Sunday, December 8, 2013

Never Trust The Words of a Federal Reserve Official

By, Chris Rossini

The 2008 financial crisis reality check saw the crumbling of some very prestigious U.S. financial institutions. Lest we forget, the following "powerhouses" went down: Lehman Brothers, Bear Stearns, Washington Mutual, Countrywide,  and others...

These were institutions that the establishment would have you believe were as permanent as the Earth's water cycle (i.e., precipitation, evaporation, condensation...). And yet, in the blink of an eye, and in a tremendous panic, they were all turned to dust.

So what were Federal Reserve officials saying in the years prior to 2008? Not the cheerleaders in the press, like the Kudlows, Liesmans, and Bartiromos. We know what they were saying. What were the big kahuna's saying? That is, the guys that walk through marble palaces, and sit at oversized conference tables.

Here's a look back:

May 2004: Federal Reserve Governor, Robert McTeer: "Policy makers are smarter. They’ve got a lot of mistakes that they can learn from and we won’t be able to have a smooth sailing, perfect economy but we won’t make the tremendous errors in judgment that turned some of the past recessions into depressions and I’ll include the Fed in that."

June 2005President of the Minneapolis Fed Gary Stern said,“Shifting trends in home mortgages and the increased use of adjustable-rate terms are not a huge risk to banks. It sounded to me like credit standards have been relaxed. Some people expressed concern then and continue to express concern. There’s some smoke there, but is there a fire? Not yet, anyway.”

June 2005: Dallas Fed President Richard Fisher said,“Where would the world be if Americans did not live out their proclivity to consume everything that looks good, feels good, sounds good, tastes good? We provide a service for the rest of the world. If we were running a current account surplus or trade surplus, what would happen to economic growth worldwide and what would be the economic consequences? So I think we are doing our duty there.”

June 2005: Federal Reserve Board Governor Donald Kohn said, “I expect that the adjustment to more-sustainable patterns of spending and production and saving will occur in an orderly manner.”

Sept. 20, 2005 CNBC’s Ron Insana interviewed former Vice Chairman of the Federal Reserve Alan Blinder.

RON INSANA: “Should it be looking at the price of gold as an inflation indicator?”
ALAN BLINDER: “No. I think it’s time we outgrew gold. (laughing)…It’s also not a good indicator of the stance of monetary policy, the state of bank credit, a predictor of inflation or anything like that.”

What are the lessons to be learned here?

1) Never trust the words of a central planner. Central planning is impossible, yet these characters are taking a crack at it anyway. In other words, they're incapable of even knowing the truth.

2) Even the mightiest financial institutions are powerless against economic laws and the market. Anyone who would have walked through the halls of one of Lehman's, Bear's, or Merrill's many palaces and proclaimed "in a couple of years, this will all be gone" would have been admitted to a mental institution. Yet they would have been right.

3) Rinse and Repeat. In other words, on this very day, the financial situation is even worse than it was in 2008. The usual characters at the Fed, on CNBC (that now no one is watching) and in the dying establishment media are saying the same things: 'everything is fine'....'there's no inflation'....'Yellen will unwind in an 'orderly' manner....blah...blah...blah.

Put your chips on economic laws (on understanding the Austrian Business Cycle Theory) and the market. It's not different this time.

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  1. Since Binder laughed at gold, the rate of headline inflation has been 2%/year. Your graph supports his claim that gold does not predict inflation.

    What is wrong with Fisher's statement? He was expressing an opinion about the trade deficit and the impact reducing it would have on our trading partners. He was arguing in favor of a strong dollar and a trade deficit.

    1. Not much of a chess player, are you? What's wrong with Fisher's statement is that the consumption is being fueled by debt and is not a sustainable proposition. The day of reckoning will most assuredly come for all who live beyond their means.

      And anyone who cries himself to sleep at night over the fate of the exploited, downtrodden worker must surely understand the effects an artificially strong dollar has on the citizens of our trading partners, who must either continually devalue their currency or peg it to the dollar.

    2. wish I would have bought some gold when Binder was laughing at it.