Sexy is scary I

Butterwood argues in the Economist that the U.S. stock market is overvalued.  At 32.8, the Cyclically adjusted price earnings ratio (CAPE) is certainly pricey.  Perhaps that is one reason investors have backed off some of their love affair with FAANG stocks.

Buttonwood cites research by Research Affiliates, a fund-management group.
You can hear the authors of the research ("Cape Fear: Why CAPE Naysayers Are Wrong"), Rob Arnott Vitali Kalesnik Jim Masturzo, explain their thesis in in this video.

James Grant And Nouriel Roubini on Macro Risk

James Grant and Nouriel Roubini square off at the Octavian Institute:

What Happens to Tesla, If It Can Not Produce a Half Million Electric Cars Next Year?

In the Wall Street Journal (10/6/2017), we fin that "Tesla Needs to Pick Up the Pace of Production:" 7:00AM

Tesla's super automated car factory had to finish its cars by hand.  It produced 70% less than target. Elon Musk's electric-car company fell short of its third-quarter production goals. Is it too ambitious?

How the Interest Rate "Super Cycle" Pressures Insurance Comapnies: Allianz

Allianz is one of  the World's largest insurers.  Here Allianz's chief executive, Oliver Bäte, speaks with Alistair Gray, who covers insurance the FT, talks to  about ultra-low interest rates, asset bubbles, M&A activity and Pimco after the departure of Bill Gross in this September 27, 2015 View from the Top.  Do credit bubbles have to burst? Is the interest rate "super cycle" driving investors into foolishly risky investments and insurance companies into mergers they will regret?

A Different Take on the Two Tier Corporate Jet Market

Michael Stothard, the FT’s Paris correspondent, reports from the Farnborough air show: Business Jets on the Rise (see the 3:51 minute August 13, 2014 video below.) After a 30 per cent fall in revenue following the financial crisis, the global business jet market is pulling out of its dive.  But as he explains in his article, there is a big difference between the market for big expensive jets and smaller ones.





Big Birds, Little Birds 

What lies behind the more horrendous drop in small plane demand (down 56%) and their continued weakness? I would argue it is yet further evidence of the root causes of America's weak recovery. The large corporations, the Fortune 500 and the next rank down have been very profitable and have gained enormously from the loose monetary policies of the Bernanke and Yellin Fed. Smaller firms have not fared well and the business climate is definitely hostile to unglamorous start-ups. Big Corporate America is buying big jets. The smaller guys are either not starting up in the first place (for the first time since the statistics have been kept more business went out of business than started up) or they can not grow to the point where a small plane would be cost effective.

In a recent Economist interview, President Obama disputes

Cheap Or Dear?

Cheap or dear? That is the question: Whether it is nobler for the pocketbook to buy stocks or sell them! Aye, there's the rub.  

The FT's John Authers squares Robert Shiller off against Jeremy Siegel in a debate over whether stocks are over priced or under priced.

I met Robert Shiller when he was first attacking the Efficient Market Hypothesis, a dogma that commanded stronger belief among finance professors than the Real Presence did from Catholics at the time.  He showed statistically that if stocks represent the present value of future earnings and/or dividends, stock prices are much too volatile to be correctly valued.  Later he took the profession on using the Cyclically Adjusted Price Earnings Ratio as his lance.  You can link to his data online.

Market strategists and the like have tried to use it to guage when the market as a whole is too dear or too cheap.  Shiller's measure is signalling stock prices are too rich in Great Britain and the U.S.  

Jeremy Siegel, like Shiller a student of long data trends, argues against this conclusion and, specifically, that "The ratio’s pessimistic predictions are based on biased data."  The problem with any P/E ratio is measuring the denominator.  Earnings reflect accounting and even adjusted for inflation, as Shiller does, may not be the proper measure.  Earnings are affected by companies' use of leverage and the growth in earnings is affected by firms dividend payout practices.  Faster earnings growth should be associated with higher valuations.

