Bernanke Must Go

Some years ago (40, to be exact) I attended a rally for then-U.S. Sen. Eugene McCarthy, who was running against Lyndon Johnson for the Democratic nomination for president. “Clean Gene,” as he was called, shared a bit of barnyard humor that has stuck with me ever since. My knowledge of farm animals is pretty limited, so I can’t vouch for whether it’s true on a biological or zoological level.
According to McCarthy, pigs are mostly insensitive to temperature except in their snouts. In Minnesota, where McCarthy was from, it gets pretty cold, of course. But because pigs mainly sense temperature with their snouts, as long as their snouts are warm, they believe they’re warm all over. So when a pig gets cold, McCarthy said, it will try to warm itself up by sticking its snout between the hind legs of another pig.
According to McCarthy, it’s not unheard-of to see whole herds of swine forming a kind of daisy chain, each with its nose up the backside of the one in front of it. And if there’s an unexpected hard freeze, an unfortunate pig farmer might come out the next morning to find his entire herd frozen to death in a circle.
McCarthy shared this somewhat indelicate information as a metaphor for the behavior of politicians, but it also strikes me as highly applicable to the way financial regulators and executives have been behaving lately.
Take, for instance, Federal Reserve Chairman Ben Bernanke. Throughout the first half of this year, Bernanke insisted that the U.S. economy was not in a recession and stood a fair chance of avoiding one. While he acknowledged that the economy was weak and the financial system vulnerable because of mortgage-related problems, he expressed confidence that the Fed’s cuts in its key interest rate would be enough to prevent an actual economic decline.
We know now, of course, that Bernanke was wrong. According to the National Bureau of Economic Research, a private nonprofit business group that is the quasi-official authority on economic cycles, the U.S. entered a recession a year ago this month.
What’s more, a lot of people have known that all along; even an armchair economist like me. Back on April 23, I wrote in my blog for The Post and Courier that “it would appear likely that we’ll look back at the fourth quarter of 2007 as the beginning of this recession.”
But Bernanke – who holds his job as Fed chairman because he’s regarded as one of the nation’s top economists – continued to insist that there was no recession and that a recession could, in fact, be avoided.
There are only two possible reasons why Bernanke kept saying those things: Either he’s an incompetent economist or he was being deliberately deceptive.
I’d probably opt for the latter explanation, because there does seem to be a kind of traditional belief in the financial community that denial of negative conditions will somehow make those conditions go away. (The real estate community took a somewhat similar approach early in the ongoing collapse of that market.) And there’s also the Straussian belief, widespread in the Bush administration, that deception of the citizenry is a valid policy tool.
However, it doesn’t matter which explanation you prefer. Either way, it’s clear that we have no good reason to trust Bernanke as a steward of our economy and financial system.
Bernanke’s partner in the ongoing economic Tweedledum and Tweedledee act, Henry Paulson, will be leaving office in January as part of the turnover of the White House to Barack Obama’s team. But Bernanke’s 4-year term as chairman of the Fed doesn’t expire until January 2010, and his 14-year (!) term on the Fed’s board will last until 2020.
The totally inadequate response of Bernanke and Paulson to the current economic and financial problems is reason enough to want them both gone. But now that we have clear, decisive evidence of Bernanke’s unreliability even on the level of Economics 101, it’s imperative that he be replaced as rapidly as possible.
Bernanke should do the honorable thing and resign, now. And if he won’t do that, then the new administration and the new Congress should do whatever is necessary to dismiss him for incompetence. All he has done is try to keep financial executives’ noses warm, but the economic temperature is still dropping.

The Price of Everything

With the release over the next two days of the government’s two main inflation indicators – the Producer Price Index, due Tuesday, and the Consumer Price Index, set to be announced Wednesday – the markets, policymakers and financial media are likely to be focusing on this topic for the first time in a while. Lately, the only thing price-wise that has gotten much attention is the big decline in oil prices since the all-time high in July.

Wall Street forecasters on average are predicting the CPI fell in October by 0.7 percent after zero change in September, and are looking for October’s year-on-year increase to be 4.0 percent after a 4.9 percent rise in September.

Those estimates are based on the seasonally adjusted index, of course. I’ve been looking at the unadjusted figures going back to 1913, and frankly I don’t see any evidence of strong seasonal tendencies in this index, which is already kind of overprocessed without adding seasonal assumptions to the brew. And I’m not even going to talk about the inane “core” inflation concept, which excludes food and energy prices, allegedly because of their “volatility.”

In any case, one group that ought to be paying close attention to these numbers, adjusted or not, is the Federal Reserve’s interest rate-setting Open Market Committee. The minutes from that august body’s latest meeting are due for release Wednesday afternoon. Given that the FOMC opted at that meeting to cut the Fed’s main interest rate again, it seems likely that they decided (again) that inflation isn’t much of a threat right now.

I’d say the following chart argues otherwise:



What the chart (click on it to enlarge; right click to open in a new window) shows is pretty straightforward, with no massaging or processing: It’s the CPI, not seasonally adjusted, going back to 1990.

The top line of the orange-colored trend channel actually connects all the way back to a big spike in inflation that resulted from war-related shortages – World War I, that is. So as a growth rate, it generally represents the maximum rate of increase in inflation over a period of about 90 years.

But as you can see toward the right side of the chart, the CPI’s rate of increase accelerated at the beginning of 2004, as indicated by the red trend channel. By the middle of 2005, the index had actually broken above the 90-year top trendline. And by April of this year, it outpaced even the new, faster rate of increase, as indicated by its breach of the upper red line.

The all-time high in the index was set this past July, and the index has declined slightly since then. As mentioned above, the forecasters on Wall Street believe it fell again in October, and if there’s any seasonal tendency in this index, it’s toward an easing of the rate of increase during the fourth quarter. If the prediction of a 0.7 percent dip is correct, it will be the biggest monthly drop in the CPI (seasonally unadjusted) since November 2005. But it won’t be enough to drop the index below the top red line on the chart, let alone to bring it back into the long-term trend channel.

For some time now, high inflation combined with an economy in recession – “stagflation,” to use the term coined in the 1970s – has been the ultimate nightmare scenario for policymakers, politicians and investors. The Fed clearly thinks it has a better chance of warding off recession, by cutting interest rates, than of cooling off inflation, which would require raising interest rates. But if the rate cuts don’t keep the economy from declining – and so far, they obviously haven’t, as the latest gross domestic product numbers attest – they still stand a good chance of keeping inflation climbing.