Friday, September 27, 2013

Ben Bernanke you are my hero. May your retirement from the Federal Reserve be filled with joy.

Fed Reserve Chairman Ben Bernanke
I'm sure most of you guys have heard the term "taper tantrum" that has been bantered occasionally on the news in reference to recent pullbacks in the stock market. But for those of you who are left confused by this term, it refers to speculation over whether or not the Federal Reserve will begin to scale back its monetary stimulus program known collectively as "Quantitative Easement." QE3 started about a year ago, and is the third phase designed to nurse an ailing economy back to health through the purchasing of $85 billion in bonds per month. To feel its effect, just look at your savings account. Mountain America Credit Union (my bank) pays .10% on a savings account. Our current inflation in the U.S. is 1.5%. This means that if you're keeping any money in your savings account, it's basically the same as stuffing it in your mattress. In other words, your money is getting eaten alive by inflation. Welcome to the new reality.
The Federal Reserve Bank has an impressive facade.
Why would the Federal Reserve do this? That's a big question, and it comes with a lot of hitches. The idea behind it is to stimulate the economy and grow the middle class. It's resulted in one of the most profound bull markets in history, and I have to say, the going has been pretty sweet. I stopped fighting the Federal Reserve in May. I likened it to a raging river threatening to sweep us all over the falls. In my metaphor, the falls is really a stand-in for "fear" that the stock market will crash and that I (along with anyone else that puts their money into the pot) will be broke and penniless. Sure that could happen. But I could also get hit by a bus crossing the street tomorrow. In the movie, "The Thirteenth Warrior" a Viking tells Antonio Banderas (who's playing an Arab) that "Fear profits a man nothing." I take that saying to heart. So to return to my metaphor of the river, there I was holding onto the branch of a tree being pummeled by the force of this huge river that wants to pull me over the falls. Hanging onto other branches with me are more middle-class Americans. However, here's where the metaphor ends. In May of this year, I let go.
The team of Fast Money talking the taper. When will it rear its ugly head?
Stocks will drop the day it does, but they'll recover. And any drop in stock
prices is just a chance to buy more. It means everything's on sale. And I
love a good sale.
I allowed myself to get thrown over the brink and into the pool at the bottom.

I didn't drown. I haven't lost my savings. In fact, my liquid assets have increased by quite a bit in five months with some shrewd investing that I did all by myself (I paid no financial advisor and I suppose I think I'm smart enough to be my own advisor).

Color me optimistic, but I don't think the U.S. economy is going to crash again for a long time. I encourage all of you that are afraid to invest to grow some balls and put some money in the stock market, whether you choose to do it through your 401K, a 457, a Roth IRA, or through the purchase of a mutual fund or carefully chosen equities. With the Federal Reserve pumping money into the economy, I think it's immune from crashing (unless the government defaults on its debt at which point we're all screwed whether or not you have stocks). And it won't last forever so ride the gravy train while you can. Sure, there will be setbacks, there will be pullbacks, and not every day is rosy on Wall Street. But if you invest for the long term (years and years) then you will reap the rewards. It's better than sitting back and watching your savings account devalue in front of your eyes. I have to say, I was sick and tired of doing that.

