If Jerome Powell Has a Middle Name, It Might Well Be Bert
It has been a long time since Bert the Turtle has been a mainstream star. For many of the Baby Boomer generation, and even some Gen X-ers, who could forget the cartoon reptile wearing his silly pith helmet jumping into his shell whenever his monkey nemesis set off a firecracker? Bert was the face of “duck and cover”, once a serious effort about a very serious matter that very quickly became the object of derision and spoof.
The Soviet Union detonated its first atomic bomb (using stolen technology, of course) in 1949. President Truman turned to the National Security Resource Board, assigning it a portfolio of civil defense responsibilities. These were absorbed by the newly created Federal Civil Defense Administration (FCDA) under an act which had been signed into law on January 12, 1951, one of Truman’s final.
Defending the whole country, or even much of it, from potential atomic attack seemed an impossible task. But it was one that FDCA took up, beginning with ordering up a study to be conducted by America’s “Associated Universities”: a research organization begun in 1946 and operated by Brookhaven National Laboratory, it was - and still is - a collaboration of some of the country’s leading research universities.
Associated Universities, Inc., immediately commissioned Project East River, putting some of its top scientists into an endeavor that was absolutely no joke. Its first goal was to divide up the herculean chore into more focused practical areas of responsibility. What could the military do that might make an atomic strike less lethal? What could civilians do to reduce the harm caused by any nuclear detonations?
In its earliest stages, Project East River had already noted severe fatalism on the part of the American people as one of the country’s greatest hurdles. Not Soviet technological prowess (meaning, the prowess of its spy network to steal technology), nor the capabilities of its bombers to evade early warnings and US fighter patrols.
The project’s final report, published in October 1952, instead had flagged:
“The civil defense program must convince the people of the United State that because of its activities, the individual citizen’s chance of survival is greatly increased and his property damage minimized. Much of the existing apathy derives not only from the magnitude of the problem but also from the mistaken impression nothing much can be done about it…The average American citizen is not greatly concerned over the manner in which he is picked up after he had been killed, but he is much interested in increasing his chances for survival.”
The study recommended that the FCDA understand its first priority would have to be in emphasizing any activity which would convince as many individual members of the US public that their chances of survival were not small, and that there were ways to minimize damage to private and commercial property. Human nature, “the prevailing philosophy seems to be that with loss of home, family, and friends”, and such loss almost certain, what would be the point of any level of preparation?
No one would shell out the necessary time, money, effort, and voting approval if the situation was considered hopeless.
Simple things like taking into account the spacing of infrastructure, making it harder for a single bomb to take out lots of crucial things in one blow, hardening of some (well, a lot) buildings, shelters and such, and finally something that would later be called “emotion management” (this exact term does not appear in the study itself, rather in subsequent use of its recommendations).
In 1950, under advice of the predecessor National Security Resource Board, several school districts in a few key target cities like New York had already volunteered to pilot “sneak attack” drills. The teacher in each classroom would suddenly, out of nowhere, shout “drop!” and students would already know to quickly shuffle underneath their desks, covering their heads with their hands.
Before ever turning things over to the FCDA, President Truman had made a slogan out of the phrase, “Education is our first line of defense.”
Enter Bert the Turtle.
The FDCA in 1951 awarded Archer Films a contract to produce one of nine educational movies. The others, such as Survival Under Atomic Attack, and Fire Fighting For Householders, were straightforward instructional flicks obviously meeting Project East River’s loose, at the time still-unpublished, emotion management doctrines.
Following along with Truman’s slogan, Archer’s producers had heard about the school drills, met with some teachers involved and then got the endorsement of the National Education Association to center the film around “duck and cover” – using a mix of live action set against this animated turtle (alongside the mischievous cartoon monkey).
Completed and released in January 1952, the FCDA was thrilled with the product; for nine months of 1952, the agency paid for a fleet of 10 trucks and trailers to tour the country, Duck and Cover their centerpiece. This Alert America Convoy, as it was called, would introduce America to Bert and his atom bomb-defying ploy.