One factor neither seems to address is my observation that the business cycle is now a ten year cycle in the image of the nineteenth century British trade cycle.  This is a departure from the immediate postwar cycle which was a five year inventory cycle.

As an investor, you still have to choose whether to buy and hold or make timly entries into and out of the market:  "The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings."

Tom Hoenig Nominated to Be the Vice Chair of the FDIC

Wow!

I do not know to what party Dr. Thomas Hoenig belongs, but he has been great on the FOMC (the Federal Open Market Committee that determines monetary policy.)  President Obama has nominated him to be the number two official at the Federal Deposit Insurance Corporation (FDIC) which guarantees bank deposits.  The FDIC also is one of the agencies that examines banks for soundness.

Tom Hoenig has been a staunch critic of the "Too Big to Fail" syndrome in American bank supervision.  He has been seemingly a Cassandra warning of the bubble in farmland prices.  Hopefully his arms will not be chained when he raises them to prays for policies to address the problem. 

On the FOMC, Hoenig has voted for raising rates.  Knowing that we are creating new bubbles rather than stimulating new investment in real projects creating real jobs, he has dissented from the prevailing majority.  What business owner in its right mind would invest in a risky business project when there is free money to lever up holdings of financial assets made risk free by the Bernanke put?  Why subsidize investment banking bonuses? And he has not kept quiet.  As Michelle Lucci pointed out over a year ago, "Kansas City Federal Reserve Bank President Thomas Hoenig has been recently speaking publicly about his desire for an increase in the federal funds rate, sooner rather than later, and also about his concern for community banks and the drag on earnings from commercial real estate loans."

Scott Canon at the Kansas City Star warns "Hoenig is ... a provocative selection to join [the FDIC's] board of directors."  Three cheers for President Obama on this one.  Even Ron Paul should be cheering. He would be available should a President Cain need a Fed Chairman.

FT interview with Carmen Reinhart, co-author of This Time is Different, about the crisis in Greece

This Time Is Different:
Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogoff

Joseph Count de Maistre once wrote of "history, which is empirical politics."  I find it makes for good empirical economics and finance as well.  Carmen Reinhart and Kenneth Rogoff have written a history of eight hundred years of financial crises.  I am remined of the Pete Seeger song, "Where Have All the Flowers Gone?"  The refrain is:

"When will they ever learn? When will they ever learn?"

On May 5, 2010, Aline van Duyn, the Financial Times' U.S. Markets editor, interviewed Carmen Reinhart, co-author of This Time is Different.  In this first video, they talk about the history of financial crises and their patterns (4m 41sec).

Then the hangover

What happens after a crisis has happened?  In this second video, they talk about the aftermath of financial crises  (4m 55sec)  To my simple-minded ears, the consequences of financial crises sound awfully much like Austrian unemployment rather than Keynesian unemployment.  How heretical!

I Owe, I Owe, It's Off the Cliff We Go!

In this next video, the discussion turns to the role of debt and monetary policy. (3m 13sec) Maybe the economy hasn't read the textbooks?

Was it a Greek who said there was nothing new under the sun?

And then, in this last video, they turn to the crisis in Greece, and the possibility for contagion and restructuring .(4m 11sec) Note this was done over a year ago.

Stephen Roach: Unconscionable Policy Blunders

Stephen Roach, the chairman of Morgan Stanley Asia on the bittersweet taste of vindication and China's role in the economic crisis:

Bursting Bubbles Leave Their Marks

March 9 is the tenth anniversary of the crash of Nasdaq's bubble.


In this FT.com video,John Authers opines that we are still suffering consequences.

