Barry's Imaginary Fed Statement

Opening statement of the FOMC Chair, Senate Testimony
February 27, 2008:

Senators, we find ourselves in a very challenging situation.

Following the dot com implosion, my predecessor at the Fed slashed rates to a generational low of 1%; the FOMC then kept rates at 1% for over a year.

While that re-inflated the economy, it also set off a shock wave of inflation unseen since the 1970s. Houses doubled in price, Oil is up 5 fold, food stuffs have tripled, and the dollar has collapsed. Gold is at multi-decade highs.

As always happens, these price increases in hard assets attracted speculators, and that made the situation -- especially in housing -- much more complex. Even worse, the housing speculation contributed to a debacle, while these other assets are actually accelerating in price.

Further, as was the political fashion, deregulation and a lack of interest in the oversight role of the banking system allowed an unprecedented expansion of credit, including to the least credit worthy consumers. Additionally, derivative selling -- at is heart, an unregulated form of insurance -- expanded from a few billion dollars to $46 trillion dollars.

The credit crunch is unprecedented, far worse than the S&L collapse and Long Term Capital Management -- combined.

All of these factors have combined to create our present situation. Inflation remains very elevated and worse, quite sticky. Growth continues to slide towards zero -- and possibly beyond.

Like many others, our forecasts in these areas have been wrong. We expected the slowing economy to moderate inflation, and so far, that has not happened. Demand for commodities from China and India is keeping prices elevated. The weakening dollar -- now at levels last seen in the 1960s -- is forcing all dollar denominated commodities higher. I don't necessarily believe in "Peak Oil," but the fact that the Saudis are one of the world's biggest investors in alternative energy research might tell you something.

The last time a slowing economy failed to moderate prices was the 1970s. Even as the economy slid into recession, we had major spikes in the prices of energy, food, clothing.

What is particularly worrisome to me is that as we have slashed interest rates 225 basis points, consumer loans -- mortgages and revolving credit -- have actually moved higher.

Gentleman, this is a major problem. And our internal, non-public projections forecast it is only going to get worse for the next 4 quarters . . .

I think we can all agree that Barry imaginary central banker would make a horrible Fed Chairman, he's just too honest. I think even the worst central banker have been given basic training on words to avoid, among which "implosion" is probably up near the top next to "explosion", "meltdown"and "contagion." But, Barry makes his point: in public conversations the Fed Chairman must sugar-coat everything in order to maintain confidence in the US financial system.

That being said I think that increasing concern over the Fed's "independence" is warranted. There is no reason for the largest economy in the world to fear the lower part of the business cycle. Most sane economists agree that recessions are a healthy and necessary part of longer term economic growth. When faced with a recession, the policy of devaluing the currency and fueling inflation is not a sound long-term strategy for the United States. Bernanke is risking a repeat of the 1970's stagflation nightmare. From everything we've learned, inflation is a pernicious, resilient foe. It seeps in and is tough to fight back. Let us hope that Bernanke doesn't forget about inflation this year. But, in the meantime lets buy all the non-dollar denominated real assets we can get our hands on -- asian currencies, agricultural commodities, base metals and emerging market materials stocks.