Tags: Ben Bernanke, Federal Reserve System, Foreclosures, Gold Prices, Housing Market, Inflation, Interest Rates, iShares Silver Trust, Paul Volcker, SPDR Gold Trust, Subprime, Templeton, Weak Dollar, ZIRP

My Confrontation With Ben Bernanke: The One Question He Refused to Answer

"The Federal Reserve continues to work actively to prepare for the possibility of financial stress."
- Fed Chairman Ben S. Bernanke, Jan. 5, 2007

By , Money Morning •

The Secret Service agents watched me warily as I approached U.S. Federal Reserve Chairman Ben Bernanke.

I didn't waste any time. After introducing myself, I showed him a copy of the talk he gave at the American Economic Association (AEA) meetings in January 2007. I circled all the times he used the words "panic," "crisis," and "stress" in his speech, entitled "Central Banking and Bank Supervision of the United States."

A total of 36 occasions.

I asked him point-blank: "Did you know in advance that a financial crisis was headed our way?"

He looked nervous. I could tell he was uncomfortable with my question. He looked at me stoically and smiled.

And he refused to answer.

But there was no doubt in my mind what the correct answer was. I think he was worried about his job if he said, "Yes."

Bernanke Knew This Was Coming

After hearing Bernanke's AEA address three years ago, I wrote in this in the February 2007 issue of my investment newsletter, Forecasts & Strategies:

"Anyone reading between the lines could understand that Bernanke is worried about a financial storm ahead. In his speech, Bernanke used the terms 'crisis,' 'panic,' 'threats,' 'stress' and similar words at least 36 times.

Bernanke said the Fed has set up a 'crisis center' to handle potential global financial problems - to anticipate them and deal with them if they occur. What are the possibilities?

  • A dollar crisis, like the one [former Fed Chairman] Paul Volcker suggested would happen in the next few years.
  • A non-dollar currency crisis in Asia, Europe or Latin America (shades of the 1997 Asian currency crisis).
  • A housing crash and foreclosure crisis.
  • A major terrorist attack on a key financial center, such as New York, London or Tokyo.
  • A sharp rise in inflation.

I doubt the Fed will cut rates again unless there is an imminent financial crisis of some sort that will require more liquidity and lower rates."

Of course, Bernanke's fears became reality just one year later when the financial panic of 2008 forced the Fed to cut interest rates to nearly zero and to inject billions of dollars worth of new money into the economy to prop up the financial system.

Bernanke has since admitted that the crisis was "the worst in modern history."

So what is Bernanke saying now?

Blowing Bubbles, Blowing Policy and Blowing Smoke

After our somewhat awkward confrontation, I sat down to listen to Bernanke's new speech: "Monetary Policy and the Housing Bubble."

He stepped up to the podium in a state of denial, rejecting the common-sense notion that the Fed's low-interest-rate policy in 2002-04 caused the housing bubble or the financial crisis. Bernanke said the housing boom was global and couldn't be blamed on U.S. monetary policy.

However, he did take some responsibility for the lack of proper banking standards that led to the housing crisis. According to Bernanke, the Fed's moves to regulate the subprime mortgage market were "too little, too late."

Once Bernanke had finished his speech, he took questions. He probably didn't want another any more from me - but I asked anyway.

Three Ways to Play the Fed's "ZIRP" Policy

Mark Skousen: "Mr. Bernanke ... in your speech, you talked about interest rates and the price of money, but you said nothing about the supply of money. Will you comment on the fact that the adjusted monetary base [the Fed's checking account] is now growing at an 80% rate again? Does that suggest you fear another financial crisis or credit crunch soon?"

Ben Bernanke: "No, the rise in the monetary base is due entirely to the Fed's recent purchase of mortgage securities that we agreed to buy."

Mark Skousen: "I note that foreign central banks like Bank of India and Bank of China are now buying tons of gold. Is this a sign that foreigners are losing faith in the dollar-based world monetary system?"

Ben Bernanke: "The world financial system is sound."

What struck me about Bernanke's responses was his "What, me worry?" attitude. He showed no concern about the constant loss in the value of the dollar on the foreign exchange markets, or about the dramatic rise in the price of gold since he became chairman.

I came away from this meeting having reached the following conclusions: Don't count on the Fed chairman - or any other high government official - to admit mistakes or tell us what is really going on. No doubt many Americans share that view, too.

My advice: As long as the Fed's Zero Interest Rate Policy (ZIRP) is in place, the following three scenarios will play out:

  • The U.S. dollar will remain weak.
  • Gold prices will rise.
  • Foreign stocks will perform better than U.S. stocks.

And if you're wondering how to combat this, consider these three investments:

  • SPDR Gold Shares Trust (NYSE: GLD)
  • iShares Silver Trust (NYSE: SLV)
  • Templeton Emerging Markets Fund (NYSE: EMF).

[Editor's Note: Mark Skousen is a contributing editor for Investment U - a free daily e-letter that provides economic insights, investment education, trading strategies and stock tips. Skousen 's new book - "The Making of Modern Economics: The Lives and Ideas of the Great Thinkers" - just won the "Choice Book Award for Outstanding Academic Title for 2009." In its award summary, Choice wrote: "With a supreme, lively blend of economics and sociology of economics, Skousen has magnificently managed to put flesh, blood and DNA on the skeleton of economics in this survey of great economic thinkers. It's must reading." To obtain a copy, please click here.

To check out Skousen's recent letter to the editor of The Wall Street Journal pertaining to Fed Chairman Ben Bernanke, please click here.

For more information on Investment U, please click here.]

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