The Voice Crying Out In the Wilderness

Maria Anastasia O'Grady normally writes about Latin America.  She is the Wall Street Journal's Americas columnist.  Perhaps her experience with Latin American inflationist policies and monetary proflicacy made her the appropriate person to interview Tom Hoenig, the one hawk on the Federal Open Market Committee, the only member who seems to think loose money sinks economies.  Ms O'Grady explains this is in part because Tom Hoernig learned bank supervision in the the 1970s in the mid-west when the energy and farmland bubbles burst in the late 1970s and early 1980s.  He saw the effect on the local economies, businesses, employment, and growth.  He is no stranger to the human costs of bubbles.

Yet our policy makers are once again pursuing a policy of negative real policy rates (i.e., the federal funds rate is set below what inflation is expected to be.  Investing in T-Bills is a guaranteed mug's game.  it would seem new bubbles are on the way. "But if it happens the fault won't lie with one stubborn voice of dissent, crying out in Missouri."

It is refreshing to hear Hoenig tell us that "'Monetary policy has to be about more than just targeting inflation. It is a more powerful tool than that. It is also an allocative policy, as we've learned. In other words, when we kept interest rates unusually low for a considerable period we favored credit and the allocations related to it over savings, and we created the conditions that I think facilitated a bubble."

Here Is One Investor Who Thinks Fighting Bubbles Is In Dr. Bernanke's Job Description!

Many still think Alan Greenspan walked on water.  Jeremy Grantham is not one of them.  The good Dr. Greenspan seemed to think that preventing bubbles was neither part of his job nor realistically feasible. Having suffered thorough the aftermaths of the high tech bubble and the housing bubble, has thinking on Constitution Avenue changed?  unfortunately not.  Pauline Skypala writes that "Mr Grantham sees Ben Bernanke, chairman of the Federal Reserve, following the same path as his predecessor." He and his firm have identified thirty two bubbles over the last ninety years. 

As to his own business, the investment business, does it add value?  "The business is a zero-sum game, he points out, and 'we collectively add nothing but costs'. Costs have grown because there is no fee competition, due to the agency problem and the information advantage the agent has over the client. Growing complexity has increased the client’s dependence on the industry."

Do You Care a Rap About the Business Cycle?

John Maynard Keynes was perhaps the most imposing economist of the Twentieth Century.  He is the father of macroeconomics (John Hicks might be called the midwife: indeed Hicks is probably the most influential, although his influence across the board in modern economic theory is so pervasive he is seldom cited.)

Friedrich von Hayek developed the ideas of Wicksell and the Austrian School theory of capital based on Boehm-Bawerk and von Mises into a coherent theory of the business cycle which does much to explain the mess we are in.

Keynesian economics justifies the use of stimulus programs such as are being used around the world to revive the world economy.  Nations around the world are following President Richard Nixon when he said, "We are all Keynesians now."

One should not assume Keynes would approve of current economic policy.  At a meeting of American economists shortly before he died, Keynes remarked "Perhaps I am the only non-Keynesian in the room." (as quoted in Bran Domitrovic's Econonoclasts: the History of the Supply-Side Revolution.)





Many thanks to both Ryan Pendleton and the Kansas Policy Institute who alerted me to this.

Dr. Hoenig, the Hawk: We Need More of Them

Dr. Thomas Hoenig, President of the Kansas City Federal Reserve Bank, has been known as a monetary policy hawk in the past. If he has been part of the Federal Open Market Committee's consensus supporting negative real interest rates, he is a dove no longer. He told the American Economics Association (AEA) meetings, “Experience both in the US and internationally tells us that maintaining large amounts of stimulus over an extended period risks creating conditions that lead to financial excess, economic volatility and even higher unemployment at some point in the future.” Amen!

Hoenig vs. Bernanke

Hoenig and our current Fed Chairman, Ben Bernanke offered opposing views of history at the AEA meetings.