At that particular time, duck and cover wasn’t so absurd. The Soviets didn’t possess that many bombs in their arsenal, and what few they had were of lower yields closer to the pair dropped by the United States on Japan. One of those going off near an American city, ducking and covering under a school desk might actually do some good for the vast majority in it where the greatest immediate threat to children attending class was the explosion shattering windows and sending shards of glass flying all around the interior.
It sounds ridiculous in light of the later period of the Cold War when enemies on both sides possessed not only tens of thousands of such weapons, but, not long after Project East River published and Duck and Cover in widespread circulation, also adding H-bombs and thermonuclear devices which would simply wipe out unthinkably enormous chunks of the physical landscape, everything in them, and seemingly all hope.
Bert wasn’t always a dumb idea, nor duck and cover a useless bit of manipulation. Both were merely outdated very quickly by a fluid and constantly evolving situation. To someone in 1952, it wasn’t completely crazy. To someone in, say, 1956 and thereafter, yeah, it was really stupid and pointless.
To the latter, “emotion management” takes on instead the more obvious feel of pure propaganda. Useless drivel. Especially when anthropomorphized as a cartoon turtle juxtaposed against the backdrop of the smallest possibility for World War III.
One year ago, in September 2019, the Federal Reserve was shaken by an “unexpected” alert. The US economy was straining, the bond market was signaling worse, and Jay Powell’s genius plan was unraveling in front of the whole world. No big deal, he’d said, nothing that a few rate cuts wouldn’t easily handle.
Then, on September 16, 2019, seemingly out of nowhere (but not really), the repo market put him and the Fed to the test. Repo rates jumped so much that on the very next day, the same day the FOMC held its policy meeting when the second of those rate cuts was supposed to have been the unrivaled financial news, the fed funds rate broke out of its “limits.”
It was a very public humiliation at exactly the moment officials had carefully planned for more stable soothing.
Slow, as always, to respond, the FOMC came up with repo operations to bail out the repo market for reasons no one wished to specify. At least, that’s how the mainstream financial press dutifully framed it. In truth, these were “repo” operations in name only, transactions which merely mimicked a repo trade done in the private marketplace.
And the end result of them was, as always, bank reserves. When all you have is a hammer…
Chairman Powell didn’t end there, of course; the FOMC pressed further ahead with, well, QE but not QE. Because this repo thing was all a big nothing, they claimed, but it was still something, by virtue of so much action, the level of bank reserves would have to be increased on a more permanent basis by the only other thing the Fed does: asset purchases.
When all you have is a small set of slightly different hammers…
Not-QE, you might remember, was the Fed distinguishing this “small scale asset purchase” from a regular QE by exclusively buying T-bills and purposefully staying out of Treasury bonds and notes. Acquiring any of the latter longer-dated securities would have risked, authorities claimed, the public seeing not-QE as QE.
If the repo market did blow up, as an H-bomb going off, what good would these “repo” ops and not-QE do?
This is not, as it turned out, a rhetorical question. Unlike World War III which thankfully never happened, leaving for future generations Bert as a curious perhaps lovable laughingstock, GFC2 actually did. And the repo market ended up being Ground Zero.
You see, what really had happened last September was a warning that something big was legitimately wrong in it. Money dealers for those three days in question took to the sidelines, withdrawing their necessary monetary activities, and they did this leaving huge potential profits on the table (skyrocketing repo and unsecured money rates). To say that was abnormal would be an understatement; such blatantly obvious backwards elasticity is something you will never find in functioning markets.
The Fed didn’t even assume bank reserves would fix the problem; not directly. Bank reserves are little more than the central bank’s talisman, the token the public is supposed to believe cures all monetary ills without ever taking the smallest moment thinking more about how that might be.
Bank reserves would have once made a fine and legitimate response in days long, long ago past. The monetary system, repo collateral, in particular, like atomic bomb technology, simply evolved and rendered them obsolete. Potential financial problems made bigger and more complex, the possible fallout from them far, far more serious and closer to unsurvivable (something about 2008 rings a bell).
