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As usual, the markets were hanging on every word of the Bernanke testimony to Congress today (Wednesday).
By now, everyone should know better.
In the years that U.S. Federal Reserve Chairman Ben Bernanke has been a member of the Fed – both as a member of the Board of Governors from 2002 to 2005, and in his two terms as chairman beginning in 2006 – he has been stupendously wrong time and time again.
Bernanke gave the markets what they wanted by hinting that his monetary easing policies won’t change any time soon, pushing both the Dow Jones Industrial Average and the Standard & Poor’s 500 Index up more than 0.5% in midday trading.
But when members of Congress started asking the Fed chief questions about whether those policies might be inflating bubbles in stocks and other assets, we got Bernanke testimony like this:
“To this point our sense is that major asset prices like stock prices and corporate bond prices are not inconsistent with the fundamentals….. our sense is that those issues [the threat of market bubbles] are still relatively modest.”
That Bernanke would dismiss such serious concerns is no surprise; he’s done it many times before, and often with disastrous consequences.
And yet, just as with Alan Greenspan before him, Bernanke’s every public utterance has the power to move markets. Utterly baffling.
Today’s Bernanke testimony is only the latest example of how poorly he seems to grasp the many complex forces that threaten the markets.
The following seven statements from Fed Chairman Ben Bernanke‘s past show why no one should ever take anything he says seriously.
1. “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” (July 2005)
For the next two years, as the housing bubble continued to inflate, Bernanke repeatedly dismissed signs that a crisis was brewing.
2. “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.” (November 2005)
Risky derivatives were the root cause of the 2008 financial crisis. The entire country has suffered because of Chairman Bernanke’s lack of foresight on this issue.
3. “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.” (March 2007)
Bernanke also failed to grasp the seriousness of the subprime mortgage meltdown until it was too late.
4. “They will make it through the storm.” (January 2008)
Bernanke was referring to Fannie Mae and Freddie Mac, the government-sponsored mortgage companies that collapsed just two months later. The ensuing bailout cost American taxpayers $170 billion.
5. “Although low inflation is generally good, inflation that is too low can pose risks to the economy – especially when the economy is struggling.” (November 2010)
Bernanke, like all fans of Keynesian economics, likes to see higher inflation because he believes it helps spur economic activity. That’s why he continues to pursue inflationary monetary policies. But most ordinary people dislike rising prices.
6. “One myth that’s out there is that what we’re doing is printing money. We’re not printing money.” (December 2010)
Bernanke may not literally be printing up greenbacks, but its massive bond-buying program known as quantitative easing has created more than $2 trillion out of thin air. Why do you think the stock markets are at record highs?
7. [When asked what he thought of the U.S. dollar losing status as world's reserve currency:] “I don’t see any sign that that’s happening. The amount of reserves held in dollars is actually growing, not shrinking. I think that reserve currency status at least for the foreseeable future is very much intact.” (February 2013)
True, the dollar is not in imminent danger of losing its status as the world’s reserve currency. But there are plenty of signs that the Chinese yuan’s growing importance is threatening that status. For example, from January 2012-January 2013, global transactions in yuan grew 171% in value. And HSBC predicts that half of all trade with emerging markets will be settled in yuan by 2015 – the same year the yuan will become a fully convertible currency in London.
Bonus: “I wish I’d been omniscient and seen the crisis coming.” (December 2010)
Bernanke didn’t need to be omniscient; he just needed to pay closer attention to what was happening right in front of his eyes.
If you think the Bernanke testimony is full of good info, you need to check out 5 Things the Federal Reserve Hopes You’ll Never Find Out