Federal Reserve Chairman Ben Bernanke has gone from being Time magazine's Man of the Year in 2009 to … what? A Fed chairman who may not be reappointed for a second four-year term. Why the sudden turnaround in his fortunes?
Like a spy who gets a burn notice (as depicted in USA Network's hit series, Burn Notice), suddenly he lost his support. No one trusts him anymore. Bernanke may have the sense that somebody out there issued a burn notice, defined by the Department of Defense as an "official statement by one intelligence agency to other agencies, domestic or foreign, that an individual or group is unreliable for any of a variety of reasons."
But here's the crazy truth: It's not his fault. If Bernanke had spent more time studying socionomics (the science of social prediction as promulgated by Bob Prechter) rather than the Great Depression, he might better understand his plight. Prechter has written about the history of Fed chairman, presidents, and other icons over the years, and his research shows that their popularity rises and falls with social mood. Here are two excerpts from the November 2005 and June 2006 issues of The Elliott Wave Theorist that predicted what's happening today.
* * * * *
Excerpted from The Elliott Wave Theorist, November 2005, by Robert Prechter
The Coming Change at the Fed
Public figureheads have a way of representing eras. This is certainly true of entertainment icons and politicians. The history of fed chairmanship implies a similar tendency for changes of the guard to coincide with changes in social mood and therefore stock prices and the economy. Figure 1 depicts our social-mood meter—the DJIA—since the Fed’s creation in 1913, marked with the reigning chairmen according to a list on the Fed’s website.
The first chairman, Hamlin, presided over a straight-up boom. As it ended, Harding took over and presided over an inflationary period that accompanied a bear market, exiting just as a new uptrend was developing. Crissinger took over at the onset of the Roaring Twenties, and Young presided over the boom, the peak and the rebound into 1930. Meyer took over just as confidence was collapsing and left the office in early 1933 at the exact bottom of the Great Depression. The next three chairmen struggled through the choppy years of the 1940s. Then Martin presided over virtually the entire advance from the early 1950s through 1969, exiting just before the recession of 1970. Burns and Miller presided over a bear market and exited as the new uptrend was developing. Volcker, after weathering an inflation crisis, presided over the explosive ’80s. Greenspan has presided over the manic ’90s and the topping process. The next chairman will have his own era. Given the eras that have immediately preceded the coming change in leadership, the odds are that this new environment will be a bear market.
The chairmanships of 1967 to the present are remarkably like those of 1913 to 1930. Figure 2 [Editor's note: not shown] shows the two eras, with the latter time expanded variously to show the similarities in form. When we place the chairmen on this graph, we can see that
Martin = Hamlin,
Burns = Harding,
Miller = none listed,
Volcker = Crissinger
Greenspan = Young.
If this progression continues, then
Bernanke = Meyer,
the man who presided over the “deflationary collapse” years of the Great Depression.
Most economists don’t accept cycles as valid. I think that the correlation between the social-mood environments of waves IV and V in the 1910s-1920s and waves IV and V in the 1970s-1990s, and their changing representatives, is not coincidence.
Excerpted from The Elliott Wave Theorist, June 2006, by Robert Prechter
Economists are convinced that the Fed can “fight” inflation or deflation by manipulating interest rates. But for the most part, all the Fed does is to follow price trends. When the markets fall and the economy weakens, the price of money falls with them, so interest rates go down. When the markets rise and the economy strengthens, the price of money rises with them, so interest rates go up. The Fed’s rates fell along with markets and the economy from 2001 to 2003. They have risen along with markets and the economy since then. Regardless of the Fed’s promise to keep raising rates, you can bet that the price of money will fall right along with the markets and the economy. Pundits will say that the Fed is “fighting” deflation, but it will simply be lowering its prices in line with the others.
It is highly likely that the next eight years or so will test the nearly universally accepted theory—among bulls and bears alike—that the Fed can control anything at all. The Great Depression made it look like a gang of fools, as will the coming deflationary collapse. We have predicted unequivocally that the new Fed chairman will go down as Hoover did: the butt of all the blame, and if you are reading the newspapers you can see that it’s already started. “When Bernanke Speaks, the Markets Freak” (San Jose Mercury News, June 10, 2006); “Bernanke is being blamed for spooking Wall Street” (USA Today, June 7, 2006); “Bernanke to blame for volatility” (Globe and Mail, Canada, Jun 13, 2006). The new chairman had a brief honeymoon (which we also predicted), but it’s already over.
By the way, I heard his commencement speech at MIT last week, and in it he spoke eloquently of the value of technology and free markets. But he also opined that economists have successfully applied technology to macroeconomics. We believe that the collective unconscious herding impulse cannot be tamed, directed or managed. In our socionomic view, the Fed cannot control the mood behind the markets, but rather, the mood behind the markets controls how people judge the Fed. We’ll ultimately find out who’s right.