Obama’s risky Bernanke gamble.
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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.
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