As George Santayana taught us, "Those who cannot learn from history are doomed to repeat it." So at issue is what role monetary policy played in creating the real estate bubble that caused the so called Great Recession of 2007-9. To Hoenig and to me it is clear that the over-expansion of credit that inflated the bubble had as its root cause the Fed's war against the paper dragon of deflation. Negative real interest rates in 2002-2005 and much too low rates in 2006 subsidized the creation of ever more esoteric securities which was the stuff from which Wall Street's leverage binge was made.  Negative real interest rates inflate investment bankers' profits and bonuses, misdirect productive resources into speculation, cause a dangerous correlation of returns, and subsidize the ever increasing financial roundabout production we saw during the recent bubble. Short term interest rates are the price for the raw materials with which investment banks create leverage in securities markets and financial engineers manufacture designer securities.Subsidize the raw materials and increase the supply.

Bernanke is a better student of the Great Depression of the 1930s than of the recent bubble. As John Cassidy relates, that Ben Bernanke "[r]ather than conceding that he and his predecessor, Alan Greenspan, made a hash of things between 2002 and 2006, keeping interest rates too low for too long, he said the Fed’s policies were reasonable and the main cause of the rise in house prices was not cheap money but lax supervision." Cassidy is moved to wonder in the Financial Times whether Ben Bernanke is "Decended From the Bourbons?" recalling "Talleyrand’s quip about the restored Bourbon monarchs: 'They have learned nothing and forgotten nothing.'”

The State of General Aviation and the Consequences for Wichita

The National Business Aviation Association conference is opening in Orlando, Florida next week.  It and surrounding events will provide focus the business world's attention on general aviation and the economic hammering it has taken.  The Wichita Eagle's Molly Mullins in a big Business Section feature surveys the damage, "The state of Kansas' business aviation industry."


She writes:


"Nobody saw this coming.


"Thousands of jobs lost. Production cuts. Furloughs. The cancellation of a major new aircraft program.


"The global financial crisis hit the business jet market hard and fast and put Wichita's lifeblood industry in an agonizing free fall.


"A year later, there is evidence that the global economy is in the early stages of recovery. But for business aviation and Wichita planemakers, the climb back will be long and slow."

Back in March, 2008, I argued that the national economy had been in a recession for six months or more ("What is Good for Wichita Is Hemlock for Wall Street.") The National Bureau of Economic Research eventually dated the recession to have started in December, 2007.  Few fully appreciated the extent of the general aviation bubble ("2007 Increasingly Looks like It was a Bubble Year for the Aircraft Industry.")  The bursting, when it came in the fourth quarter of 2008 was dramatic. 


Peter Sanders at the Wall Street Journal reports on the effect of the aviation downturn on Wichita's economy noting that "more than a quarter of the area's aviation work force has been let go, not including thousands more layoffs among parts suppliers and support businesses."

Cessna's New Orders "Nosedived" In the Fourth Quarter of 2008

To amplify Sanders' report, Cessna's new orders, net of cancellations, averaged about $2.4 billion a quarter in the first three quarters of 2008.  They fell over 80 percent to $400 million in the last quarter.  (These are my estimates based on Textron financial reports.)

Outsourcing

Sanders also reports on a "recent push to manufacture offshore that many Wichita aerospace companies have embarked on. Some companies have opened operations in Mexico. During the boom times in late 2007, Cessna announced it would build a new, small propeller plane in China. That plane would be shipped to Wichita for reassembly and delivery to U.S. customers.


"While the companies are guarded about their plans in light of the downturn, officials concede that it is unlikely that they would expand their Wichita operations beyond today's level. Any future growth would probably happen abroad."

Commentary

A few points:

1) 2007 was a bubble year for general aviation.  Look at the new orders data. 

2) The bubble was fueled by the same over expansion of credit that fueled the housing bubble. 

3) The negative short term interest rates of 2002-2004 enabled (should I say caused?) the credit over expansion.

4) The general aviation industry over expanded in 2008. 

Fun Question: Would Cessna have expanded production as much in 2008 had it been independent rather than owned by Textron?


5) On the commercial front, Boeing expanded much more cautiously.  Compare Boeing's production in the run-up to this recession with its production in the run-up to the 2001 recession.   This has allowed Spirit to hang tight and manage for the longer run.