What do bank reserves really do? Don’t ask, just be impressed. Tuck your body under your desk and place your arms over your head. With the entire financial world adopting the duck and cover posture, everyone in it would surely be left to feel so much better for the effort, and whatever might’ve been wrong (the Fed still doesn’t know) it would all just fade away with a little more time.
While that may have been September 2019, it sure wasn’t March 2020. Whereas the former had been, as I wrote numerous times last year, a dress rehearsal and nothing more, the latter proved the real deal.
And just like September, in March money dealers quickly retreated to the sidelines – only this time with added purpose and destructive power. The collateral bottleneck which had caused dealers their dress rehearsal level of angst last September had shown up front and center in March. I wrote on March 3, just as it was getting going:
“At the slightest little hiccup in September, a dress rehearsal, they [dealers] pulled their limited, precious balance sheet capacities out of the repo market – at almost any price. In February and now March 2020, the same thing is disappearing. Except, it’s not just or even much repo. It’s disappearing from everywhere at the moment. Liquidations galore. The very thing September’s repo dress rehearsal was rehearsing. The level of bank reserves? Substantially higher than September, of course.”
Some had said, even from the beginning, Bert the Turtle and the other efforts at “emotion management” like him weren’t just silly, neutral propositions; they actually caused harm by diverting attention from the real problems and more concrete solutions especially in the thermonuclear era, the source of later ridicule for duck and cover.
The Fed’s “repo” operations had accomplished something similar; for a short while, the public’s limited attention had been focused on the right place for once. With its Open Market Desk running more smoke and mirrors, the problem seemingly died down, badly needed urgency was lost just when it had been needed most and could have been most useful (in the months leading up to GFC2).
More insidious had been not-QE. Not even neutral at all, the purposeful buying of only T-bills contributedmightily to the harm suffered in March 2020 (and the fallout we are still experiencing one year later). I also wrote all last year that it was blatantly scandalous to so strip the collateral system of T-bills when T-bills would have to be the last line of defense if the aforementioned fears of a collateral bottleneck should ever come about.
In late February 2020, it so came about. And there were so many fewer T-bills around to aid in the desperate scramble for repo function, causing untold liquidations globally, all because the Fed wanted to convey a message that had no basis in any reality. I wrote in early October last year:
“The whole bond market screams systemic collateral shortage and these guys think, well, let’s fix it by…removing the best collateral from circulation. Can anyone in such a position really be that obtuse? It has to be on purpose, right?”
Emotion management versus monetary proficiency. Monetary policy is entirely the one thing, and has nothing left in it of the other.
But it’s even worse than that; its whole basis in emotion management is predicated on the public believing in its monetary proficiency. Ask no questions, just believe that duck and cover bank reserves will save you and the system.
After getting blown up repeatedly, how many more duckers and coverers can be left?
While all this has been taking place, the US central bank has been engaged in what it wishes you to further believe has been serious soul searching. Officials for a long time haven’t been able to find inflation, you see, and that’s a big problem. What they really mean by that has much less to do with consumer prices than you think.
They’re groping their way forward trying to figure out why the US and global economy had never actually recovered from the first time we went through this very same kind of repo detonation a dozen years ago. And doing so carefully so as to avoid, at all costs, admitting their obvious lack of monetary proficiency just might have had something to do with it.
You know what they say: inflation is always and everywhere a turtle phenomenon.
One year ago, the repo market put the world on notice. Money dealer fears at the time being expressed more gently, but still violently enough, were demonstrated, verified, and observed to be destructively authentic just six months later (even though, another reminder, with the level of bank reserves greatly expanded in between).
Today, six months further on, the Fed’s message is again one of inflation and positivity if only because their lack of successes has left us all with an even worse situation: trying to dig out of a second unnecessary crisis while yet having dug out from the first.
Trillions more bank reserves, obviously.
Where’s inflation? Why don’t the safest, most liquid instruments lose any value? Because it’s not 1952 anymore.
I honestly don’t know what Jay Powell’s middle name really is, or if he even has one. I would not be shocked to find out, however, if it was Bert.