In retrospect, I think Ben Bernanke has been an astounding chairman for the Federal Reserve given the challenges he's faced. I think he was truly looking out for the middle class, no matter what people say about him. Sure, QE may not have worked like he intended and that's mostly because the middle class is so underrepresented in the stock market. But I have to ask myself, what other than that could the Fed have done to help the middle class? The economy is a tricky devil, and just handing out money to families might have made them put it into savings. For an economy to pull itself out of recession, there needs to be spending and not hoarding. The complexity of it sometimes boggles my mind, and I understand why there are people whose entire career is spent to try and understand the idea of money.
Will Obama nominate Janet Yellen for the job of Fed Chair? If he does, Janet
will become the first woman in history to sit in the esteemed position. That
in itself is very exciting. I think she'll do a fine job.
For the record, I think Ben's replacement is going to be Janet Yellen. She's touted as the small woman with a HUGE I.Q. Her Alma Mater is none other than U.C. Berkeley, and she served as president of the Federal Reserve bank in San Francisco. She's also one of those people that believes in keeping their thumb firmly on the print money button. Lots of people like to scoff at the Federal Reserve and say, "Ben's just printing money." Well...that's what the central bank is SUPPOSED to do. It's SUPPOSED to print money. Money is good. Liquidity is good. When the economy is flush in money it makes things work smoothly. People can get money to buy houses and to buy cars and to buy the things that they need. That's how economies work. So yeah...I hope Janet slams the "print money" button as often as she can.
Nancy Pelosi. Yeah I know you Republicans out there
absolutely hated her. For the record, I'm not a fan of
Speaker Boehner so I get it. However, I still think you
should read her op-ed on USA Today and try to
imagine how you'd react if you were told over the phone
what got said to her five years ago.
We live in extraordinary times. This is our parent's economy. We can go and blame the past generation; democrats can blame republicans and vice versa. But the fact remains, we are here and this is the way the world works right now. Extraordinary times require extraordinary messures. I don't think a lot of people understand the depths of how close capitalism came to utter destruction in 2008. Recently, former Speaker of the House, Nancy Pelosi wrote an op-ed for USA Today. In it, she said something that scared the shit out of me (you can read the full article located HERE):
Five years ago Wednesday, when I was the speaker, I gathered the other Democratic House leaders in my office to discuss the latest financial news. I told them that, as a matter of course, Treasury Secretary Henry Paulson briefed me on the state of the markets and the financial system, but had not done so that week.
In that time, Lehman Bros. had filed for bankruptcy; Merrill Lynch had faced failure and had been purchased by Bank of America; and, two days earlier, AIG had survived only after a Federal Reserve bailout.
After the meeting at 3 p.m., I placed a call to Secretary Paulson and asked him to come the next morning to brief the leadership. Then came his stunning response: "Madam Speaker, tomorrow morning will be too late."
My conservative friends, say what you will about Nancy Pelosi, but you have to admit that hearing that on the other end of the phone would be absolutely chilling. And of course, you know what followed. Congressional hearings around the clock and emergency measures to approve a trillion dollars in stimulus money because all the facts said that if the U.S. didn't do this, capitalism WOULD HAVE DIED. Our entire financial system would be in shambles. Every single one of us, red and blue, would be destitute. Children would have no future.
Billionaire investor Warren Buffett
But the stimulus alone wasn't enough. So that's where Ben and the Fed stepped in with Quantitative Easement programs to prop up the economy. There are tons of critics (and there should be because that's how democracy works). However, I've felt the power of QE myself, and I've got a new found respect for our central bank. Here's what Warren Buffett had to say of Ben Bernanke's Quantitative Easement bond-buying program:
"The Fed is the greatest hedge fund in history," Buffett told students at Georgetown University. "It's generating US$90 billion a year in revenue for the U.S. government and that wasn't the case a few years ago."
Yes, you heard that right. The math doesn't lie. QE is actually GENERATING MONEY. A LOT of money. How is the Fed doing that? Answer: tons and tons of bonds. Yes, all that bond buying they are doing to stimulate the economy that comes under heavy criticism that the Fed is borrowing from your children's future is wrong. They are INVESTING in your children's future. All of those bonds are increasing in value and paying the government back. In fact, QE may not cost this country a cent if you look at it from a certain point of view. It will make this country money. Neat, right?

It's been five years since Lehman Brothers went belly up, and I'm writing this post to thank Ben Bernanke. I think you've done a wonderful job. I don't care what the critics say. You've made me money, and in a time where scraping by is hard, that makes you a hero in my book. May your retirement from the Federal Reserve be filled with joy.

Today, I'm being interviewed over at Yolanda's blog Defending the Pen. Have a great weekend.


  1. Caught your interview already.
    Think it will be a long time before the stocks tank like that again.

  2. Everyone says there won't be another crash right before the crash. I'm getting antsy because October is a bad time traditionally for the markets. I just need it to not collapse for about 3 weeks. But I wish someone had told me to get out of bonds about 3 years ago. I'm sure my 401K would be a bit higher.

