Tyler Durden has accurately observed of late that there is some contrariness (one might even say in a loose sense “irony”) in the latest twist in the career of former Federal Reserve Chairman Ben Bernanke.
Bernanke is getting into the alpha-hunting business, taking a position at Citadel. His new boss there, Ken Griffin, has said the usual nice things one says at such a moment. Bernanke “has extraordinary knowledge of the global economy and his insights on monetary policy and the capital markets will be extremely valuable for our team and to our investors.”
This has caused some hand-wringing. Oh the revolving door! Oh, the cronyism! That aspect of the situation isn’t irony, though. It isn’t even news. It’s business as usual.
An About Face
What may be ironic, and is certainly contrary, is the about-face this represents for Griffin.
Speaking to the Milken Institute Conference, in April 2013, Griffin said that the Fed’s policies, Bernanke’s policies, were “doing two things that I am very gravely concerned about. Number one is that we have all learned over the years that if you reduce the cost of capital you increase your use of fixed assets and you take out jobs.” [Follow that link to a YouTube video and skip to the 7:30 point to hear the full passage.]
This is a quite sound point. Let’s expand upon it. Economists in the U.S. often use the Rocky Mountains by way of example. There are lots of ways of getting a right-of-way through the mountains. Probably the most expensive, wasteful way imaginable would be to level the mountains entirely, taking all the rock and soil involved out to sea and dumping it – or perhaps shooting it into space.
As interest rates become negative, though, then it may make financial sense for someone to borrow money even for that absurd task. And though stimulation is the idea, the fact remains that waste is still the result, and an economy built on waste is not a sustainable one.
More realistically perhaps, cheap money, even money that funds itself by the very act of borrowing it, can inspire the automation of processes that a rational cost/benefit analysis wouldn’t automate. It can finance outsourcing, too, in respects that are wasteful and even destruction of the production system.
Under the influence of all the quantitative easing, he said, corporate America “is taking every step they can possibly take” to reduce employment, said Griffin, summing up his first point.
Loss of Independence
That wasn’t all Griffin had to say against Bernanke at the Milken Institute, though. His second point was, “We are taking one of the greatest institutions in our society and eroding its independence from our political bodies. I find it hard to believe that as the Fed balance sheet eclipses $3 trillion in assets, that future appointments will not be based …on the simple question ‘are you willing to continue to monetize our country’s debt…’”
The following month, speaking to the Economic Club of Chicago, Griffin expanding on this second prong of his Milken Institute statement, said that QE3 was a terrible idea “because we are now reaching to point where the Fed is becoming captive to our political institutions.” At future confirmation hearings, he said, potential Fed chairs will be asked more-or-less explicitly “to help subsidize the cost of the U.S. federal government’s borrowings” despite the fact that those borrowings increase the risk of potentially uncontrollable inflation. Griffin said, repeating phrase for emphasis, that he was “very worried about that, very worried about that.”
Now he has hired Bernanke, praised the extraordinary knowledge and insights of the man behind all that QW about which he was “very worried … very worried.” What gives?
There are several possible ways of reading this, of considering what Griffin might really now expect to gain from this hire. The least likely, though, would seem to be that Griffin has decided that he was wrong, that he was worried when he had no reason to be, and that Bernanke was right after all.
The Saudi Monarchy
It is the case that standard measures of price inflation haven’t shown runaway inflation of late. Quite the contrary. The Bureau of Labor Statistics reported recently that the CPI for all urban consumers increased a modest 0.2% in both February and March, with seasonal adjustment. Also, this rise is itself overshadowed by a decline of .7% in January. For the twelve months ending in March there’s been a decline of 0.1.
The likely key to the extraordinary price stability despite all the new money creation is that falling crude oil prices, which ramify throughout the economy, have had a dampening effect. This dampening is in turn largely due to the policies of the Saudi monarchy, and could change as quickly as the politics of the region in which that monarchy is located can change. In short: don’t count on this dampener remaining in place forever.
The House of Saud, after all, is at least as entitled to change its views as is, say, Ken Griffin.