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Feature
Not-So-Gentle-Ben
Obama’s risky Bernanke gamble.
(Page 2 of 2)
So when Bernanke suggests he can contract U.S. bank reserves and lending through interest payments on dollars returned to the Fed, he is not speaking truthfully. Just the same, if the Fed increases reserve requirements on banks in order to reduce lending and the money supply, there will similarly be no decrease in dollars lent in the U.S. despite Bernanke’s protests otherwise.
Bernanke cheerleaders will doubtless point to low government measures of inflation as a counterargument to the Fed’s policies, but we would argue that the correct measure of dollar stability and flat prices is the price of gold, not the Consumer Price Index. The gold price is double today what it was in 2005. So even as an inflation fighter, Bernanke’s record is oversold.
We worry as well about Fed mission creep under Chairman Bernanke. The Fed has now declared that not only should it fight inflation, and fight unemployment, but that it is now responsible for preserving “financial stability.” It has added roughly $1.2 trillion to its balance sheet with almost one-half trillion of mortgage-backed securities, many of which will default. The Fed is micro-engineering the economy to a greater extent today than at any time in its 80-year history. Is it any wonder as the Fed takes on extra-constitutional powers that members of Congress ranging from Barney Frank to Ron Paul want to require more transparency and congressional oversight?
Looking at unemployment on his watch, it was 4.8 percent when he took over, yet the latest reading for August was 9.7 percent. If we’re to judge the Bernanke Fed on two key measures as mandated by Congress, the case for Bernanke gets no better.
Under a stable dollar regime, the financial crisis that has hopefully passed wouldn’t have occurred to begin with. When money values are unstable, investment is invariably distorted and what von Mises termed “malinvestment” occurs. Allowing for the truth that the Bush Treasury was more than accepting of the dollar’s decline on Bernanke’s watch, it can’t be stressed enough that the irrational rush into housing by individuals who couldn’t afford it and the resulting spike in mortgage defaults that crippled the banking system wouldn’t have occurred had the dollar been strong and stable.
Regarding the disaster that is TARP, it is well documented that Bernanke played a major—even coercive—role in its imposition and subsequent emasculation of the banking system. If we ignore that the Bernanke Fed was caught asleep at the wheel by a looming financial crisis among banks that it’s charged with regulating, it should at the very least be said that the Fed’s solutions have greatly weakened the banking sector, thanks to the latter’s inevitable bailout-induced politicization.
The Fed’s main policy tool is of course the short money rate that it sets. That it now sits at zero is not a compliment to our Fed chairman, but instead a strong signal from the Bernanke Fed that it has failed. Had monetary policy been rational and bank oversight sound (the latter perhaps an oxymoron), the Fed would never have had to reduce the funds rate to its present level.
In openly politicking for reappointment, Ben Bernanke made plain that a price rule is not in the cards, and that he’ll continue in his vain attempts to manage economic growth and the supply of money. The suspicion is that Messrs. Bernanke and Obama have gotten on famously because of the accommodative Fed policies that have opened up the floodgates. As the dimwitted “cash for clunkers” program showed, Americans love free money and incumbent politicians love easy money.
Here is our profound fear: Rather than saving capitalism, Bernanke’s hyper-interventionist policies and unbridled money creation over the past year have simply laid the groundwork for future economic crises. With large financial institutions well aware that their mistakes will be cushioned thanks to the misnomer that is “systemic risk,” the Bernanke Fed would better be described as a systemic risk generator than capitalism’s savior.
It is telling that Mr. Bernanke is now one of the few holdovers from the Bush years. No doubt when the combination of a blitzkrieg of fiscal stimulus from Obama and open floodgates of money from the Fed fail, the White House will blame the Bush administration.
Uh-uh. It’s the Obama-Bernanke economy now—for better, but more probably, for much worse.
About the Author
Stephen Moore is a member of the Wall Street Journal editorial board.
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Alan Brooks| 10.18.09 @ 9:39PM
We can rest assured that since no one ever goes broke under-estimating taste, the economy will do just fine.
Alan Brooks| 10.18.09 @ 11:10PM
'risky gamble' is redundant.
All gambles are risky.
Pingback| 10.29.09 @ 7:17AM
The American Spectator : Not-So-Gentle-Ben « Ring Gold links to this page. Here’s an excerpt:
Ryan| 10.29.09 @ 9:20AM
Several things that the article is right and wrong about:
1. Economists persist in leaving out one critical statement. It was NOT low interest rates that were the problem. It was low interest rates WITHOUT STANDARDS FOR LENDING. The matter KEEPS not being spoken about. If banks had actually lent the money to people who could afford to pay it back, we either wouldn't be in the current mess or it would be greatly abated. The low interest rates were a BOON to both individuals and businesses, but people got greedy on all sides.
2. Gold prices are NOT related to inflation, they are related to FEAR. People are running back to putting their faith in useless, pretty rocks because they're afraid of what may or may not happen. Yes, the dollar is getting far too undervalued (I'm not an opponent of a weak dollar from time to time - it's actually good for the economy occasionally - but it's getting too low with no near-term solution for strengthening it).
3. The article is right about saving. How many banks would be in decent positions today if there was less of a borrow-and-spend mentality? Not just that, how many wealthy people and businesses with offshore accounts would have that money back home if there were lower tax rates?
L. Ross| 10.29.09 @ 11:41AM
I have a small dispute with your first point, Ryan.
While I certainly agree that relaxed lending standards totally mucked up the housing market, keeping interest rates too low too long were at least as big a problem regarding housing. Couple this with very creative financing and no down payment requirements, and it quickly becomes obvious that the system is ripe for a meltdown.
