Bernanke is a Total Failure Unsuited for Role as Fed Chairman

Inquiring minds are reading Bernanke Flubs Tryout, Still Up for Leading Role by Caroline Baum.

Most often I agree with Caroline, but not this time.

After trashing (and rightfully so) Bernanke's last appearance before Congress, Caroline somehow arrives at the following conclusion.

It would be hard to find someone more suited for the job of Fed chairman than Bernanke. His performance yesterday has nothing to do with his unique qualifications for the position. ... Unless President Barack Obama wants a solo pilot, he would do well to tap Bernanke for a second term.

Let's take a look at the qualifications of which Baum speaks.

Ten Qualifications

1) Bernanke is either a liar or has a memory problem. I believe the former. Either way, there is a problem when a Fed chairman cannot recall a conversation with another Fed governor over something as critical as the Bank of America/Merrill Lynch merger. See Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl" for my take.

2) Bernanke claims to be a student of the great depression yet amazingly concludes the cause was misguided Fed policy after the stock market crash. This is nonsense. The cause of the great depression and the cause of the current depression (yes we are in a depression), is the massive expansion of credit and debt fostered by the Fed itself. Bernanke is no student of history, he is a dunce.

3) Bernanke has on many occasions promised transparency. This is an outright lie. There is no transparency and Bloomberg has filed freedom of information lawsuits requesting information that should have been disclosed. Moreover, Congress had to subpoena the Fed in regards to the Bank of America / Merrill Lynch shotgun wedding which is how we know about Bernanke's selective memory loss. What else is Bernanke hiding?

4) Bernanke is creative. Some might think creativity is a positive attribute. It is, for a design engineer. Unfortunately creativity is not a good attribute for a Fed chairman. This whole mess was sponsored by the Fed when Greenspan got creative with interest rate policy. Bernanke is light-years more creative than Greenspan as witnessed by an amazing array of Fed lending facilities and the ballooning of the Fed's balance sheet swapped for garbage collateral. The unintended consequences of Bernanke's extraordinary actions are coming down the road. We do not even know what those consequences are. However, we do know that the Fed has no exit policy, and will come up with one by the seat of Bernanke's pants on the fly. Given there is no need for the Fed at all, the last thing we need is for a creative Fed.

5) Bernanke supports policies of theft. Proof of this is easy to establish. Bernanke favors a policy of 2% inflation, and inflation is theft. How so? Inflation benefits those with first access to money: governments, banks, and the wealthy. Government benefits when property taxes rise more than wages, banks benefit by borrowing money into existence, and the already wealthy benefit by being next in line for access to cheap money. By the time those low on the totem pole have access to cheap money, asset prices are already through the moon. Moreover, those with enough common sense to avoid the bubbles, get nothing for their money sitting in the bank. The middle class has been ravished by inflation, and Bernanke supports that inflation.

Please note that Bernanke cannot even follow his own mandate. Where was Bernanke when property and commodity prices were soaring? The answer is he was ignoring them. Thus we see the one sided nature of Bernanke's policies. He let home prices soar, and now that they are crashing looks to support them. By the way, this is not just Bernanke, this is a symptom of central bankers in general.

6) Bernanke cannot dissent. As a member of the Greenspan Fed, Bernanke went along with everything Greenspan did. It is clear Greenspan failed. Thus it is clear that Bernanke failed by supporting Greenspan's policies.

7) Bernanke supports policies of outright fraud. Fractional reserve lending is a fraud. Please consider Murray N. Rothbard and the Case for a 100 Percent Gold Dollar in which Rothbard condemned fractional reserve banking as a violation of contract. "In my view, issuing promises to pay on demand in excess of the amount of the goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues "fake" warehouse receipts � warehouse receipts, for example, for ounces of gold that do not actually exist in the vaults. This is legalized counterfeiting; this is the creation of money without the necessity of production, to compete for resources against those who have produced. In short, I believe that fractional-reserve banking is disastrous both for the morality and for the fundamental bases and institutions of the market economy...."

8) Bernanke could not spot the housing bubble. Amazingly Bernanke thought the housing bubble was "well contained" right before it exploded in his face. Of course there is another possibility: Bernanke is a liar and knew it was not contained but did not want to say so.

