Tuesday, September 23, 2008

Ben Bernake: Live and Uncensored

Helicopter Ben made an unscripted comment today at the congressional hearings. It is below in its entirety [emphasis is mine]. My thoughts and analysis follow...

"Let me come to the critical point: I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

"First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down. Second, liquidity should begin to come back to these markets. Third, removal of these assets from balance sheets and better information on value should reduce uncertainty and allow the banks to attract new private capital. Fourth, credit markets should start to unfreeze. New credit will become available to support our economy. And fifth, taxpayers should own assets at prices close to the hold-to-maturity values, which minimizes their risk.

"Now how to make this work. To make this work, we do need flexibility in design of mechanisms for buying assets and from whom to buy. We do not know exactly what the best design is. That will require consultation with experts and experience with alternative approaches.

"Second, understanding the concerns and the worries of the committee, we cannot impose punitive measures on the institutions that chose to sell assets. That would eliminate or strongly reduce the participation and cause the program to fail.

"Remember the beneficiaries of this program are not just those who sell the assets, but all market participants in the economy as a whole.

"But finally and very importantly, this is not to say the financial institution should not be reformed. It should be, it's critical. I agree with the Treasury secretary, the Federal Reserve will give full support to fundamental reform of the financial industry.

"But whatever reforms the Congress makes should apply to the whole industry, whether they participate in this program or not. So in summary, I believe that under the Treasury authority being requested, a program can be undertaken that will help establish reasonable hold-to-maturity prices for these assets.

"Doing that will restore confidence and liquidity to financial markets and help the economy recover without an unreasonable fiscal burden on taxpayers. So I urge you to act as soon as possible. Thank you."

Ben is a student of the Great Depression (here's a great NY Times Weekend Magazine article that I originally added to the Inergy market update back in February), and a man who has consistently made the same tough choice in the face of market adversity. That is - he has chosen liquidity and a larger, looser money supply (i.e. lower interest rates) to illiquidity and constricted money supplies. Each time he has lowered the Fed Funds rate, each time he has spent money on a bailout or shored up a lender...he has chosen liquidity. As maybe the foremost expert on central banking and its role in the Great Depression, he understands that economies can fall victim to their own negative inertia, imploding under the double-whammy of tight monetary policy and a broad economic malaise.

The problem with his consistent choice is that this liquidity impacts the currency values negatively. Inflation, Inflation, Inflation. We saw it in February when the first emergency rate cut was announced. We saw it again this Monday after the market had a chance to fully metabolize the "big give" that he and Hammerin' Hank were proposing. This should teach us something about Ben's belief system. Inflation, to Ben Bernake, is the lesser of two evils. In fact, in comparison to the metaphorical elephant of market liquidity, price inflation and currency devaluation is just a fly.

Remember this in your purchasing this year. Being long against the backdrop of Ben Bernake's belief system might be a prudent choice.

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