Fun Question: Do you attribute that to good management, conservatism, or technical delays?

6) Hypocrisy in Washington about corporate jets is business as usual.  Congress votes to appropriate for themselves a more elaborate fleet of planes than the Air Force requested.  Simultaneously, it pillories corporate executives.  (For the Journal, Brody Mullins and August Cole reported in August, "the House more than doubled the [Air Force's] request to $550 million for a total of eight new passenger planes for use by government VIPs.")

7) Outsourcing has its drawbacks as the yo yo economy of 2008 demonstrates.  

8) Outsourcing means having less control.  Boeing has had to buy back three of its suppliers to get the Dreamliner back on path.


9) The administration's fiscal policy and the Fed's monetary policy represent more than the benign neglect of the 1980s.  This may be Washington's real industrial policy.  Let the dollar get so worthless that manufacturing will find it cheaper to come home.  We can debate whether that is a plan.

In the long view of things, Wichita's current 8.9% unemployment rate (10% in July) is collateral damage from Alan Greenspan's and Ben Bernanke's misjudgment that preventing bubbles was not their job.  As in the refrain from the old Pete Seeger song goes, "When will they ever learn?"

Yes, Virginia, the Fed Does Have An Exit Strategy

It seems literally Providential that Dr. Ben Bernanke was chairing the Board of Governors when the financial crisis hit. He, as a young researcher at Princeton, demonstrated how the financial crises in the 1930s were the missing link that converted the mild cyclical downturn of 1929 into the Great Depression.

In today's Wall Street Journal (see also below), he explains the Fed's exit policy. I have a very big worry about what he says. He argues the Fed has plenty of tools to fight inflation. He never mentions asset price bubbles.

The Wall Street Journal accuses him, in a former stint as a Governor, of being at the housing bubble's birthing. He helped support the intellectual case for not fighting the emerging bubble. At the December 9th, 2003 Board meeting he argued that the Fed could continue its negative real interest rate policy. His focus was on consumer price inflation and the output gap.

There are two problems with the Chairman's perspective: If a bubble allocates resources in the real economy, there will be cyclical unemployment that reflects these structural distortions. This unemployment will require a longer period of adjustment than ordinary cyclical unemployment. Thus the output gap will underestimate the economy's inflationary potential. Secondly preventing a bubble is just as important as preventing consumer price inflation.

Some of the comments share my concern. I particularly appreciated Avery Goodman's comment (reproduced below.)


The Fed’s Exit Strategy by Ben Bernanke (WSJ: July 20, 2009)

The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.

These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.

But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy.

To some extent, reserves held by banks at the Fed will contract automatically, as improving financial conditions lead to reduced use of our short-term lending facilities, and ultimately to their wind down. Indeed, short-term credit extended by the Fed to financial institutions and other market participants has already fallen to less than $600 billion as of mid-July from about $1.5 trillion at the end of 2008. In addition, reserves could be reduced by about $100 billion to $200 billion each year over the next few years as securities held by the Fed mature or are prepaid. However, reserves likely would remain quite high for several years unless additional policies are undertaken.

Even if our balance sheet stays large for a while, we have two broad means of tightening monetary policy at the appropriate time: paying interest on reserve balances and taking various actions that reduce the stock of reserves. We could use either of these approaches alone; however, to ensure effectiveness, we likely would use both in combination.

Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.

Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve. Moreover, they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because, by so doing, they can earn a spread without risk.

Thus the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the federal-funds rate. Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed.

Considerable international experience suggests that paying interest on reserves effectively manages short-term market rates. For example, the European Central Bank allows banks to place excess reserves in an interest-paying deposit facility. Even as that central bank’s liquidity-operations substantially increased its balance sheet, the overnight interbank rate remained at or above its deposit rate. In addition, the Bank of Japan and the Bank of Canada have also used their ability to pay interest on reserves to maintain a floor under short-term market rates.

