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Open Letter to Federal Reserve Chairman Ben S. Bernanke

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  • Open Letter to Federal Reserve Chairman Ben S. Bernanke

    To: Chairman Ben S. Bernanke
    From: Eric Janszen, President, iTulip, Inc.
    Subject: Congressional Testimony and Fed Credibility
    Date: September 21, 2007


    Dear Chairman Bernanke,

    Reading your testimony "Subprime mortgage lending and mitigating foreclosures" before the Committee on Financial Services, U.S. House of Representatives September 20, 2007 I am compelled to comment. Two assertions in your testimony in particular drew my attention.

    In your testimony you state: "As I noted in a speech last month at the economic symposium hosted by the Federal Reserve Bank of Kansas City, the turbulence originated in concerns about subprime mortgages, but the resulting global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans."

    Evidence of the potential for substantial losses by investors in housing market related securities have been available from numerous credible sources since at least 2003, that is, for over four years. Research by the Center for Economic and Policy Research (CEPR), International Monetary Fund (IMF), and The Levy Institute is consistent with research by analysts at several major banks, including Credit Suisse and Northern Trust.

    In addition, an Internet search produces links to many web sites that provide copious amounts of information on the topic, such as the following:

    dollarcollapse.com
    ml-implode.com
    fallstreet.com
    immobilienblasen.blogspot.com
    comstockfunds.com
    californiahousingforecast.com
    housingdoom.com
    globaleconomicanalysis.blogspot.com
    merkfund.com
    patrick.net
    marketoracle.co.uk
    thehousingbubbleblog.com
    safehaven.com
    oftwominds.com

    Further, well developed analysis of and reporting on the housing market and its impact on the economy and financial markets has been and continues to be available at the following sites:

    http://seekingalpha.com
    http://www.minyanville.com
    http://www.rgemonitor.com
    http://www.hussmanfunds.com
    http://www.prudentbear.com
    http://www.europac.net
    http://contraryinvestor.com

    An explanation of the existence of the housing bubble has been available since August 2002 and a specific step-by-step housing market decline timeline has been available since early January 2005.

    Your expression of surprise at the fallout of the collapse of the housing bubble in the presence of so much data leaves observers to conclude that you are either misinformed or are not being entirely forthright. As you have a 30 plus year record as an able and diligent researcher and thinker, the options for interpretation of your motives for making this assertion are few and unflattering and do not reflect well on the institution of the Federal Reserve.

    The second point in your testimony that I am compelled to note is your assertion that the housing bubble was primarily driven by strong global economic growth. Facts available to anyone with a basic understanding of finance and economics, and an interest in reviewing them, suggest that this cannot possibly be true.

    As the Fed lowered short term interest rates from 6.5% May 2000 to 1% June 2003, LIBOR which is used by banks to set the variable portion of adjustable rate mortgages (ARM) declined to 1.25%.



    As a result, the monthly interest rate on an ARM declined from 6.5% to as low as 2.0%, effectively reducing the monthly cost of a $1,000,000 home in 2003 to the cost of a $630,000 home purchased with a 6.5% ARM or fixed rate mortgage a few years before. Not surprisingly, an unusually large numbers of ARMs were sold.



    Several years are needed for home builders to gear up and build new homes to increase supply. However, interest rates were dropped quickly and so credit and the money supply rapidly increased. Home prices therefore rose quickly.



    Data that show the huge increase in the quantity of low quality loans following the rate cuts are readily available. For example:


    Rather than repeat the fiction that the Fed could not have known what was going on in the housing market while the housing bubble was in progress, that the fallout of the collapse of the housing bubble was not likely to be severe, and that Fed policy had nothing to do with it, you are better off saying nothing at all.

    Your predecessor, Alan Greenspan, is now attempting in his new book ageofturbulence, and on the TV interview circuit to promote it, to recast himself as a free market warrior fighting the forces of Congressional government bureaucracy and fiscal profligacy. Yet for nearly two decades he demonstrated by word and action consistent support of the interests of Wall Street over the interests of main street and the US economy.

