Before he was Chairman of the Federal Reserve, Ben Bernanke was one of the seven governors who sit on the central bank's Board. He began his term as governor in 2002 and soon earned the nickname "Helicopter Ben," from a speech about fighting deflation in which he used the phrase "helicopter drop" of money (the phrase is actually Milton Freidman's, as Bernanke himself duly noted).
The title of that 2002 speech was "Deflation: Making Sure 'It' Doesn't Happen Here." It was a manifesto of sorts, which spelled out the tools and means of influence the Fed could employ in an anti-deflation policy.
Seven years hence, that speech is more famous now than it was then -- lots of people have recently read it and have commented on what it says (including yours truly). Yet blogger Mike Shedlock's analysis remains the most devastating I've read to date regarding the Federal Reserve's impotence: It goes point-by-point through Bernanke's 2002 speech, using it as a "scorecard" for the Fed's anti-deflation policies. Here it is:
1. Reduce nominal interest rate to zero. Check. That didn’t work...
2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work...
3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work...
4. Make low-interest-rate loans to banks. Check. That didn’t work...
5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work...
6. Lower rates further out along the Treasury term structure. Check. That didn’t work...
7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work...
8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work...
9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work...
10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work...
11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work...
12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work...
13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work...
You've read this far, so please permit me another quote -- this one from Bob Prechter, in his 2002 book Conquer the Crash:
"While the Fed could embark on an aggressive plan to liquefy the banking system with cash in response to a developing credit crisis, that action itself ironically could serve to aggravate deflation, not relieve it.... Nervous holders of suspect debt that was near expiration could simply decline to exercise their option to repurchase it once the current holding term ran out. Fearful holders of suspect long-term debt far from expiration could dump their notes and bonds on the market, making prices collapse. If this were to happen, the net result of an attempt at inflating would be a system-wide reduction in the purchasing power of dollar-denominated debt, in other words, a drop in the dollar value of total credit extended, which is deflation."
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