Federal Reserve chairman Ben Bernanke gave a lesson once again in monetary policy to a still mystified House Financial Services Committee at a hearing on the Fed's semi-annual report to Congress today.

Amidst the (news flash) headlines from Bernanke, that the Fed will keep the federal funds rate and thus interest rates low, and that the US will not see a downgrade in its triple-A rating, came some fierce electrical displays of impenetrable stupidity.

An Eloquent Case for Term Limits

Providing an eloquent case for term limits, Rep. Maxine Waters (D-Calif.) asked:

“How can you assure us that your raising the fed funds rate won't cause mortgage rates to rise?”

Bernanke Instructs Waters Once More

To which Bernanke heroically tried to talk Rep. Waters down off the ceiling where she had put herself in a fit of feigned pique:

“We raised the discount rate,” which doesn't impact consumer borrowing rates, Bernanke said.

The discount rate is what the central bank charges banks to borrow from the Fed at the “discount window.” The fed funds rate is what banks charge each other for overnight loans. 

But Rep. Waters wouldn't let go for another five minutes, demanding answers as to whether the Fed's recent (non-)move would hurt borrowers, to which the Fed chair, clearly irked, said: “We don't think the raise in the discount rate has any material effect on borrowing rates, there is no linkage between mortgages and the discount rate.”

Because a hike in the federal funds rate affects mortgages and consumer loan rates more directly, he quietly noted, a rate that will stay near sub-zero (inflation-adjusted) for some time.

Discount window borrowings have tailed off to about $15 billion down from more than $100 billion at the height of the crisis in 2008, a tiny sum compared to the $12 trillion in overall credit programs (much never used) that the Fed and Treasury launched when the nation's $2 trillion in bad mortgages out of $14 trillion in mortgages started to go belly-up.

But such distinctions were lost on the representative from California despite her years spent on this committee.

Start applying Novacaine to your nerve endings.

Ron Paul Goes Tom Clancy

This came not soon after Rep. Ron Paul (R.- Texas) exhausted five minutes of taxpayer-paid for electricity to demand answers from Bernanke on the Fed's shadowy role funneling money to Iraq's Saddam Hussein as well as the Nixon administration during Watergate.

“Why couldn't we open the [Fed's] books up 10 years back and find out the truth of these matters?” Paul asked.

“Absolutely Bizarre”

Usually Uncle Ben's nice, but Bernanke, his contents clearly under pressure, uncharacteristically said the allegations about the Fed's involvement in Watergate and with Hussein were “absolutely bizarre.”

Bernanke quickly stopped using his inside voice, and noted that the Fed discloses transcripts of its Federal Open Market Committee meetings after five years.

And Bernanke seemed to agree with Paul's request to review every loan made to foreign governments.

The US's top central banker also said the Federal Reserve would release the names of banks who had availed themselves of its credit facilities, in due course.

But Paul's Watergate and Hussein questioning was mustered as alleged evidence as to why the Fed should be subjected to wider audits of its monetary policy by the Government Accountability Office, which the Fed opposes as it would lead to political interference, and possibly greater inflation, something former Fed chair Arthur Burns swore would happen the last time Congress threatened this in the late '70s.

Never mind that the Fed has monetized Congress's deficit spending enough already, something Bernanke also averred today would stop. “We are not going to be monetizing the debt,” Bernanke warned.

Is Fed's Market-Timing State of the Art?

Not yet clear, because no one on the committee asked, is whether US taxpayers will ever get to see exactly what sludge they paid for in the AIG bailouts, where Goldman Sachs, Societe Generale, Calyon Securities and Merrill Lynch were made 100% whole on their trades with the toppled insurer.

The committee also did not give ample airing to the Fed's exit strategy, in which it will need to dismount out of its very complex, very unorthodox, and very sizable intervention into the US economy, in which it has ballooned its balance sheet to $2 trillion from $800 billion pre-crisis, where it has junked up its financials with all sorts of asset-backed securities to rescue Wall Street.

Also not discussed are the Fed's market-timing abilities, proven to be not so state of the art.

Can the Fed time the market right and make a profit selling these securities, many of which are underwater, to avoid losses? Since it took the Fed nearly two years to raise rates after the last two recessions, which exacerbated the bubble?

Can it do so when even Wall Street can't get it right, dancing deeper into paper refuse when their computer screens flashed red on subprime securities, proving artificial intelligence is no match for natural stupidity?

Fannie and Freddie Take Over Quantitative Easing

While the Fed has already ended all sorts of credit facilities for the financial sector, it's clear Congress intends Fannie Mae and Freddie Mac will now take over the role of lending support to the US economy, as the Congress authorized for them an open-ended line of credit, previously capped at $400 billion, in the dead of night last December.

The House hearing of course didn't give much time to discussing the impact of this blank check given to two of the worst offenders in the government distorted housing market which is getting a government bailout.

Hot Molten Evil

Because this is the same House Committee—Frank, Waters, et al--that chastised critics as hot molten evil if they dared come before it to tell the truth about Fannie and Freddie.

The Fed chairman didn't quite fully address Fannie and Freddie reform, meekly noting something about the two being a private but yet maybe a public utility (my head just exploded), because again the representatives didn't really fully give this issue an airing.

“Crap-ital Standards”

Although Rep. Randy Neugebauer of Texas did ask what the Fed was doing about bank reform in the way of tightening, as he unintentionally though aptly put it, bank “crapital standards.” 

Standards which Congress seems to follow, as Bernanke noted once again that it's “very important for Congress and the Administration to have a credible plan to bring the government back to a sustainable position on deficits,” since “basic arithmetic shows that interest payments on the debt would go higher and spiral out of control,” noting the Congressional Budget Office came up “with the same results.”

"Governments Jobs Are Not Productive"

To which the Fed chairman also said that while fiscal stimulus has created jobs, “you don't want to create government jobs that are not productive.”

Deficit Spending Hurts Markets Now

This deficit spending problem “is not 10 years away, it affects the markets today,” Bernanke replied to a question to Rep. Ed Royce (R-Calif.), the only person on the committee who appears to not be a few peas short of a casserole, upon which committee chairman Barney Frank (D-Mass.) cut off this line of questioning.