    During his tenure, two massive asset bubbles, one in stocks and another in housing, creating $6 trillion and $13 trillion in fictitious value respectively by our calculations, were encouraged by monetary policy in concert with the policies of the very government bureaucrats Greenspan purports to have countered. Through tax policy, but also via politically motivated de-reglation of the banking system through repeal of the Glass-Steagall Act, conflicts of interest in the real estate and financial services industry were created while regulatory responsibilities were not carried out. These combined to create the credit and foreclosure crisis we are experiencing today.

    Hiding behind the mantel of free market capitalism, Greenspan did more than any other public or private official in the past 20 years to turn the US economy from the most economically strong, independent, and credit-worthy in the world to one of the most economically fragile, dependent, and indebted.

    I believe I speak for many of the organizations listed above when I say that after 18 years of watching and listening to Alan Greenspan we have hoped for better from the Fed under your leadership, and that there is widespread disappointment that the Bernanke Fed did not reveal itself to be a new regime of openness and honesty before Congress and the American people in yesterday's testimony as many had hoped. Instead we see evidence of more of the same–propagation of discredited theories and obvious fictions.

    The consequences of this cannot be overstated. Over time, as reflected in the recent decline in the exchange rate value of the dollar and declines in net foreign purchases of U.S. financial assets, as well as empirical evidence collected from conversations our firm has had with global market participants, investors around the world have been losing their faith and trust in U.S. financial markets, which for the decades preceding the Greenspan Fed, with the exception of the Nixon/Burns Fed, represented the global gold standard for operational transparency and stability. While out of your control, the loss of confidence in the U.S. economy and financial markets has been compounded by perceived errors in U.S. foreign policy, making a return to capital markets transparency all the more urgent and important.

    Continued abuse of the trust and intelligence of global investors risks critically damaging the U.S. investment climate. If allowed to continue, not only will foreign investment in the U.S. decline, but domestic capital will leave the U.S. for more stable and transparent capital markets abroad. A period of capital flight cannot be ruled out.

    But it's not too late. The damage has been severe, but is not irreparable.

    I conclude with a sincere appeal to you to endeavor to reverse this trend, starting with your next testimony to Congress. I believe you will find that the admission of past errors and a commitment to more sound and sustainable monetary policy in the future, followed up in practice, will be greeted by Americans and the world with enthusiasm and good will to the betterment of our nation and the global economy.

    Sincerely,



    Eric Janszen
    Founder & President
    iTulip, Inc.


    iTulip Select: The Investment Thesis for the Next Cycle™
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    Last edited by FRED; 09-25-07, 09:09 AM.
    Ed.

  • #2
    Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

    Quite nice, Eric.

    Now imagine this.

    Bernanke to secretary Suzie after he hurriedly thumbs through your pages, pausing to look at the charts, then handing the letter to Suzie, "Suzie, please put this in the round-file," and, "Oh, what time am I having lunch with the Wall Street bankers?"
    Jim 69 y/o

    "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

    Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

    Good judgement comes from experience; experience comes from bad judgement. Unknown.

    Comment


    • #3
      Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

      Originally posted by Jim Nickerson View Post
      Quite nice, Eric.

      Now imagine this.

      Bernanke to secretary Suzie after he hurriedly thumbs through your pages, pausing to look at the charts, then handing the letter to Suzie, "Suzie, please put this in the round-file," and, "Oh, what time am I having lunch with the Wall Street bankers?"
      ROFL. Best laugh today. Thanks, Jim! Yours is much more plausible than what came to my mind as I was reading Eric's letter:

      Martha:
      "Send this to Kohn. Tell him we need a memo on it. No hurry."
      "Phone Hank. Tell him to expand the PPT mandate to infiltrate blogs"
      "If anybody calls I'll be in the chopper".

