Today's Market Observation  07.27.2009  Mon  Tue  Wed  Thu  Fri  Kirby Archive

Mr. Bernanke's Report Card:

We Should All Be Holding Our Noses

BY ROB KIRBY | july 27, 2009

On Sunday, July 26, 2009, Federal Reserve Chairman Benjamin Bernanke participated in a town-hall styled meeting, moderated by public television's Jim Lehrer in Kansas City, Mo., where he was peppered with several questions about government decisions last year to rescue so-called "too big to fail companies" like insurance giant American International Group.

Mr. Bernanke responded,

"I had to hold my nose. ... I'm as disgusted as you are…”

“Nothing made me more frustrated, more angry, than having to intervene" when companies were "taking wild bets."

And,

It was a "perfect storm," he said, where housing, credit and financial problems converged into a major crisis the likes of which haven't been seen since the 1930s.

It would appear that Mr. Bernanke would have us all believe that he was ‘surprised’ at the outcome we have experienced in financial markets; after all, he did characterize the situation as a “perfect storm” – not exactly a garden variety occurrence.

The failure of Bear Stearns, AIG and the collapse of Lehman Brothers were ALL brought on by derivatives EXCESS. Will Mr. Bernanke be surprised when further losses are socialized?

Does anyone question Mr. Bernanke’s sincerity? Should we be surprised [or appalled, perhaps?] that Mr. Bernanke was “surprised”?

Bernanke taught at the Stanford Graduate School of Business from 1979 until 1985, was a visiting professor at New York University and went on to become a tenured professor at Princeton University in the Department of Economics. He chaired that department from 1996 until September 2002, when he went on public service leave. He resigned his position at Princeton July 1, 2005. Dr. Bernanke served as a member of the Board of Governors of the Federal Reserve System from 2002 to 2005, and was Chairman of the President's Council of Economic Advisers, from June 2005 to January 2006. Bernanke succeeded Alan Greenspan as Chairman of the Federal Reserve on February 1, 2006. 

So, let’s just say Mr. Sincerity was academically qualified and present in the decision making process, first as a Fed Governor, then followed by a run in a senior capacity White House Economic aide from 2002 onward:

Source: Comptroller of the Currency

The chart above only captures derivatives held at the Commercial Bank level. The United States of America has [roughly] a 13 Trillion economy. Heck, Global GDP was only 70 Trillion in 2008. Bank Holding Companies are regulated by the Federal Reserve. At the Bank Holding Company Level, the growth in derivatives was almost an additional 100 Trillion, measuring 291 Trillion in notional at Mar. 31, 2009:

Source: Comptroller of the Currency

Under Mr. Bernanke’s supervision, U.S. banks and former investment banks were growing their derivatives positions [instruments that there is NO discernable end use for] to amounts which are MULTIPLES of U.S. GDP, and Mr. Bernanke is surprised that this became problematic?

Two of the biggest players in this cancerous growth in derivatives were none other than Goldman Sachs and J.P. Morgan Chase – BOTH institutions known to have deep ties to the Federal Reserve and the U.S. Treasury. As Chairman of the President's Council of Economic Advisers, from June 2005 to January 2006 at the White House, Mr. Bernanke worked elbow-to-elbow with former employees of Goldman Sachs [a prerequisite to work in the U.S. White House it seems].  Are we to believe that he never spoke or ‘talked shop’ with these people?

This is being brought up for a very good reason because a debate over the future of the U.S. Federal Reserve is taking place in the halls of Congress:

On one side is U.S. President Barack Obama and his plan to expand the authority of the Federal Reserve. In addition to its current powers, Obama plans to give the Fed regulatory authority over large financial institutions that are considered "too big to fail.”

And,

On the other side is U.S. Rep. Ron Paul, R-TX, who has gathered 250 signatures for a proposal to audit the Federal Reserve. This audit, by Paul’s own admission is only a down payment towards his overriding goal of abolishing the central bank.

The report card on the quality of oversight already administered by the Federal Reserve and serious questions regarding the believability of Mr. Bernanke himself has an odor to it leaving very much to be desired.

Today’s Market

Overseas equity markets began the week on a positive note with Japan’s Nikkei Index adding 144 points to 10,088. North American markets shrugged off early losses to end the day in positive territory too with the DOW up 15.30 to 9.108.50, the NASDAQ ahead by 1.93 to 1,967.89 and the S & P gaining 2.95 to finish the day a 982.20. NYMEX crude oil futures ended the day at 68.21 per barrel, up .16 on the day.

The benchmark 5 yr. government bond finished the day at 2.58% while the 10 yr. government bond finished the day at 3.72%.

On foreign exchange markets the U.S. Dollar Index fell .20 to 78.67.

Precious metals ended the day mixed with COMEX gold futures adding 2.30 to 954.90 per ounce while COMEX silver futures added .14 to 14.05 per ounce. The XAU Index fell .69 to 148.81 while the HUI Index dropped 1.63 to 359.52.

On tap for tomorrow, at 9:00 a.m. July Consumer Confidence data is due – expected 49.0 vs. prior 49.3. Also at 9:00 a.m. May S & P Case/Shiller Home Price Index data is due – expected -17.90% vs. prior -18.12%.

Wishing you all a pleasant evening!

Rob Kirby
Registered Representative

Copyright © 2009 All rights reserved.

contact information

Rob Kirby
Kirby Analytics Newsletter | Toronto, Ontario, Canada
Email | Website | Observation Archive | FSU Editorial Archive