Today’s SEMIANNUAL MONETARY POLICY REPORT TO THE SENATE: All posturing and no substance. In the usual scene of playing for the folks back home, Chairman Bernanke was lectured to about the need to do his job and feed the system with so much liquidity that “job growth” would have to take place. (Mr. Schumer, to you a copy of the work of Richard Koo and the concept of a balance sheet recession). Some Senators were berating Bernanke for the LIBOR scandal in an effort to show that the U.S. Congress was serious about banking abuses. For the record: When the banking sector is under stress the FED’s only concern is the repair of banking balance sheets and if the profits come from manipulating the setting of a short-term bank rate, the means justifies the ends.
First and foremost, from the FED’s view is the health of the banks. Bernanke was very clear in stating that the LIBOR RATE was sometimes set lower and therefore consumers got that benefit so if you average out the manipulation it is probably no big deal. (I am opining and putting in my own analysis). The FED CHAIRMAN laid the blame on the recent downturn on two elements: EUROPE AND CONGRESS’ INABILITY TO HEAD OFF THE CRISIS OF THE “FISCAL CLIFF.” Mr. Bernanke minced no words in letting Congress know that the FED needed the greatest deliberative body to actually stop talking and start implementing policies to head off the coming fiscal disaster that he warned about back in April. “THAT RECOVERY COULD BE ENDANGERED BY THE CONFLUENCE OF TAX INCREASES AND SPENDING REDUCTIONS THAT WILL TAKE EFFECT EARLY NEXT YEAR IF NO LEGISLATIVE ACTION IS TAKEN.”
Further he throws the gauntlet down: “THE MOST EFFECTIVE WAY THAT CONGRESS COULD HELP TO SUPPORT THE ECONOMY RIGHT NOW WOULD BE TO WORK TO ADDRESS THE NATION’S FISCAL CHALLENGES IN A WAY THAT TAKES INTO ACCOUNT BOTH THE NEED FOR LONG-RUN SUSTAINABILITY AND THE FRAGILITY OF THE RECOVERY.” The lack of will on the part of Congress was preventing households and businesses from having the confidence to spend and invest. It is not that the current FED policies may be flawed,it is now the BAD LUCK OF HAVING A DO NOTHING CONGRESS.
As predicted, Bernanke revealed nothing about FED INTENTIONS for further stimulus. Bernanke is checking and waiting to see if the LEGISLATIVE BRANCH CAN BET THEIR OFFICE AND ACTUALLY MAKE A GENUINE DECISION AND SHOW LEADERSHIP. Hey BEN, this is an interesting strategy but remember 1937.
***THE BANK OF CANADA held rates at 1% today as Governor Carney is waiting to see what further economic damage will result from the European debt crisis. “The BOC’s base case projection assumes that the European crisis will continue to be contained,although this assumption is subject to downside risks.” So, as with the Australians and other central banks, caution is the watchword as the ill-effects of the European crisis are given more time so as to measure the global fallout.
***The most interesting part of the Bernanke testimony was that no Senator asked the FED Chairman about the impact from an agricultural disaster. What will the impact be on U.S. exports, small rural banks, grain elevators, commodity exchanges and food prices if the drought continues. Not one question was posed. As I watch stock prices on ag-based businesses, the CHART OF ADM catches my eye. In a world of soaring grain prices I would think that Archer-Daniel’s stock would be a star performer, but it is just the opposite. What is ailing the great American agricultural company? The signs of an impending storm are developing … not a concern from the FOOLS ON THE HILL.