      Comment


      • #4
        Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

        Interesting, thoughtful and well composed; but to what effect? Those who have the intellectual capacity to understand what you have written will . Your targets will behave :mad:ly.

        I have never ceased to be shocked at the insufferable arrogance of the high caste human baboons on the top of the various rockpiles they inhabit - be it political, academic or business. These gobshites KNOW they are right - hence the rest of us lower caste types are axiomatically WRONG and any criticism is 'swiftboated' . Trouble is, they are in positions of power and authority and will cause significant and serious damage by the exercise of their 'skilled incompetence'. The lower types are left to clean up the mess and pick up the tab.

        Hindsight is a wonderful thing. It allows you to view you successful failures with such clarity that you can perform new ones with even greater success.

        bpw

        Comment


        • #5
          Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

          "If allowed to continue, not only will foreign investment in the U.S. decline, but domestic capital will leave the U.S. for more stable and transparent capital markets abroad."

          Just where? Should investors flee to the even bigger bubble of Hong Kong? Or maybe over to those basket case nations like Canada, New Zealand and Australia, who's currencies are currently flying so high, yet which on paper are in worse shape than the US?

          Greenspan didn't vote the two idiot presidents in (Reagan & GW) into office, nor have any effect upon thier pro-market agendas - nor did Greenspan's dramatic interest rate cuts have anything to do with America's love affair with the "something for nothing" mentality.

          Greenspan may have been a fraud (see the book by the same name) but he was only riding the trend. As the trend fizzles, nothing Bernanke does can prevent the inevitable. He can go ahead and cut rates to zero like the BOJ, or he could raise rates into double digits. Neither will stop whatever consequences are already embedded in the financial system as a result of past decisions.

          Recall the Greenspan Conundrum - which not only showed old Milton's Nobel Prize wasn't worth the paper it was printed on, but also set the stage for the present anti-gravity DOW and the Goldilocks Boom in commodities - both false signs of an impending inflation. Inflation and scarcity are different animals, as are price rises due to either diminishing global trade or monopoly conditions. Interest rates really don't effect most of these causes.
          Last edited by stumann; 09-24-07, 01:36 AM. Reason: because

          Comment


          • #6
            Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

            Power structures maintain themselves by carefully selecting people that:
            1. have proven themselves to be loyal to the power structure
            2. have no morality towards those outside that structure

            Anyone that doesn't play ball is fired, not promoted, or otherwise dealt with.

            Incompetence is a matter of perspective. From yours and mine, the Fed is an utter failure. To those in control of the Fed, it has been a resounding success.


            I remember facing the Fed dilemma a few years ago and do remember it was extremely difficult for me to accept the fact that the entire organization was purposefully designed and organized to fleece the public.

            We are ruled by sociopaths.


            I believe Bernanke is a useful idiot. Chosen for his promise to print. And to be the fall guy for the Fed.

            Comment


            • #7
              Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

              Originally posted by stumann View Post
              ...Just where? Should investors flee to the even bigger bubble of Hong Kong? Or maybe over to those basket case nations like Canada, New Zealand and Australia, who's currencies are currently flying so high, yet which on paper are in worse shape than the US?...
              Unlike NewZealand and Australia (and the US of eh), Canada has been running a fiscal surplus for years. Add that on to the trade and current account surplus, factor in their Canada Pension Plan which is on a hell of a lot better actuarial footing than the "basket case" called Social Security. And that's all before we get to things like infant mortality rate comparisons, etc. People in glass houses...

              Comment


              • #8
                Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

                Originally posted by bpwoods View Post
                Interesting, thoughtful and well composed; but to what effect? Those who have the intellectual capacity to understand what you have written will . Your targets will behave :mad:ly.

