Control Panel: Advice from Ben Bernanke

Benjamin S. Bernanke was Chairman of the Federal Reserve through the Great Financial Crisis until 2014. I read his book, " 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19," which is a detailed explanation of the many monetary policy adjustments the Fed has used to attempt to fulfill its two obligations of currency stability and maximum employment during economic cycles and crises.

It isn’t often that Dr. Bernanke sits down for an interview.

Ben Bernanke Talks About Bank Runs, Inflation, A.I., Market Bubbles and More

The former Fed chairman shared his thoughts with our columnist.
Jeff Sommer

By Jeff Sommer, The New York Times, June 9, 2023

At the moment, the banking system appears to be stable, he said, but you never know…Conditions in the financial system appear to be fairly calm today, he said, but added, “I’ve learned from painful experience that one never says never; it’s always possible.”…

  • If the Fed had the legal authority that other central banks possess, it wouldn’t need to invoke emergency powers and set up temporary rescue “facilities” every time a crisis demands that it backstop “shadow banks,” which include hedge funds, investment banks, private equity funds, money market funds and the like. These giant institutions perform many of the functions of traditional banks. The Fed is hampered by “a structural flaw that was never corrected by Congress, which is that the Fed is restricted on normal grounds to lending only to banks and not to other types of financial institutions,” he said.

  • Don’t ever assume everything in the financial system is OK. It may not be. There is a need for constant monitoring and bolstering of systemic regulatory oversight to head off major problems…

Are we in an A.I. bubble? Mr. Bernanke said it was hard to identify bubbles as they were forming, and to know what to do when one existed. “A.I. stocks are zooming up despite the fact that the overall economic environment is worrisome,” he said. “Is that a bubble? It depends on whether A.I. turns out to be the transformative technology that some people think it will be. Maybe it is, maybe it isn’t.”… [end quote]

Let’s look at the “worrisome overall economic environment.” It doesn’t look very worrisome to me, yet, but it is showing small signs of slowing.

The unemployment rate, 3.7%, is near a multidecade low. U-6, which includes Total Unemployed, Plus All Persons Marginally Attached to the Labor Force, Plus Total Employed Part Time for Economic Reasons and is the broadest measure of everyone who wants to work, is similarly low.

The Labor Force Participation Rate is rising but is still below the pre-Covid level. But the Labor Force Participation Rate - 25-54 Yrs., which doesn’t include the people who retired due to Covid, is now higher than the pre-Covid level. It’s near the highest on record. Unemployment Level/Job Openings: Total Nonfarm is near the lowest on record.

The Federal Reserve would see this as a very tight labor market. It’s inflationary and would move the Fed to raise or at least maintain the current fed funds rate.

The 4-Week Moving Average of Initial Unemployment Claims, while still very low, is beginning to creep up slightly.

Economic activity in the manufacturing sector contracted in May for the seventh consecutive month following a 28-month period of growth, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®. The May Manufacturing PMI® registered 46.9 percent, 0.2 percentage point lower than the 47.1 percent recorded in April. Regarding the overall economy, this figure indicates a sixth month of contraction after a 30-month period of expansion. The New Orders Index remained in contraction territory at 42.6 percent, 3.1 percentage points lower than the figure of 45.7 percent recorded in April.

Economic activity in the services sector expanded in May for the fifth consecutive month as the Services PMI® registered 50.3 percent, say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business ®. The majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy. The services sector is much larger than the manufacturing sector and employs far more people.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 was 2.2 percent on June 8. This is respectable growth and certainly not recessionary. The growth rate of real gross domestic product (GDP) measured by the U.S. Bureau of Economic Analysis (BEA) is a key metric of the pace of economic activity. It is one of the four variables included in the economic projections of Federal Reserve Board members and Bank presidents for every other Federal Open Market Committee (FOMC) meeting.

These numbers look pretty solid to me, not showing a recession right now. But other data point to a future recession and have for many months.

No matter how you slice it, inflation is much higher than the Fed’s target of 2%.

The next FOMC meeting is in 3 days. Betting in the futures market is 75% for holding the fed funds rate steady, 25% for raising it 25 basis points. The market is heavily weighted toward raising it in July and afterward.

Going back to Dr. Bernanke’s comments, I was a little annoyed by his whining about how the Fed should be able to backstop the “shadow banking system.” The Fed doesn’t regulate the shadow banking system, which takes many risks that banks aren’t allowed. There would be serious pushback against any expansion of the Fed’s use of public funds to backstop the shadow banking system. There was significant anger and backlash after 2009, when AIG was bailed out. I’m surprised that Dr. Bernanke is so politically insensitive.