Despite this logic and experience, the federal-funds rate has dipped somewhat below the rate paid by the Fed, especially in October and November 2008, when the Fed first began to pay interest on reserves. This pattern partly reflected temporary factors, such as banks’ inexperience with the new system.

However, this pattern appears also to have resulted from the fact that some large lenders in the federal-funds market, notably government-sponsored enterprises such as Fannie Mae and Freddie Mac, are ineligible to receive interest on balances held at the Fed, and thus they have an incentive to lend in that market at rates below what the Fed pays banks.

Under more normal financial conditions, the willingness of banks to engage in the simple arbitrage noted above will tend to limit the gap between the federal-funds rate and the rate the Fed pays on reserves. If that gap persists, the problem can be addressed by supplementing payment of interest on reserves with steps to reduce reserves and drain excess liquidity from markets—the second means of tightening monetary policy. Here are four options for doing this.

First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions. Reverse repurchase agreements involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date.

Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline.

The Treasury has been conducting such operations since last fall under its Supplementary Financing Program. Although the Treasury’s operations are helpful, to protect the independence of monetary policy, we must take care to ensure that we can achieve our policy objectives without reliance on the Treasury.

Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks—analogous to the certificates of deposit that banks offer their customers. Bank funds held in term deposits at the Fed would not be available for the federal funds market.

Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market.

Each of these policies would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.

Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.
—Mr. Bernanke is chairman of the Federal Reserve.

Avery Goodman's Comment:

Dear Mr. Bernanke,

There is nothing that I would like better than to see you proved correct. But, all the evidence shows otherwise.

The primary dealers of the Fed have received huge wads of almost-free-cash, in one way or another, as a part of your balance sheet expansion, as well as the fact that you have traded Treasuries for toxic waste held by the banks. So far, the cash you've handed out is not being used to fund productive industry in America. Instead, it is being used to fund speculation.

These primary dealers appear to be making loans mostly to client-speculators including hedge funds, and, also, supplying their own trading divisions. Since speculation thrives in time of volatility, price instability has resulted. The markets, in turn, have become Fed-driven, rather than free and independent,

We have seen an explosion in prices, as well as the overall level of speculation in the stock, oil, gold, silver, and commodities markets. A new bubble in asset prices is now being formed, and it has every prospect of eventually exceeding the previous one. We have seen little actual improvement in the U.S. economy, however.

Oil, in particular, has roared back in price, even though it is in serious oversupply. This is because people are buying everything that tends to rise in inflationary times. The wild speculative buying impairs the potential for the economy to recover.

Meanwhile, the dollar is currently in a free-fall, and the Chinese, Russians, Indians and even the Brazilians are threatening to settle trades in other currencies. Gold and silver, in contrast, are soaring into the stratosphere. Foreigners clearly do not have confidence in your policies.

You had better make it very crystal clear, when you testify, that you intend to take very strict and affirmative action to reduce the Fed balance sheet back to $900 billion or less, or this situation will continue to deteriorate.

I would love to be proven wrong. However, the result of your easy money policies has been rampant speculation. This speculative activity is being encouraged by, or directly participated in, by the big banks you have bailed out. We are now seeing a falling dollar, rising stock, gold, silver, and commodity prices, and a continuing hollowing out of the American economy.

It would have been better to allow the insolvent banks to fail, while allowing the FDIC to do its job of replacing whatever deposit money was lost. There would have been no repeat of the Great Depression, because of the existence of the safety net provided by FDIC insurance. The market share lost by the failed banks would have eventually shifted to their competitors, who would become bigger.

Instead, the Federal Reserve has attempted to micro-manage the economy in a manner similar to the Politburo of the old Soviet Union. This has brought us ever higher levels of moral hazard. Such policies are unwise, but since you apparently intend to continue to pursue them, I wish you the best of luck. You, and we, are going to need it.