you is simple.? Raise the Fed funds rate to 1%, and stop the QE, and pseudo-QE.? At the zero bound, monetary policy has no punch, and the same for QE.? It affects asset markets; it does not affect goods markets.

Time to abandon useless theories about the Depression, and embrace the practical difficulties that we now face.? Ben, grow up and abandon your failed theories on the Great Depression.? And resign, if you can’t grow up.

Recent Tweets

Posted on 26 January 2012 by David Merkel

@The_Analyst does Hempton do Twitter? Bright guy. Jan 26, 2012
RE: @SoberLook It’s not a pledge, indeed, but it is an estimate.? The bond market has reacted quite strongly to the e? http://t.co/crpU3QpH Jan 26, 2012
RE: @SoberLook Does this post from Alea change your opinion at all? http://t.co/2hs1LTyN? http://t.co/p3Plmjnb Jan 26, 2012
MF Customers Face Long, and Possibly Fruitless, Slog http://t.co/MoMIalrc Law s/b modified: customer accts s/b top priority in broker BK Jan 26, 2012
Solar Cheaper Than Diesel Making India?s Mittal Believer http://t.co/ZW2ta2aB This is the right way 2 employ solar; with no subsidies $$ Jan 26, 2012
Obama Pushes Salad in Schools at $3B Cost to States http://t.co/M9nWkW4T Healthier food is no good if the kids don’t eat it, ask L.A. $$ Jan 26, 2012
Con Artist Starred in Sting That Cost $GOOG Millions http://t.co/ErAgeziD New motto: Don’t be evil, but if you are evil, make $$ by it Jan 26, 2012
This is y well-capitalized P&C insurers r hard 2 kill, & usually make $$ over the int-term: past losses r more than paid 4 by higher prems Jan 26, 2012
US Commercial P&C Rates to Climb, Marsh Says http://t.co/OxCUuSsU The insurance brokers know; after a year of losses comes a hard market Jan 26, 2012
@researchpuzzler @The_Analyst “There’s an institutional hedge fund analyst born every minute.” Alleged 2 PT Barnum but, http://t.co/ku1NlqZG Jan 26, 2012
@BarbarianCap What I am saying is that structural legal protections around economically necessary authorities & municipalities r significant Jan 26, 2012
@BarbarianCap PV of losses are typically small, except on odd munis that don’t have any necessary economic value 2 a municipality + Jan 26, 2012
@BarbarianCap Part of the difficulty is that states can’t default, and Ch 9 4 what municipalities can use it, merely gives breathing room + Jan 26, 2012
@BarbarianCap There will be significant issues, but even during the Depression, losses were remarkably small on munis. Taxes will rise. $$ Jan 26, 2012
@The_Analyst Then again, it’s probably more “a fool and his money are soon parted.” Due diligence ain’t always that great 4 institutions $$ Jan 26, 2012
@The_Analyst Typically they were pretty good salesmen to get fund #1 off the ground, even better 4 #2. W/fund #3 they sell “It’s fixed.” $$ Jan 26, 2012
Iran’s Ahmadinejad ups rates to stem money crisis http://t.co/6IhpevuO Sanctions r having an internal effect on the Iranian economy. $$ Jan 26, 2012
Niederhoffer Discusses Being Wrong http://t.co/mWrnI7mg Frank talk from one who blew up twice. Perhaps he has a risk control discipline now. Jan 26, 2012
What’s In Your 401(k) Fund Line-Up? http://t.co/1ufb7xk2 Plan sponsors have an obligation 2 remove poorly performing funds but many don’t Jan 26, 2012
Wither the Wirehouse RT @ReformedBroker: Whither the Wirehouse? http://t.co/E4Xtz5Ul Jan 25, 2012
Wither the wirehouse 😉 http://t.co/TnuMFvDE Jan 25, 2012
RE: @wallstCS None of the competitor companies you list compete w/ $RGA. $PRE does a little bit of life reinsurance &? http://t.co/v9r3kg5z Jan 25, 2012
@TimABRussell Yes, I think Bernanke is sincere in what he is doing. That doesn’t mean that it doesn’t confuse, or get the right result. $$ Jan 25, 2012
@TimABRussell That was the Greenspan strategy. Talk about the six sides of the square & confuse: Top, bottom, right, left, inside, outside Jan 25, 2012
Fed learns that it is easier to hide a needle if they put it in a larger haystack. $$ All for now on the Fed. Back to normal activity. Jan 25, 2012