9) Bernanke has no idea where interest rates should be. Of course no one else does either. But Bernanke thinks he does. The result is overshooting interest rate policy in both directions, just as Greenspan did. This is the Fed Uncertainty Principle Corollary Number One in action: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

10) Bernanke is a power grabbing hack. This is the Fed Uncertainty Principle Corollary Number Two in action: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Summary:

Bernanke is a disingenuous liar with a memory problem. He is also an economic dunce who does not understand the cause of great depression nor could he spot a housing/credit bubble visible to nearly every blogger in the country. However, like his mentor Greenspan, Bernanke believes that every problem can be cured by throwing money at it. Finally, he is a creative, political power grabbing hack who gives memorable speeches about throwing money out of helicopters.

I have to hand it to Caroline. That is indeed a unique set of qualifications.

Bernanke�s four-year term ends in February, let us hope he is gone. Better yet, it's time to Audit the Fed Then End It!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Monday, Monday

My weekly page update:

Spuimarkt in The Hague, Netherlands by BOLLES+WILSON.

This week's book review is 2G 48/49 Mies van der Rohe: Houses edited by Mois�s Puente.

Some unrelated links for your enjoyment, three solid recent Archinect features:

ShowCase: Storage Barn
A workshop and storage facility designed by Gray Organschi Architecture.

Urban China, Crisis, and the Bootlegging of a Magazine
A three-part interview about publications around the recent Urban China: Informal Cities exhibition.

Working out of the Box: Thumb
Architects designing beautiful books.

Bloated State Police Pension Plans � Something Has To Give

The police union in Michigan is doing what public service unions in general usually do, 1) whine for more taxes 2) Complain they need more workers to maintain safety 3) Elect layoffs over reduced pay 4) Ignore the long term issues that need addressing.

Please consider Michigan State Police layoffs take effect Sunday.

LANSING, Mich. (AP) - About 100 Michigan State Police troopers will be laid off Sunday after a last-ditch effort to avoid the job loss failed.

Members of the Michigan State Police Troopers Association voted against a furlough plan that would have temporarily cut their pay to avoid layoffs of low seniority workers.

The furlough plan would have required troopers to take 37 hours of unpaid leave over a six-week period. That would have saved jobs now, but there was no guarantee low-seniority officers would have kept their jobs in the next budget year.

Mike Moorman, the troopers' union president, said the vote reflects dissatisfaction with how the state has handled public safety funding in recent years. Michigan has lost more than 2,000 law enforcement officers statewide this decade, including more than 400 from the state police. Positions have been eliminated as government tax revenues decline during a lengthy recession.

"The membership's rejection of furlough time is not a reflection on our unwillingness to stop the loss of 100 troopers," Moorman said in a statement. "Our members are fed up with the lack of public safety priorities in Michigan, which have been discussed for years, yet never acted upon."

Col. Peter Munoz, director of the Michigan State Police, said in a statement he is "deeply disappointed" a solution could not be found to avoid the layoffs.

The state spent more than $8 million in the past few years training the troopers it now plans to lay off to save less than $2 million in the current budget year.

Some state lawmakers continue to question why Gov. Jennifer Granholm's administration plans to move the police department into a new $40 million headquarters building in downtown Lansing early next year. The move could have long-term financial implications for the state police -- including significantly higher annual lease payments of $3.7 million per year -- but it does not affect the department's budget for the current fiscal year.

Peter Munoz, director of the Michigan State Police, whines he is "deeply disappointed a solution could not be found to avoid the layoffs". Munoz is wrong. There was a perfectly good solution to avoid the layoffs. If the union wanted to protect the most workers, the vote would have been for pay cuts. Instead, the union elected to do what unions typically do, protect the few instead of sharing the pain.

Of course there is plenty of blame to be spread around. Why is the legislature and/or Governor authorizing a new $40 million police headquarters in Lansing with lease payments $3.7 million per year higher?

After the layoffs, the Michigan State Police will have 958 troopers at posts across the state. Reduce the pension plans and benefits to reasonable levels and perhaps Michigan can afford 1200 officers. Then again, why isn't 900 or even 850 officers enough? Michigan has lost 400 state police in a decade. Is anyone suffering for it? How?

Voters are fed up with paying ever increasing taxes to keep unneeded public servants in high paying jobs with ridiculous pension benefits.

State Police Pension Double-Dipping

Inquiring minds are digging further into the Michigan State Police layoff situation. Please consider Why another budget "crisis?" State Police Pension Double-Dipping (among other reasons).