The mention of a possible bubble in AI stocks when the rest of the stock market is languishing is a flashing red light that there really is a bubble, despite Dr. Bernanke’s disclaimers. (Fed officials always claim they can’t see bubbles, even when they are obvious.) Nvidia stock has a P/E ratio of 200. NVIDIA’s market cap reached $ 1 Trillion last week. Reported revenue for the first quarter ended April 30, 2023, of $7.19 billion, down 13% from a year ago and up 19% from the previous quarter. If that isn’t a bubble, I don’t know what is.

I also found it interesting that Dr. Bernanke didn’t say, “Don’t worry, be happy” about the safety of banks and the financial system. Having been blindsided by the 2008 financial crisis, he’s not willing to say everything is hunky-dory with banks in 2023, just a few weeks after a banking crisis and while the Fed is still raising interest rates. By the way, I bought KRE ( SPDR ® S&P ® Regional Banking ETF) a few days after the panic but sold it last week for a short-term gain. Given the problems in commercial real estate, I expect more problems for regional banks later this year and don’t want to hold their stocks for that future mess.

The Control Panel shows a happy stock market. It doesn’t show that most of the growth is in only 10 tech stocks and the rest of the market is languishing. VIX is low. Financial stress is very low.

Treasury yields are rising along the entire yield curve. This will put pressure on many companies, especially tech companies, startups, zombies and commercial real estate. Expect serious trouble, including debt defaults and bankruptcies.

The 30 year mortgage has been creeping up and is near its recent high which impacts residential real estate. The Case-Shiller U.S. National Home Price Index fell a little from its all-time high but is recently creeping up.

The trade is risk-on. The Fear and Greed Index is in Extreme Greed. SPX and junk bonds are climbing faster than Treasury prices. In fact, Treasury prices are falling as their yields rise.

Like me, many investors are risk-averse. There’s another shoe yet to drop. It’s usually not a great idea to buy stocks just before a recession. (The bubble tech stocks are in a different category.)

ETF Flows Sputter as Investors Favor Defensive Strategies

Risk-averse investors aren’t chasing the new bull market

By Jack Pitcher, The Wall Street Journal, June 11, 2023

Despite a 12% rally for the S&P 500 so far in 2023, ETF flows paint a picture of a cautious investor base, reluctant to wade back into equities after a rough 2022

With interest rates at a 15-year high and the Federal Reserve’s path ahead uncertain, investors appear wary about stocks even after the S&P entered a new bull market Thursday. Traders will next hear from the Fed on Wednesday at the conclusion of its June meeting, a day after the release of closely watched inflation data…[end quote]

The METAR for next week is sunny. There are no new crises on the horizon. I’m sure that the Fed will make the market happy by holding the fed funds rate constant. The market will ignore the high likelihood that the Fed will raise a month from now. But it’s not likely that many risk-averse investors will overlook the obvious – it doesn’t make sense to jump into the market when the support is a narrow bubble and a recession is just over the horizon.


# Labor Force Participation Rate


Is this important in mid 2024? Does corporate American move on as usual?

Why are factory orders down? Thoughts?

Semiconductor shortages?

The Federal Reserve has been raising interest rates throughout 2023 to slow the economy with the objective of reducing inflation. Factory orders are down because consumers are facing higher financing costs. This is part of the Fed’s plan.



Not yet. But it could form. AI could have its sock puppets moment in the next 1, 2, 3 years. Given a decade timeframe it will recover just like the dot-com bust did, and probably be even bigger than the Internet days.

If there was one thing helping things not become a bubble, it would be that cheap money is all but vanished. We should remember that.


Importantly, most of what people mean by “AI” are the rather trivial programs now passing the Turing Test with regard to images, music, coding, and writing. Stunning as all that is (even though in my not humble opinion the actual products are mostly junkier versions of the schlock they used as inputs), where AI will have its biggest impact, especially as quantum computing is buckled in, will be in solving what are now hugely difficult problems such as inventing proteins that block cancers, calculating or breaking potent cybers, or multi body gravitational problems…just to name the lowest hanging fruit.

But can they solve the biggest problem?: human political social insanity as we come further unmoored from the forms of living together evolved over millenia that anchored morality ethics reciprocal care. No. That will be on us.

david fb


I think AI as an investment choice dies down by the end of summer. The reason accountants are going to add up call center costs. Turns out AI bot agents do very little to help most people. We are most of us having to turn to emails and phone calls to company offices and people to get our needs met. Call centers have to hire because AI wont do the job much of the time.

I think the bean counters will start to talk this summer and it wont at all be good for AI.

AI has taken years to form. The spreadsheet revolution and word processor revolution was like a wildfire. AI is more irritation and avoid after seeing it in action. The entire lets invest in this will just fade away.

Yes NVDA GPUs make use of it. That is not all that new. It is not news worthy either.

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I see all that as big data, datamining, I do not see that as AI. The guy who has to look over major arrays of data makes it possible to data mine. AI would be something weird in the way.