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Not everyone admires the Fed under Bernanke

July 11th, 2008 · No Comments

We noted how influential economist Melvin Krauss came out in defence of Bernanke’s Fed. Not everybody is a believer though… 

Here are some biting comments from Marc Faber, an influential investor, economist, and former managing director of Drexel Burnham Lambert:

  • The Federal Reserve has misled the public, and its fiscal policy has greatly damaged the U.S. economy. But the big Wall Street banks and brokerage firms will be bailed out by the Fed if they get in trouble because they’re members of the same “club.”
  • “Let’s say if I’m a manufacturer and I’m a bad businessman and I go out of business, who’s going to help me? But Bear Stearns and the Wall Street elite because they’re tied into the Treasury and the Federal Reserve and they lunch together, it’s a club … and they’re bailed out. I mean it’s a joke.”

Well, sort off. We can see his point, but that ‘fiscal policy’ surely must be a misquote, unless the Fed pulls even more strings than most people are aware off.. And one could argue that a banking failure could be the prelude to something of a systemic crisis in the financial sector, and he seems to agree with that:

  • In Faber’s recent note to investors he writes with extreme pessimism that he expects 150 bank failures in the next 12 months. “I think a lot of banks are already bankrupt,” Faber says. “And a lot of insurance companies and financial institutions, but they hide their rotten assets in level three asset categories, where you don’t need to value them.”
  • I think the financial sector by and large has much larger problems than is perceived by the investment community. The stock market to some extent is telling you that, is giving you the price signals.”

And many people would argue that it’s the Fed’s job to keep that from happening, a systemic financial crisis would do more damage than even a failure (not even terribly unlikely, in the present circumstances) of, say, GM. but Faber doesn’t see it that way, according to him, there is nothing wrong with a big bank going bankrupt (and he, of all people, should know):

  • A bank failure does not necessarily hurt depositors or clients, Faber says. “I don’t think there would be anything wrong if Bear Stearns or another investment bank would fail because you could transfer the assets of clients to another investment bank or to another broker. I was working at Drexel Burnham,” he says.
  • We went bankrupt. Nothing happened to the clients. Their assets were transferred somewhere else.”

It would be interesting to know whether Faber also thinks that the Fed should do nothing to keep Freddie Mac and Fannie Mae alive…

According to Faber, interest rates have gone way too low in the US (although he seems impervious to the argument that higher rates might very well have led to more banking problems):

  • “The first thing that people should do is stop listening to the Federal Reserve in America, and specifically to Mr. Ben Bernanke,” Faber said in a recent CNBC interview. “They are misleading the public and investors by claiming they want to have a strong dollar and that they’re concerned about inflation. “But when it comes to actions, they show no concern about inflation and [about] the ordinary Americans and middle class at all.”
  • Faber believes the Fed cut interest rates too sharply and should’ve stopped cutting at 4 percent. “Great damage was done to the U.S. economy when the Fed rate was cut from September [2007] from 5 ¼ percent to 2 percent. These [current] rates are negative real interest rates, and the purpose of money is to be a store of value.”
  • “When rates are negative it destroys the wealth of honest depositors who have their money in the bank and don’t want to speculate…The Federal Reserve is the greatest speculator. They force people to speculate,” Faber says.

Not only do they “force people to speculate”, they bail their big buddies in the banking system out when thing goes wrong, causing a moral hazard problem (which is economic speak for providing people with one way bets, the consequences of which would be that their next bets will be even more risky than their previous ones).

The next time you speculate, blame the Fed. And if things go wrong, you could give them a call..

Tags: The Markets