Troopers start getting a portion of their pension while still working and simultaneously collecting their regular salary. The amount of pension they can collect is 30 percent the first year, 50 percent the second, and then increases 10 percent each year until eventually they are getting full pension and full pay before they have retired. The money is not paid out to them immediately but is deposited into an interest-bearing retirement account they get when they really retire.

That's nuts, of course. No sane private sector employer would give away such a benefit.

We offer one because legislators abandoned their fiduciary duty to be responsible stewards and gave away a huge pile of loot to a powerful public employee union.

The rationale under which that caper was foisted on taxpayers was that Michigan State Police are eligible to retire and collect their pensions after just 25 years of service with no minimum age. As a result it's not uncommon to have age 40-something men and women in the prime of life eligible to call it a career and head for the beaches, spending the last 35-40 years of their lives lounging at taxpayer expense.

Needless to say this causes potential staffing problems at the MSP. Rather than fix the problem in a rational and fiscally prudent way - establish a minimum age of say 55 or 65 before an individual can start collecting a pension - the political class gave away some boodle in the form of a goofy DROP program as an incentive to keep troopers working.

Pretty sweet deal, huh? Sweet for the troopers, but not for the taxpayers. And just one more example of why you should never believe a politician who says, "Our budget has been cut to the bone."

Mike Moorman, the troopers' union president, whines "Our members are fed up with the lack of public safety priorities in Michigan".

Moorman is not bright enough to figure out what everyone else in the world knows: The US is in recession and Michigan is at the top of the list. There simply is no more tax money to pay for boated unions or their pension plans.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Masonry "Masterpiece" or Mistake?

Over at David Byrne's blog I came across this monstrosity by none other than Michael Graves, the Federal Reserve Bank of Dallas in Houston, Texas. The former Talking Head memorably says, "This very out of place structure somehow lingers, like a fart left by someone no longer in an elevator."


[Federal Reserve Bank of Dallas in Houston, TX by Michael Graves & Associates | image source]

The architect explains the building "is a 300,000-square-foot office building and regional bank-processing center. A pitched roof marks the wing housing secure cash processing facilities on the lower floors, while a boardroom, meeting rooms, and dining rooms benefit from panoramic views of the Houston skyline visible from the two levels above. The wing opposite contains the storage vault under a green tile barrel-vaulted roof. These volumes are intended to exhibit the Bank�s commitment to security, as the loggia at the building�s entrance suggests outreach and openness."


[Federal Reserve Bank of Dallas in Houston, TX by Michael Graves & Associates | image source]

The Masonry Contractor's Association of America (MCAA) calls the building a true "masonry masterpiece." Why? One reason is because "Mr. Graves used masonry extensively for both the exterior and interior construction." How much is extensive? "The overall exterior consists of 537,000 closure brick (4"x8"x4"), 31,400 blue structural glazed tile (8"x8"x4"), 90,000 modular accent brick and 3,307 cubic feet of cast stone. Additionally, the architect utilized 3,428SF of green precast paving (to match the color of money) at the main entrance stairways and accent pavers in the concrete plaza...over 178,450 fully grouted and extensively reinforced concrete masonry units were used for backup and partition walls...Over 5,800 SF of Hadrian limestone and Palamino tile adorns the main entrance lobby, boardroom and executive restrooms. Green glazed tile units (over 15,000 of them) were used in the walls of the cash processing areas as well." That's alotta masonry!


[Federal Reserve Bank of Dallas in Houston, TX by Michael Graves & Associates | image source]

Another reason the MCAA loves this building is because Mr. Graves made the thing look like it was made of GIGANTIC bricks, like a toy model blown up to the scale of a real building inhabited by real people. Those 31,400 blue structural glazed tiles help make the majority of the exterior walls read in this manner; they are the mortar to the 537,000 closure bricks "bricks." It's deplorable, as if Mr. Graves is regressing into a grade-schooler. I'm surprised that the Federal Reserve Bank sees this postmodern playfulness as appropriate for a fairly serious institution. Perhaps they are trying to paint a goofy face on highly secure facility.


[Federal Reserve Bank of Dallas in Houston, TX by Michael Graves & Associates | image source]

That said, I actually like the footprint and massing of the building, the way it fizzles from the pedimented face fronting the highway to the old building it is linked to. The colonnaded roof deck is equally hokey, and maybe unusable during many months in Houston, but it seems to be in the right place. Nevertheless, it does not make up for a design that continues Mr. Graves' treatment of buildings as purely graphic exercises, apparently removed from the considerations of not only occupants but those that are confronted with his buildings on the outside.


