Fed Chairman Bernanke Clowns Around, Exceeds Stock Market Expectations


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November 5, 2008

Anyone who's watched the business channels for more than an hour or two will have been well indoctrinated in the magic thinking that is the Federal Reserve mandate.

The Fed plays 'an expectations game.' In order to maximize the impact of their manipulation, the Fed will try to 'surprise' the markets, because if the markets 'expect' an action, they may not react. Often it's market analysts explaining what the Fed could do that might or might not meet market expectations, or surprise them. We also hear members and spokespersons for the Fed adapt this habit of speaking. You'd think they were generals in war, analyzing enemy preparations.

But if surprises work so well in that piece of the economy, why not try them everywhere?

UPS could surprise its customers by sometimes delivering next day, sometimes putting your package in storage for six months, or perhaps even delivering something when you've asked for a pickup.

Burger King could sell its customers dollar burgers on Wednesday, $35 porterhouse steaks on Thursday, and plumbing supplies on Friday.

If other economic sectors would follow suit (suits being available at garden supply stores'or are they? Maybe your expectations are being managed again' ?), then you can start to see that soon we'd have an unprecedented economic boom, since according to Fed lore, no one knowing what's going on is a sure path to success (as long as it's not so sure that we can't still be surprised).

Has the Fed itself fully explored all the possibilities for surprise?

Maybe Chairman Bernanke could show up at press conferences in drag or funny costumes:

'Chairman Bernanke surprised the financial press today when he attended a briefing wearing an old raincoat and a Harpo Marx wig. Attendees were further taken aback when the Chairman answered all questions by honking a clown horn. Reporters quickly adapted, requesting that Bernanke answer questions with one honk for yes, and two honks for no. All market participants were adjusting to the new conditions, but then Chairman Bernanke yanked away the coat and wig to reveal a Spiderman costume, stunning markets and precipitating an enormous rally''

While Treasury Secretary Henry Paulson may or may not be glad to see us, but always carries a bazooka, for the Fed, the talk is of how many bullets they may have left, and how they can maximize their potential for impact on the markets.

And why use bullets on the market? Why surprise them (us) at all? This talk is of a clear effort to take a group of actors who believe one thing, and get them to believe another. It's the not very disguised language (in fact pretty much says what it is) of confirmed serial bubble makers.

Yet when the bubbles inevitably occur, then the folks with the self-proclaimed power over expectations, with the bazookas and bullets, have an epiphany-- it's the market's fault. 'Sure, we had all the advantages, privileges, power and information, but we couldn't have foreseen that if we threw money at people, they might try to grab it. We need more bullets to get the benighted, frightened public to trust (and borrow) again so we can re-ignite the markets that we perpetually mistake for the economy.'

It should be pretty clear who provides and produces, and who makes noise and pretends. Unsurprisingly (the actual word that the economy as a whole prefers), the people who produce goods and services are the people who produce goods and services. It isn't Wall Street or the banks, and it certainly isn't the Fed or the government.

Creation of money and credit doesn't, in the long run, produce anything except a boon for the creators and early spenders, and confusion and malinvestment for the rest of us. Attempted management of the perceptions of the beneficiaries and victims of fiat money and credit creation may sometimes keep the game cycling a little longer' but more time spent obliviously making poor investments is a worse outcome, not a better one.

Banks and government don't grow or manage the economy; they don't run it, expand it, or stabilize it. What banks and government do to the economy is rape it.

And what would any rapist do to try and dodge consequences from his crime? Blame the victim, of course.

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Les Lafave's picture
Columns on STR: 14

Les Lafave works in the insurance industry.  The opinions in this column are his own.