Low interest rates and no down payment meant that peoples ability to purchase more expensive housing increased dramatically, therefore the price of housing increased dramatically. The value of the house (lot price, materials, labor, permits) didn't increase any, just the price.
Ryan| 10.29.09 @ 11:53AM
That was EXACTLY the point that I made. It was the lending STANDARDS that were at fault, not the lending rates. Banks and other lending institutions did not show the proper restraint.
Of course, some blame can be thrown at the CRA and Freddie and Fannie as well, as they made the path clear for lowering standards.
Todd| 10.29.09 @ 3:58PM
So you think having prolonged lending rates from the Fed well under the rate of inflation is okay? It is all interrelated Ryan, all part of the recklessness that comes with easy money in an foolish attempt to "stimulate" the market. The hangover after the party if you will.
Ryan| 10.29.09 @ 4:55PM
Letting the rate float would probably be better. That being said, it WAS probably a mistake to let it go so long, but it's hard to tell what would have happened had lending standards not been so loose. It doesn't come back to the rate itself, but to the standards attached to those rates. Everything is so interconnected, that it's well-nigh impossible to predict anything when everything is coming up roses.
We don't know what it would have caused, but we DO know that the core problem was people borrowing too much money. It doesn't matter what the rate is - when people and businesses can't repay en masse, it's a problem.
Another problem was the market continually thinking in terms of short-term growth rather than long-term maintenance.
JohnD| 10.29.09 @ 9:28AM
The new 3rd Quarter GDP data was released today, and they are being touted as showing growth. Yes, 3.5% growth quarter to quarter, however, 3rd Real GDP Q 2009 is down 2.3% year to year (from 3rd Q 2008).
However, if you look behind the numbers, the “good news” on GDP is being fueled largely by a weak dollar and unsustainable deficit spending by the U.S. Government: Some highlights:
“Real personal consumption expenditures increased 3.4 percent in the third quarter. . . The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program).”
“Real exports of goods and services increased 14.7 percent in the third quarter” (Reflection of the weak dollar)
“Real federal government consumption expenditures and gross investment increased 7.9 percent” ($1.4 trillion FY 2009 deficit)
Bad news for consumers:
“Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter”
“Personal current taxes increased $4.8 billion in the third quarter”
“Disposable personal income decreased $20.4 billion (0.7 percent)”
Bob Miller| 10.29.09 @ 11:13AM
Above all, Bernanke has to outmaneuver George Soros and his associates and facilitators. One of the latter is the President.
A Fan| 10.29.09 @ 12:04PM
Too much money can no doubt be a prolem. Just look at the 0-1 Yankees. Go Phillies!
Lullaby's, Legends and Lies| 10.30.09 @ 2:38AM
It's tied up now "Fan" at 1-1. Let's Go Yankees!!
LiveFreeOrDie| 10.29.09 @ 3:55PM
END THE FED
Pingback| 10.30.09 @ 10:34PM
massage birmingham | Massage Beauty Wisdom links to this page. Here’s an excerpt:
Jake Peachey| 10.30.09 @ 11:37PM
"Money is not wealth, but a lubricant that enables the exchange of wealth."
First let's get some definitions straight so we don't talk past each other:
Value is an attribute that exists only in the imagination of the mind.
Assets are things to which participants in the marketplace ascribe value when trading.
Wealth is the term used for the accumulation and quantity of assets.
In the real world practice of modern economy, money is actually the premier asset. When there is a bankruptcy, everybody with a stake in it wants the money ----not the real assets of tangibility except for the purpose of converting it to money. Even the burglar recognizes money as the premium asset. If he takes things of high-value, it is for the purpose of converting them to money at the risk of disposing them. Try making transactions with gold at Wal-Mart or sending gold by wire for a global current transaction.
Value (which exists only in the imagination of the mind) defines assets. Assets do not defined value because science has yet to discover properties peculiar to value in tangible things, and you can't qualify value because of which assets it is ascribed to. It just is what it is.
The fools gold for practitioners of economic thought has been pursuit of an objective base for economics in emulation of the hard sciences. Habits of thought as taught by our educational system, in emulation of the hard sciences become fixed parameters. This pursuit of "objectivity" installs limiting barriers of thought that causes severe reductionism and simplification of the chaotic open system nature of human behavior and relationships, which includes economics.
There is nothing objective about the perception of value that exists only in the imagination of the mind. It is only upon this unstable, slippery, bottomless swamp of value can the enquery of economics be built. No matter how deep you dig in this swamp of value you never come to a solid bedrock to build an objective theoretical structure. Economic theorist will then invent an objective base.
Judy Shelton in a WSJ opinion had this revelatory axiom, "and gold is real money." That was her way of saying certain assets have inherent value ----the objective starting point for her theory of finance.
And then the pursuit of objectivity with complex statistical models from historical data. However, statistical correlations are always in a state of change because perception of value is forever in a state of flux --- which is handy because you can find a correlation for every argument you want to make. There are a few successful traders using the quantitive approach, but that's only because there are always alert to changes of value correlations and quickly make changes. They recognize the short life of a working correlation. The debacle of Long Term Capital and the recent instruments of debt derivatives (risk defined by historical data) epitomizes the problem.
The real test of validity with the objective/quantitative approach is not how well you can argue with them, but whether you can make money with such objective models. If you can't--- your theory doesn't relate to the real world.
Toronto | 3.12.10 @ 1:07AM
Ben seems to be playing it safe.
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