[Federal Reserve Bank of Dallas in Houston, TX by Michael Graves & Associates | image source]


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175 California Hotels In Default; Sheraton Keahou Bay Resort in Hawaii Defaults; More Defaults Coming

Hotel owners are facing the same problems as homeowners, being upside down on their properties with no good escape. Please consider Hotel foreclosures jump in California.

In California, 175 hotels are in default -- the first stage in the foreclosure process -- according to a report from Atlas Hospitality Group, an Irvine-based brokerage firm. Another 31 have been foreclosed, nearly one third of them in the Inland region.

Of those in default or foreclosure, about 75 percent obtained new loans between 2005 and 2007 for construction financing, re-financing or to buy the hotel, according to the firm. Atlas Hospitality estimates that 2,500 hotels -- about 25 percent of the state's entire hotel population -- refinanced or obtained new loans in that time meaning more defaults and foreclosures could be on the horizon.

The industry has been rattled by foreclosures before, especially in the mid-1990s, but the impact today is more widespread, hitting both low-end and high-end properties in every region, Reay said.

Those who bought hotels between 2006 and 2006 are likely sitting on properties worth at least 50 percent less than what they paid, he said. [Mish: obviously there is a typo in the date range]

Reay's firm is marketing The Block at Big Bear, a 50-room hotel that catered to snowboarders. The hotel's owner walked away earlier this year and closed the hotel, which is in default. The hotel was appraised for more than $4 million in 2006. Today, Reay's firm, working with a court-ordered receiver, is asking $2.04 million for the property.

Hoteliers will likely have to survive at least two more years of low revenues, diminishing profit margins and fewer rooms booked by travelers unwilling to spend.

Atlanta-based PKF Hospitality Research has forecast that the revenue hoteliers earn per room will reach its lowest point of the recession in the third quarter of this year.

Sheraton Keauhou Bay In Foreclosure

In Hawaii, the Sheraton Keauhou Bay Resort and Spa is in foreclosure after owner defaults.

The Sheraton [Keauhou] Bay Resort and Spa on the Big Island is going into foreclosure after the resort's owner defaulted on its mortgage, another sign Hawaii's beleaguered tourism industry is suffering during the global recession.

Owners Koa Hotel LLC have defaulted on nearly $60 million remaining on their mortgage, interest and fines. Koa Hotel is owned by the New York private equity firm Brickman Associates. The property's major creditor is Lehman Brothers Holdings Inc., which filed for bankruptcy last year.

The resort's business declined amid a broader drop in visitors to Hawaii since last spring. So far this year, 15 percent fewer tourists have visited the Big Island compared to the first part of 2008.

Anyone who bought hotels in anywhere in the US between 2003 and 2007 more than likely overpaid, and by as much as 50% or more. Tourism is down everywhere and that tourism is not going to recover for years, perhaps decades as cash strapped consumers attempt to repair balance sheets.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Today's archidose #328

Alabama Veterans Memorial, originally uploaded by Burton24.

Alabama Veteran's Memorial in Birmingham, Alabama by Giattina Aycock Architecture Studio.

To contribute your Flickr images for consideration, just:

:: Join and add photos to the archidose pool, and/or
:: Tag your photos archidose

Embrace Deflation - It's The Cure, Not The Problem

Concern over Japanese deflation is increasing. Please consider Japan Succumbs to Deflation as Consumer Prices Fall Record 1.1%.

Japan�s consumer prices fell at a record pace in May, adding to the risk that deflation will become entrenched and hamper a rebound from the nation�s worst postwar recession.

Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971.

Bank of Japan Governor Masaaki Shirakawa said last week that price declines will accelerate through the middle of the fiscal year as demand slackens and crude oil continues to trade lower than last year�s record. Retailers including Aeon Co. are cutting prices to attract customers as falling wages and the worsening job outlook damp spending.

�Profits fall, then wages come down, then consumers stop shopping,� said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. �And because people aren�t shopping, companies lower prices. That�s the process that we�re starting to see. It isn�t easy to break out of.�

�With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting,� said Azusa Kato, an economist at BNP Paribas in Tokyo.

Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. Aeon, Japan�s second-largest retailer, this week started a discount campaign for confectionary, drinks and mayonnaise.

Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005.

Japanese Deflation Deepens

As Japanese deflation deepens, Japanese Bonds Complete 2nd Weekly Gain.