Final Q on fiscal policy asking what if deficits aren’t cut. B says that deficits need to be cut. IT’S OVER!! Jan 25, 2012
Bernanke essentially says that everyone has a lot of slack assets, and can invest them after-tax at 2% in the long run. Jan 25, 2012
Q on CPI vs PCE, critics saying Fed planning to destroy 2% of currency value per year. B: CPI has made up numbers, healthcare differences $$ Jan 25, 2012
French reporter asks whether Fed would extend a loan to the IMF. “Raison detre” cute response, punts to Tsy and Congress $$ Jan 25, 2012
Mkt news intl reporter: why have forward guidance when you give out forecasts? Bernanke: guidance describes Fed’s decision, vs expectations Jan 25, 2012
Bernanke gets symmetric questions asking whether policy is doing too much or too little, on inflation and unemployment. 😉 $$ Jan 25, 2012
WP reporter: could the Fed bring unemployment down faster if it were more aggressive? Bernanke really doesn’t answer. Jan 25, 2012
In general, people analyze better with limited amounts of data — zero data (w/Kremlinology) and lots of data make analysis harder $$ Jan 25, 2012
I think the more data the Fed hands out, the more lost the press and average people get confused. Jan 25, 2012
Q: Why isn’t Fed doing more now if you think things will be bad for so long? Internally Bernanke reconsiders the value of press conferences. Jan 25, 2012
Bernanke says that low rates conquer all and so providing more data won’t hurt things — expectations are a lesser thing $$ Jan 25, 2012
Peter Barnes, Fox Business: possibility of negative expectations because the economy is viewed as much worse than previously thought $$ Jan 25, 2012
AP reporter asks about principal reductions for the housing crisis. Bernanke says that the FOMC is concerned, but doesn’t say much really $$ Jan 25, 2012
Median b/c FOMC is a “democracy.” In practice, though, the Fed chair has 12 votes Jan 25, 2012
Robin Harding of FT asks about forecast, and what it implies for FOMC policy: Bernanke says there’s no mechanism, look at the median Jan 25, 2012
to be able to be released — mentions that June 2011 principles are still in force for shrinking the balance sheet (in 2015?!) Jan 25, 2012
Reuters reporter asks for more data on balance sheet data, versus data on Fed funds — Bernanke says there is only so much data at a time + Jan 25, 2012
RT @joshuademasi: @AlephBlog All fed needs to do is create esoteric invesment vehicle cross hedging USHY in Rand and Real. What could g … Jan 25, 2012
Donna Moran (?) of Amer Banker — Basel 3, capital requirements, etc. Me: Fed supervision of biggest institutions not done well in past $$ Jan 25, 2012
Bernanke waffles on the question of what happens to savers, confusing saving and investing. Needs to consider what finl intermediation does Jan 25, 2012
Greg Robb(?) Marketwatch asks about Republicans, and how older people on fixed incomes survive, and whether he might resign if Reps win Jan 25, 2012
Greg Ip questions the asymmetry comments — I think Bernanke would be better off saying “asymmetric in the long run.” Jan 25, 2012
@joshuademasi The hate for the Fed exists because they were overly loose 1984-2006, regulated banks poorly & created much of this crisis $$ Jan 25, 2012
Hilsenrath asks about confidence in the FOMC’s forecasting abilities. Wonders which dot is Bernanke’s… Bernanke affirms limitations Jan 25, 2012
Torres of Bloomberg asks about near-term inflation — The Bernank points to falling commodity prices, slower global growth Jan 25, 2012
Decent question on the symmetric nature of monetary policy Jan 25, 2012
Toady comments on what he views as strength RT @agwarner: Liesman Alert! $FED Jan 25, 2012
Full set of projections from the FOMC: http://t.co/VqWfrYgL Worthy of note that their forecasting ability is subpar. Jan 25, 2012
Fed Funds Projections: http://t.co/Wd9lmEeO Jan 25, 2012