Bernanke Responds to Bunning. Gives FOMC Hints in the Process

By: •

If you are an avid Fed watcher or just keep up with the news, you have likely either seen or heard about Sen. Jim Bunning's feelings towards the Federal Reserve.

Bunning, a Republican from Kentucky and a member of the Senate Finance Committee, has long been a critic of the Federal Reserve...specifically Ben Bernanke. Bunning was actually the only panel member to vote against Bernanke's first appointment four years ago.

I think this comment, made at Bernanke's re-appointment hearing on December 3, fully illustrates the disdain that Sen.Bunning has for the Fed Chairman.

"From monetary policy to regulation, consumer protection, transparency and independence, your time as Fed chairman has been a failure"

Yeh that pretty much sums Bunning's feelings in a nutshell. 

On December 8, Bunning submitted 70 written questions to Bernanke. Ben provided answers to those questions today...it took 34 PAGES

While I have no intentions of summarizing every answer, however I can provide a few points of interest from Bernanke's written responses.

  • UNLESS CHINA CHANGES FOREX POLICY, THEY ARE LIKELY TO CONTINUE  TO INVEST IN U.S. ASSETS
  • CHINA, OTHER COUNTRIES FIND U.S. TREASURY DEBT ATTRACTIVE BECAUSE MARKET DEEP, LIQUID, DOLLAR MAIN RESERVE CURRENCY
  • FED ATTEMPTED TO SECURE CONCESSIONS FROM AIG COUNTERPARTIES, BUT WAS UNABLE
  • FED 'COULD AFFECT' EVENTUAL INCREASE IN FED FUNDS PARTLY BY RAISING RATE IT PAYS ON RESERVES
  • DEBT TO GDP RATIO DOESN'T DIRECTLY INFLUENCE MONETARY POLICY, BUT GOVT DEBT LEVEL MAY HAVE INDIRECT INFLUENCE
  • DIFFICULT TO FIND EVIDENCE THAT TAX TREATMENT OF FINANCIAL INSTITUTIONS PLAY ROLE IN CRISIS
  • BANK STRESS TESTS STILL USEFUL REPRESENTATION OF RISKS TO BANKS THAT WERE EXAMINED
  • PRIVATE FORECASTS SHOW UNEMPLOYMENT TO BE LOWER IN 2010 THAN IN STRESS TEST WORST CASE; HOUSING DATA POINT TO LOWER LOSSES
  • FED WOULD TAKE SERIOUSLY ANY UPWARD PRESSURE ON INFLATION FROM FALLING DOLLAR, RISING COMMODITY PRICES
  • DO NOT BELIEVE FED'S CREDIT, LIQUIDITY PROGRAMS WILL LEAD TO HIGHER INFLATION
  • U.S. RESOURCE SLACK IS 'SUBSTANTIAL'
  • CONTINUES TO EXPECT RESOURCE SLACK, STABILITY OF INFLATION EXPECTATIONS TO HELP KEEP INFLATION LOW
  • RELEASE OF FOMC TRANSCRIPTS REQUESTED BY BUNNING WOULD "REDUCE EFFECTIVENESS OF POLICY"
  • DISCLOSING NAMES OF BORROWERS AT DISCOUNT WINDOW  WOULD DISCOURAGE USE, REDUCE EFFECTIVENESS
  • INCREASE IN GOLD PRICE DOESN'T APPEAR TO REFLECT INCREASES IN EXPECTED FUTURE INFLATION
  • EXCESSIVE EXPANSION OF BANK RESERVES COULD RESULT IN RISING INFLATION PRESSURES
  • REGULATION LIKELY TO BE MORE EFFECTIVE DEALING WITH ASSET BUBBLES THAN MONETARY POLICY
  • ECONOMY CONTINUES TO RECOVER, IT WILL 'EVENTUALLY BECOME APPROPRIATE' TO RAISE RATES
  • CONTINUES TO BELIEVE FED WILL BE FULLY REPAID BY AIG
  • NOT MUCH EVIDENCE TO SUGGEST THE STOCK  MARKET IS CURRENTLY IN A BUBBLE

In reading the above comments you might notice a considerable amount of INFLATION talk. This is important as the fear of inflation itself is enough to spark rising prices (commodities prices. READ: DEMAND PULL INFLATION vs. COST PUSH INFLATION). In regards to tomorrow's FOMC statement...we should continue to see a mixed message from the Fed. Some signs of improvement with several "BUTs"...aka caveats. Again, assumptions are based on assumptions. The economic outlook remains extremely unclear. Don't expect the FOMC to go too far out on a limb. IF YOU NEED A RECAP OF THE LAST FOMC STATEMENT. HERE IS ONE

JUST FOR FUN...this is exactly what Bunning requested from Bernanke.

Reserve System, from Senator Bunning:


1. Please provide:
a. Unreleased transcripts of all F.O.M.C. meetings you participated in as a Governor or Chairman.

b. Unreleased transcripts of all Board of Governors meetings you participated in as a Governor or Chairman.

c. Transcripts and minutes of meetings of the board of the Federal Reserve Bank of New York during your tenure as Chairman of the Board of Governors.

d. Details, including any unreleased administrative notices, on any exemptions granted or denied to Federal Reserve Act sections 23(a) and 23(b) during your tenure as Chairman.

e. Details of all discount window transactions during your tenure as Chairman,including the date, amount, identity of the borrower, details of any collateral posted, explanation of the valuation of any collateral posted, any analysis of the health of the borrower at the time of the transaction, and any legal opinions regarding the transaction.

f. Details of all transactions at facilities created under section 13(3) of the Federal Reserve Act during your tenure as Chairman, including the date, amount, identity of the borrower, details of any collateral posted, explanation of the valuation of any collateral posted, any analysis of the health of the borrower at the time of the transaction, and any legal opinions regarding the transaction.

g. Copies of any swap or other agreements with foreign central banks, legal opinions related to those agreements, and any analysis of the agreements or the need for the agreements.

h. Any economic analysis or policy materials regarding the need for or effectiveness of any Federal Reserve facilities created under Federal Reserve Act section 13(3).

i. Any economic analysis or policy materials regarding the need for or effectiveness of unconventional monetary policy facilities or actions taken during your tenure as Chairman.

j. Any transcripts, minutes, details, legal opinions, economic analysis, phone call logs,policy materials, or any other relevant information from the F.O.M.C., the Board of

Governors, the Federal Reserve Bank of New York, or other relevant body not provided under the above requests regarding the use of Federal Reserve Act section 13(3) or actions and decisions regarding AIG, Bank of America, Citigroup, BearStearns, Lehman Brothers, General Motors, Chrysler, CIT, or GMAC.

Wow....does it seem like Bunning is out to get Bernanke?

I think so...from where I stand this is counter-productive to the recovery process. Bernanke politely makes a similar observation when he says " RELEASE OF FOMC TRANSCRIPTS REQUESTED BY BUNNING WOULD "REDUCE EFFECTIVENESS OF POLICY".

At a time when the Fed's credibility is of the UTMOST importance, you would think that our policymakers wouldn't be trying to politicize monetary policy. You would thing that our lawmakers would not be LOOKING EXTREMELY HARD for trouble. 

I for one, having been educated by a economics professor who was instructed by Bernanke himself, do not believe that Ben has any ulterior motives or is favoring democratic biases. I don't believe his reponse to the HISTORIC economic downturn was inappropriate , in fact, in dealing with the crisis of confidence that was largely the catalyst for where we are today...I think Ben did exactly what he had to do to avoid the collapse of the banking system.

I would not be voting for you Sen.Jim Bunning.