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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.]
News and Related Story Links:
- Investment U:
Official Web Site - American Economic Association:
Official Web Site - Investment U:
An Imminent Financial Crisis? Find Out What Fed Chairman Ben Bernanke Is Saying - Wikipedia:
Paul A. Volcker - Money Morning News Analysis:
Can Bernanke Tune Out Political Pressure as the FOMC Again Ponders Policy Changes? - Money Morning News Analysis:
The Three Ways China May Deal With Growing U.S. Debt - Wikipedia:
Alfred E. Neuman - Money Morning Special Investment Research Report:
The Five Reasons Gold Will Hit $5,000 - Amazon.com:
"The Making of Modern Economics: The Lives and Ideas of the Great Thinkers." - Investment U:
Wall Street's Greed: How to End Big Banks' Grip on the U.S. Economy
Dear Dr. Skousen,
Aren't the current low interest rates simply an attempt at an antidote to try to reviive a badly damaged financial system? And, if this is the case, wouldn't the reinstatement of Glass-Steagal simply bring an end to the kind of risky financial behavior which almost caused the death of the patient? And secondly, why, in your opinion, are Sommers and Geitner so against reinstatement? To me this almost feels like 1933 all over again. Is it, perhaps, time for another round of Pecore Hearings to lay open, again, for the American public, what caused the crash of 2008?
Mike
Just wait until these ALT-A loan rate resets kick in later this year.
The crash of 2008 has nothing in common with the great depression period of 1929 / 1930s when banks had a liquidity problem. 2008 was the result of Mr Greenspans policy of cheap money and his reaction on every crisis with even more money to keep the economy afloat but producing an even bigger crisis as we have seen now. In 2008 banks did not trust each other because they knew that some banks had such bad portfoilios they could not longer survive till the Fed has brought them alive with fresh money to pay the bonuses.
This all is not over and worst is still to come with this brainless indebtedness heading towards a national deficit by 3,000 trillion USD. Mr Bernanke is using the methods which would have been useful in the great depression according to Anna Schwartz who analysed with Nobel laureate Milton Friedman on 900 pages and over nearly her whole life the disastrous events of the 1930s.
What makes it even worst for the worldwide economy is that the European Federal Bank can not increase the interest rates within the Eurozone because this would make the Euro even stronger and would be in no interest of export oriented nations like Germany. So the whole world will face inflation rates in double diggits very soon because the U.S. has no other possibility to get rid of their bailout loans and stimulus packages for failed industries and products as to print further money.
Therefore, hands off of US Dollar bonds or whatsoever investments, before China starts to sell their 1,2 trillion USD share and let crash the markets again but this time in a scenario we would better not think about.
Dear Hartmut,
Actually the financial collapse had everything to do with the removal of Glass-Steagal. Once this act was removed billions of dollars worth of A and B loans where bundled together and rated AAA. Before the removal this didn't happen. Banks and other financial institutions where making billions selling these very risky instruments that paid a little higher interest rate, but where rated AAA. When real estate topped and those B loans began to go bad, the value of those supposed AAA instruments began to fall and the banks and many othr organizations that where charted to only buy A-AAA instruments had a huge problem. The banks quit lending because they didn't know which banks had enough of these instruments to cause them to collapse. Reinstate Glass-Steagal and this riskiy behavior will end. Pretty simple except that some of the biggest Investment banks are again making millions selling these fisky investments. No Glass-Steagal? In my opinion, will bring on another, even bigger, meltdown followed by the next Depression. Also, if the Chinese cause a collapse by selling their U.S. Bonds, they will only be stabbing themselves in the foot because th U.S. is their biggest customer.
Mike