Fed Chairman Bernanke's report to Congress

Ben Bernanke

Federal Reserve Chairman Ben Bernanke met today with Congressional leaders of the Financial Services Committee to report on the Federal Reserve's take on the state of the economy and Federal Reserve actions in that regard.

In an introductory statement Mr. Bernanke made it clear that the fiscal policy that legislators have chosen to take has been a detriment to the economic recovery.  In an effort to acknowledge the impact that a dysfunctional Congress has on the economy, he highlighted that tight fiscal policy will restrain economic growth.  He warned that political fights over raising the debt ceiling as has happened in the past would hamper the recovery.  Although a few of the Congressmen on the committee appeared to understand the importance Congress has in assisting in the recovery, it is still to be seen if Congressional Republicans take this guidance into consideration as they enter discussions about raising the debt ceiling, ending sequester or resurrecting the American Jobs Act.

Bernanke believes the economy is recovering at a moderate pace.  He cited the improvements in the housing market as contributing to economic gains and predicted this would continue to improve notwithstanding recent mortgage interest gains.

He believes the labor market is improving gradually and contributed a 0.1% drop in the unemployment rate to the Fed's policies of buying assets.  He admits that job growth has a long way to go to be considered satisfactory.  As I have stated in previous blogs, I question the impact that buying assets really has on the job market especially because it does nothing to increase demand for products and services.  It does have an important impact on the stock market as we have seen investors sell off stocks and bonds when Bernanke hinted that the asset purchase program was going to be discontinued.

Understanding the emotional nature of the stock market, Bernanke was careful not to repeat the mistake of hinting at a change in the asset program at the committee meeting.  He emphatically stated that the current asset purchase program will continue and monetary policy will be "accommodative" for the foreseeable future.  As of noon today the US markets appeared to be unaffected by Bernanke's comments.

In order to help prevent another Bush era financial collapse of the big banks, Fed policy is to prevent  collapse by increasing the requirement for cash reserves under what is called Basel III capital reforms.

 In summary, Bernanke explained three mechanisms that the Fed is using to support economic growth.  These are mortgage asset purchases, forward guidance on Fed plans for the federal fund rate target and Basel III capital reforms.

Based on the comments at the committee meeting, it appears obvious that the Fed needs a lot of help from Congress to revitalize the economy.  Bernanke's warning about Congressional actions around fiscal policy may have been his cry for help.

How the rich will make $millions while avoiding the impending financial crisis

Ben Bernanke

When Fed commissioner Ben Bernanke announced that the Fed’s purchase of mortgage securities might be reduced if the economy continued to improve, he gave early warning to the 1% that they should cash out of the market and use one of their off-shore tax shelters to keep their money safe.

As a result, the market lost billions of dollars in the last two days when many wealthy investors cashed out.  The market doesn't look much better today.

I contribute the recent loss in the stock market directly to the one-per centers.  

This was not a case of middle-class investors cashing out their 401K’s because the penalty is too much to cash out a 401K.  It was not a case of investors moving their investments around because that would have had no net change impact on the market.  It was an outright removal of investment cash by selling while prices are still good.  The group of investors who can do this without tax consequence are the wealthiest people in America.  Other investors may soon follow in this selling frenzy now that the trend is sounding alarm bells.

Middle-class workers who try to save some of their pay in 401Ks have the most to lose. 

They do not have the freedom to cash out of the market without losing 40% of their cash to early withdrawal penalty tax.  They must weather the storm when disaster happens.  So when the billionaire investors got out of the market it caused the loss in value which will be to the detriment of middle-class owners of 401Ks.

In 2007 we saw the serious financial collapse of the market as millionaire’s and billionaire’s who had the freedom to remove their dollars from the market did so at a rapid-fire pace.  In that disaster middle-class Americans lost up to 50% of their savings in 401K’s.  

After only the last two days, the market has lost up to 5% of its value.  The trend seems to be continuing today.  If it continues to lose at this rate it will only take a month to repeat the 2007 disaster.

Do the wealthy believe that Bernanke’s security purchase program is really improving the employment situation?  Is that what is worrying them?  Of course not!  They are the job creators, so they should realize that increasing jobs only happens when there is an increase in product and service demand.  That is not happening.  So what are they worried about?  

They worry that Bernanke may be starting to realize that any increase in the economic outlook or jobs for America is really not due to his policies.  They are getting the idea that Bernanke will end security purchases even if the job situation and the economy does not improve.

Up until now, Bernanke’s policies have kept interest rates low and made it easy for investors to purchase stocks and bonds without fear.  The stock market usually does very well when interest rates are low and investors feel confident.  This undoubtedly favors the wealthiest investors.  

By removing that investor guarantee, Bernanke has decreased the certainty of profiting in the stock market.  And one thing the 1%’ers love more than anything is profit.  So they are willing to trash the rest of America and start the collapse of the market in order to preserve their beloved cash.

I expect that this free-fall in the stock-market will persist in the upcoming weeks as more and more of the wealthy catch on to what many of them have already deduced.  They will remove their cash from the market, shelter it off-shore and just wait it out.  When the market bottoms out, they will be ready to pounce on some really cheap stocks and the whole cycle will repeat itself.  That's how you make millions and avoid the financial crisis.

And for the millions of baby-boomers who are retiring, or about to retire, they can thank the wealthy for the additional burden that they will have in their old age as they try to find ways to stretch their greatly reduced nest eggs.  Even when the market comes back eventually, we will have lost whatever time it takes and this lost time will stunt financial growth.

I hope I am wrong.