  3. Before investing in the market I'll be waiting to see if the US defaults on its debts and receives a lower credit rating devaluing American bonds. I just wish people would understand that raising the debt ceiling has to do with money already spent and doesn't allow the administration to spend more money.

  4. @Stephen, I kinda doubt it'll come to that. Japan has double the debt we have (in debt numbers to GDP), but I do wish somebody would do something.

    Republicans complain about there's not enough cuts in government spending, but if they democrats are tax and spend, they're spend and spend.

    While they're not big fans of "welfare" they still continue the programs anyway so there not doing much trimming spending there.

    Then they insist that the military become even stronger and bigger, and we know have a military that has bankrupted us.

    And yet after the sequester they act like the cuts are weakening our defense. We spend more than the next 10+ nations combined on their armies and navies, we can trim down a little or hell cut it in half.

  5. You've said a lot here. I did flirt very seriously with getting a degree in economics, and took several classes towards that goal, but ended up not (I did change majors, something like 6 times, ended up without a degree... but anyway) The only thing I'll touch on is your comment on how close we came to a total collapse 5 years ago. I know that the commercial paper business collapsed, only for a day or so, but still - It was stunning. The CEO at my job (a fortune 500 company with enormous cash flow) was like, "we can't do business."

    It was scary. Very scary. I think Planet Money did a show on once. Or maybe it was This American Life, either way. I shudder.

  6. @P.T. & Stephen: I think you mean the government shutdown pending for October. That's not the same as defaulting on our bills. If we default on paying bills, we're screwed as a nation. I think everything will crash at that point and we'll basically all be out of jobs and no one will ever lend us money again. But I'm not nervous about that per se because if the stock market totally crashed, again everyone is in the same boat and sure...I have no money...but so does everyone else. Does that logic make any sense?

  7. Sure because in that case it'll probably just turn into some kind of apocalyptic Mad Max thing where only the strong with a lot of guns survive.

    This latest "crisis" is so f-ing dumb. I think Republicans must just want to get in the news. That and suck up to the Tea Party morons. (Still. When will those people go away? Talk about poor losers.)

  8. But for the record I was referring to that most big crashes happen around this time of year. 1929, 1987, 2008...

  9. Michael, that was a great post, not sure if I agree with everything but it was definitely , as I've come to expect from you, an interesting read !

  10. @Mark: You should of course feel free to disagree and to point out logistical fallacies that I make. I enjoy a good debate and I think I have an open enough mind that I can of course admit when I'm wrong. I actually welcome that as it is a learning opportunity for me.

  11. Investing in the future is never a bad thing. Fear can cripple you so keep going forward Mike and may there not be another crash for a really long time.

  12. An enlightening article, Mike. When things go bad here, we tend to pull our money in a knee-jerk reaction and send it elsewhere - read that as somewhere outside our shores.

  13. I LOVE your optimism.... WE DO need to invest in our future... WE can't just hide forever.

    Thanks for the incredible amount of information and going where very few people are willing to go and put themselves out there.

    I always respected you for that, Michael.

  14. Thanks for stopping by today, great interview!

    The state of the worlds finances is frightening, and I have little to no understanding of any of it. I hope prayer works!

  15. Excellent post pal. And I applaud you for talking stuff most of us wouldn't touch with a FIFTY foot pole! *wink*

    I don't think that stocks will crash like that again but I ain't a stock market whiz like you. I'm proud of ya! Sounds like you did a great job being your own adviser! Maybe I should call you the wiser adviser. ;-)

    Going to check out your guest post.

  16. Mmm... careful with the print money button. In the long run, printing too much actually creates inflation.

    It's one of many disastrous things that happened in Zimbabwe.

  17. QE is essence makes the rich richer and the poor poorer. It helps raise the value of stocks. It also helps raise the price on commodities. Food, for example, gets more expensive. And that hurts the middle class and the poor.

    I'm still investing in my 401K that's very diversified, and I'm buying company stock too. Oh, and I do have some stashed under the mattress!