Sick Minds

panderFrederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.


DOW JONES NEWSWIRES – June 22, 2011 –

Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.

“According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.

“Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.”

Social Security payments must be reduced. Promises were made – by lawmakers – that are beyond the government’s (the taxpayer’s) ability to pay. The latest scheme is a ploy by cowardly elected representatives who surreptitiously cut benefits for those most in need: the old and the frail.

First, the logic is indefensible: Gasoline prices rise; higher prices are unaffordable; people drive less; less gasoline is consumed; the Bureau of Labor Statistics (BLS) reduces the weighting of gasoline in the Consumer Price Index (CPI) calculation; this cuts gasoline’s (and, other products that are rising in price) influence on the CPI; the Consumer Price Index falls. Ergo, Chairman Ben S. Bernanke, in a future and “dreary” press conference (the adjective used by the Wall Street Journal to describe his session with reporters on June 22, 2011), states that inflation is falling.

Second, as mentioned above, this is hidden from public view. The official, government CPI which is used to increase Social Security benefits (e.g., if the CPI rises by 2.0%, next year’s Social Security checks go up 2.0%), will understate costs, reduce the ability to buy gas further, which will reduce gasoline’s proportion in the CPI even more.

By the way, this also reduces the inflation credited to owners of TIPS, or TIIS (Treasury Inflation-Protected Securities). The change reduces the value of TIPS.

It would be interesting to know if the amount spent on gasoline actually falls. The amount of gas (in gallons) might be less, but the increase in price could mean the dollars spent are proportionately greater to total costs. You can be sure the BLS has devised a method that has eliminated the possibility, which leads to:

Third, this latest scam is part of a long-running ploy to reduce Social Security benefits without inconveniencing politicians. Chapter 12 of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession is the history of Social Security and inflation manipulations between 1983 and the mid-1990s. From Alan Greenspan’s 1983 Social Security Commission through Michael Boskin’s contorted changes to the CPI measurement (1995), Social Security payments have already been reduced well below what they should be. One estimate, by Richard Karn, author of Emerging Trends Report, calculates that Social Security checks would have been 43% higher by 2006 if not for the chicanery of the scandalous Boskin Commission, a decade before.

Fourth, this latest effort shows the talk about reducing the deficit, cutting spending, and reaching an agreement on the debt ceiling is exactly that – talk. (As if you needed to be told.) Lawmakers may pat themselves on the back for this gift from the BLS, but a $220 billion spending cut is a drop in the ocean (and, probably a projection over the next 20 or 50 years). Social Security needs to be addressed by increasing, and by a substantial amount, the age at which retirement benefits can first be collected. Starving the old and the frail is not only a sick policy, it is also camouflage to win the next election.


Sheehan on Michael Boskin (January 2010)

Why Michael Boskin Deserves Our Contempt (January 2010)

Category: Inflation, Really, really bad calls, Think Tank

Tipping Around the World

Click for ginormous graphic Via Life Hacker

Category: Travel, Weekend

Pimco’s El-Erian on Greece Outlook, IEA Oil Release

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., talks about Greece’s debt crisis. El-Erian, speaking with Betty Liu, Michael McKee and Jon Erlichman on Bloomberg Television’s “In the Loop,” also discusses the release of emergency oil stockpiles and the U.S. economy.

Source: Bloomberg, June 23

Category: Energy, Video

Look Out Below, Part II: Crude Oil!

Here is the other half of today’s Look Out Below – the US release of Crude from the Strategic Petroleum Reserve. The DoE announced a release of 30 million barrels of oil, ostensibly due to Libyan supply disruptions over the next 30 days. ~~~

Category: Commodities, Energy

Marc Faber Likes Gold, Silver

Marc Faber, publisher of the Gloom, Boom & Doom report, talks about his investment strategy and the outlook for global financial markets. Faber speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”

Source: Bloomberg, June 23

Category: Gold & Precious Metals, Video

Look Out Below (6.23.11 edition)

> US Stock Futures plummeting  on news that jobless claims exceeded estimates and “European Central Bank President Jean-Claude Trichet said the debt crisis threatens to infect banks.” Looks like I picked the wrong week to quit sniffing glue cover shorts. We’re still about 39% cash.

Category: Markets

10 Thursday Reads

My reads for this morning: • What Stock-Market History Is Telling Us (Market Watch) • Does an expanded Government role impact investment returns? (Stewart Partners) • Bill Gross to Deficit-Obsessed Congress: Get Real (TPM) • Big bills racked up to buttress economic recovery are coming due (LA Times) • Crude Oil Supply & Demand (Ed…Read More

Category: Financial Press

Is “Buyer Beware” Alive and Well?

Caveat Emptor: “Let The Buyer Beware” Caveat Emptor is an old common law rule which means “Let the Buyer Beware.” In plain English, it means that home buyers are on their own when it comes to the condition of the property. If there is a defect of any kind, it becomes the buyer’s problem, not…Read More

Category: Markets, Real Estate, Think Tank

Fed Forecasts? PUH-Leeze!

Good Thursday morning. We are seeing Markets lower in Europe and Asian after Uncle Ben and the Fedettes lowered their perennially over-optimistic forecasts for growth in the US. Global Markets reversed their modest gains and sold off yesterday, and there seems to be follow through in the futures this morning. From Sub-prime being contained (James…Read More

Category: Credit, Economy, Federal Reserve

Does Bernanke Understand Why We Have a Weak Economy ?

Bernanke Is Either Not Very Bright or Not Very Honest. He Admits He Doesn’t Know Why We Have a Weak Economy … But He’s the One Who Weakened It

In “Bernanke Admits He’s Clueless On Economy’s Soft Patch”, Forbes blogger Agustino Fontevecchia notes:

Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.”

Specifically, Bernanke said today:

We don’t have a precise read on why this slower pace of growth is persisting.

Well, it is obvious to anyone who has been paying attention what’s causing the slow down, and if Mr. Bernanke doesn’t know, he should be fired.

As I’ve repeatedly explained since 2008, all independent economists and financial experts know why the economy is weak … and everything the Fed has been doing has been weakening it.

High-Level Fed Officials Slam Bernanke

Fed Vice Chairman Donald Kohn conceded that the government’s actions “will reduce [companies'] incentive to be careful in the future.” In other words, he’s admitting that the government’s actions will encourage financial companies to make even riskier gambles in the future.

Kansas City Fed President and veteran Fed official Thomas Hoenig said:

Too big has failed….

The sequence of [the government's] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state…

Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery….

Many of the [government's current policy revolves around the idea of] “too big to fail” …. History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger…

The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke’s strategy of the endless printing-press and ever-increasing fed balance sheet:

Plosser urged the Fed to “proceed with caution” with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.***

Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed’s various asset purchase programs are not easily summarized in a single number.

But Plosser said that the growth of the Fed’s balance sheet was a key metric.
“It is not appropriate to ignore quantitative metrics in this new policy environment,” Plosser said…
Plosser is bringing the spotlight right back to the Fed’s balance sheet.

“The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions,” Plosser said.

The former head of the Fed’s Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed’s open market operation – the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks – was quoted in Bloomberg as saying:

“Every time you tinker with this delicate system even small changes can create big ripples,” said Dino Kos, former head of the New York Fed’s open-market operations . . . “This is the impossible situation they are in. The risks are that the government’s $700 billion purchase of assets disturbs markets even more.”

And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:

Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.

In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.

The current situation at the Fed seems eerily similar, he said.

“What is discipline – where are the hard choices – when does Fed say our resources are exhausted?” Poole asked.

Read More

Category: Federal Reserve, Think Tank