(AEA) My Confrontation With Ben Bernanke: The Question He Refused to Answer

January 26th, 2010

by Dr. Mark Skousen, Contributing Editor
Tuesday, January 26, 2010: Issue #1183

“The Federal Reserve continues to work actively to prepare for the possibility of financial stress.” – Ben Bernanke, January 5, 2007

The Secret Service watched me warily as I approached Federal Reserve Chairman Ben Bernanke.

I didn’t waste any time. After introducing myself, I showed him a copy of the talk he gave at the American Economic Association (AEA) meetings in January, 2007. I circled all the times he used the words “panic,” “crisis,” and “stress” in his speech, entitled “Central Banking and Bank Supervision of the United States.”

A total of 36 occasions.

I asked him point-blank: “Did you know in advance that a financial crisis was headed our way?”

He looked nervous. I could tell he was uncomfortable with my question. He looked at me stoically and smiled. And he refused to answer…

But there was no doubt in my mind what the correct answer was. I think he was worried about his job if he said, “Yes.”

Bernanke Knew The Financial Crisis Was Coming

After hearing Bernanke’s AEA address three years ago, I wrote in this in the February 2007 issue of my investment newsletter, Forecasts and Strategies:

“Anyone reading between the lines could understand that Bernanke is worried about a financial storm ahead. In his speech, Bernanke used the terms ‘crisis,’ ‘panic,’ ‘threats,’ ’stress’ and similar words at least 36 times.

“Bernanke said the Fed has set up a ‘crisis center’ to handle potential global financial problems – to anticipate them and deal with them if they occur. What are the possibilities?

A dollar crisis, like the one Paul Volcker suggested would happen in the next few years.
A non-dollar currency crisis in Asia, Europe or Latin America (shades of the 1997 Asian currency crisis).
A housing crash and foreclosure crisis.
A major terrorist attack on a key financial center, such as New York, London or Tokyo.
A sharp rise in inflation.

“I doubt the Fed will cut rates again unless there is an imminent financial crisis of some sort that will require more liquidity and lower rates.”

Just one year later, of course, Bernanke’s fears became reality when the financial panic of 2008 forced the Fed to cut interest rates to nearly zero and inject billions of new money into the economy to prop up the financial system.

Bernanke has since admitted that the crisis was “the worst in modern history.”

So what is Bernanke saying now?

Blowing Bubbles… Blowing Policy… And Blowing Smoke

After our somewhat awkward confrontation, I sat down to listen to Bernanke’s new speech – “Monetary Policy and the Housing Bubble.”

He stepped up to the podium in a state of denial, rejecting the common-sense notion that the Fed’s low interest rate policy in 2002-04 caused the housing bubble or the financial crisis. Bernanke said the housing boom was global and couldn’t be blamed on U.S. monetary policy.

He did, however, take some responsibility for the lack of proper banking standards that led to the housing crisis. According to Bernanke, the Fed’s moves to regulate the subprime mortgage market were “too little too late.”

Once Bernanke had finished his speech, he took questions. He probably didn’t want another from me, but I asked anyway…!

Three Ways to Play the Fed’s “ZIRP” Policy

Dr. Mark Skousen: “Mr. Bernanke… in your speech, you talked about interest rates and the price of money, but you said nothing about the supply of money. Will you comment on the fact that the adjusted monetary base [the Fed's checking account] is now growing at an 80% rate again? Does that suggest you fear another financial crisis or credit crunch soon?”

Ben Bernanke: “No, the rise in the monetary base is due entirely to the Fed’s recent purchase of mortgage securities that we agreed to buy.”

Dr. Mark Skousen: “I note that foreign central banks like Bank of India and Bank of China are now buying tons of gold. Is this a sign that foreigners are losing faith in the dollar-based world monetary system?”

Ben Bernanke: “The world financial system is sound.”

What struck me about Bernanke’s responses was his “What… me, worry?” attitude. He showed no concern about the constant loss in the value of the dollar on the foreign exchange markets, or the dramatic rise in the price of gold since he became chairman.

I came away with the following: Don’t count on the Fed chairman, or any other high government official, to admit mistakes or tell us what is really going on. No doubt many Americans share that view, too.

My advice: As long as the Fed’s Zero Interest Rate Policy (ZIRP) is in place, the following three scenarios will play out:

The U.S. dollar will remain weak.
Gold prices will rise.
Foreign stocks will perform better than U.S. stocks.

And if you’re wondering how to combat this zero interest-rate policy, consider these three investments:

SPDR Gold Shares (NYSE: GLD)
iShares Silver Trust (NYSE: SLV)
Templeton Emerging Markets Fund (NYSE: EMF)

Good trading – AEIOU,

Mark Skousen

Investment U – Extra: The stock market hates uncertainty and change.

So it was no surprise that the stock market tumbled last week amid news that Ben Bernanke’s bid to be reappointed as Chairman of the Federal Reserve was struggling in the Senate.

However, the market picked up again yesterday as influential Senators eased doubts over his reappointment and the prospect of a major change at one of the nation’s top posts diminished. Bernanke’s first four-year term expires this Sunday and a Senate vote is expected this week. According to the Wall Street Journal, the current vote is 31-17 in favor of Bernanke’s reappointment.

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