Japan�s bonds gained for a second week as a government report showed consumer prices fell at a record pace, adding to signs deflation will hamper the economic recovery and boost the value of the fixed payments of debt.

Ten-year yields touched the lowest in almost three months after the statistics bureau said yesterday prices excluding fresh food fell 1.1 percent in May from a year ago.

�The drop in consumer prices may accelerate to about 2 percent in the summer,� said Yuichi Kodama, chief economist in Tokyo at Meiji Yasuda Life Insurance Co., Japan�s third-largest life insurer. �The 10-year yield may decline to 1.3 percent or below as the market needs to prepare for deeper deflation.�

An �extreme� slump in demand and production are causing the drop in prices, Finance Minister Kaoru Yosano said yesterday. �We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral.�

The Organization for Economic Cooperation and Development this week urged the Bank of Japan to keep pumping cash into the economy �until underlying inflation is firmly positive.� Since it cut the key interest rate to 0.1 percent in December, the central bank has been buying corporate debt and increased government bond purchases from lenders to revive growth.

Japan Fighting Deflation For Decades

Notice the misguided advice by the OECD about pumping cash into the economy. Japan has been doing this for 15 years and all they have to show for it is massive national debt and bridges to nowhere.

Will Deflation Derail A Japanese Recovery?

Jun Saito, a top Japanese economist says Deflation May Derail Japan Recovery.

Deflation �will exert a significant amount of downward pressure on the recovery,� Jun Saito, an adviser to Economic and Fiscal Policy Minister Kaoru Yosano, said in an interview yesterday in Tokyo. �An increase in deflationary expectations will raise real interest rates and that will restrain business investment.�

�Declining prices will mean lower profits, less investment and wage cuts that will weaken consumer spending further,� said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co.

According to Saito, who quantifies the risk of deflation by using government data and figures from the International Monetary Fund, the risk of persistent price declines climbed to the highest level since 2003 and almost doubled since last year.

�I think there�s a risk we may slip back into deflation,� Saito said, adding that he defines it as a sustained decline in prices.

Japanese companies cut spending at the fastest pace in 54 years in the three months ended March 31. Wages have dropped for 11 months and households reduced spending for a record 14th month in April.

Falling prices are a blow to households who borrow money because it makes it harder to repay debt, Saito said. Consumers will cut back spending if entrenched price declines push up their borrowing costs, he added.

Deflation Misinformation

There is so much misinformation in the above articles it's hard to know where to begin. For starters, inflation and deflation are monetary measures not price measures. However, let's talk about prices for a change.

The idea that "Falling prices are a blow to households who borrow money because it makes it harder to repay debt" is preposterous. When prices fall, consumers have more money and they can pay off debts faster, provided of course they have a job. Falling prices reward the fiscally prudent, which is the way it should be.

Falling home prices do encourage more mortgage walk-aways which is another matter. However, home prices must drop to the point of affordability before a recovery in housing can begin, so even falling home prices are desirable. The sooner home prices fall to the point of affordability, the better of everyone will be.

In general, falling prices are good for consumer balance sheets. Imagine the problems we would have if prices were soaring with the unemployment rate approaching 10%.

Profits are falling along with prices because demand is returning to some sense of normalcy that businesses did not plan for. In the meantime, cash strapped consumers spent recklessly for decades and need to save. They are. Proof is easy to find: US Savings Rate Hits 6.9%, Highest In 15 Years.

This saving is not bad for business as Keynesian clowns believe. Savings provides capital for businesses to expand. For more on this as well as a rebuttal to the ridiculous concept callled "Paradox of Thrift", please see Families Start Saving; Does This Aggravate The Nation's Woes?.

The only reason it appears that savings is bad is after decades of loose credit and monetary expansion by the Fed the world is awash in overcapacity. Now is payback time for misguided Fed polices and reckless consumer spending.

This recession and a rising savings rate are both necessary ingredients to restore fiscal sanity. Deflation should not be feared; deflation should be embraced. What should be feared is the reckless expansion of consumer and corporate credit made possible by Fed policies under both Greenspan and Bernanke. Deflation is not the problem, it is the cure for those reckless policies.

Ironically both Greenspan and Bernanke encouraged Japan to write off bad debts as the means to return to normalcy. However Bernanke Suffers From Selective Memory Loss and cannot follow his own advice.

Addendum:
The Fed likes to portray itself as being an "inflation fighter" when the ONLY source of inflation is the Fed itself. Because of rising productivity over time, the natural state of affairs is actually deflation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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