                I have never ceased to be shocked at the insufferable arrogance of the high caste human baboons on the top of the various rockpiles they inhabit - be it political, academic or business. These gobshites KNOW they are right - hence the rest of us lower caste types are axiomatically WRONG and any criticism is 'swiftboated' . Trouble is, they are in positions of power and authority and will cause significant and serious damage by the exercise of their 'skilled incompetence'. The lower types are left to clean up the mess and pick up the tab.

                Hindsight is a wonderful thing. It allows you to view you successful failures with such clarity that you can perform new ones with even greater success.

                bpw
                Many have asked me this over the years in connection with iTulip, Why bother?

                Voltaire said, "Men who believe absurdities will commit atrocities." In my view, pointing out economic and financial markets absurdities, if you see them, is a civic duty. Not calling attention to them is irresponsible. Promoting them is akin to treason.

                Comment


                • #9
                  Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

                  Voltaire said, "Men who believe absurdities will commit atrocities." In my view, pointing out economic and financial markets absurdities, if you see them, is a civic duty. Not calling attention to them is irresponsible. Promoting them is akin to treason.[/quote]

                  Agreed without qualification. An individual needs considerable courage, technical expertise and stamina to keep chipping away - and you seem to possess all of these qualities. I hope I did not give you the impression that I am cynical of the efforts of you and the other iTulip contributors. I am not. Indeed I am very grateful - you have given me a very useful education . I have recommended iTulip to anyone who was willing to listen.

                  However, I am :mad:-as-hell at the behaviour of those priviliged individuals who cause such economic misery to so many millions of their fellow citizens and then turn around and blame it all on - well. ( I'll leave you to fill in the gap!)

                  I regard Greenspan as a political hack, (though a very clever one!). A naked emperor who needs to be exposed for what he is. I wonder will Buffet or Soros have the courage to give him the roasting he deserves?

                  bpw

                  Comment


                  • #10
                    Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

                    Originally posted by EJ View Post
                    Many have asked me this over the years in connection with iTulip, Why bother?

                    Voltaire said, "Men who believe absurdities will commit atrocities." In my view, pointing out economic and financial markets absurdities, if you see them, is a civic duty. Not calling attention to them is irresponsible. Promoting them is akin to treason.
                    Well said.

                    Many of my co-workers saw how upset I was the day the Fed cut the rates. I'm known among them as the guy to talk to about their 401k.

                    At this point I really have no idea what to tell them. There really is no other choice than to be in stocks because everything is in dollars (we do have some international choices thankfully.)

                    I think John Stewart grilling AG on the daily show was a step in the right direction for mass acceptance.

                    In any case, at the very least itulip is here as a resource for anyone who wants to see a more rational, balanced, and inside look at what's happening.

                    Also, I will say to everyone out there, part of what makes itulip relevant was EJ's call of the tech bubble. There are precious few economic analysts out there credited with nailing the top, and EJ is (rightfully) given credit for his part in disseminating information. That puts him at least in terms of market cred right up there with Robert Shiller. I wouldn't be surprised if there was some sort of business or educational connection between EJ and Shiller (not going to speculate, just saying the rational analysis and words tend to follow similar logic).

                    In terms of this open letter, I highly doubt it will influence the fed. It's totally obvious bernanke answers to Goldman Sachs and Lehman Brothers and Merrill Lynch, and probably secondarily (or parallel to) the Bush administration. And as we all know these people care about nothing save for their own bank accounts and personal ambitions for power. If there is enough of a chorus however maybe, just maybe congress will do something... but again with the demorats talking about lifting the FHA limits, it's a depressingly low probability they will be any more responsible than the fed.

                    Comment


                    • #11
                      Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

                      Thanks from Germany!

                      Comment


                      • #12
                        Re: Open Letter to Federal Reserve Chairman Ben S. Bernanke

                        Originally posted by sparki View Post
                        Thanks from Germany!
                        Hi, Jan-Martin. Didn't mean to leave you off the list. Just added you. Thanks for your work over at http://immobilienblasen.blogspot.com
                        Ed.

                        Comment

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