Federal Reserve chairman Ben Bernanke has been feeling the love lately.Â First there was Roger Lowenstein’s piece of slobbering adulation titled “The Hero: Ben Bernanke Saved the Global Economy.Â So Why Does Everyone Hate Him?”Â in the April 2012 issue of the Atlantic.
In the piece, Lowestein is convinced that Bernanke’s efforts to stave off the financial crisis have been successful thus far; meaning that from here on out, it’s only clear skies ahead.
This coincides with the U.S. economy’s continuing upward trend which saw the stock market recently hit an historic high.Â Indicators are up, bidding wars in housing are on in major cities, and it’s hard to find a mainstream business publication not touting the so-dubbed recovery.Â Yet none of these analysts seems to acknowledge the fact that M2 money supply growth really began perking up starting last July.
It’s more than likely that should inflation start getting out of control and Bernanke puts the brakes on money supply growth, the rails may come off the green shoots.Â It’s actually not more than likely, it will happen.Â The only question is time.Â The opposite occurred in the summer of 2008 as the growth in money supply took a nose dive.Â As Ludwig von Mises pronounced, “Depression is the aftermath of credit expansion.”Â All Bernanke has really done since the housing market imploded years ago, thus wreaking havoc on the balance sheets of both the federal government and Wall Street, is kept the party from completely shutting down via continual monetary expansion.
This is what passes for success in the modern world of central banking.
Today, in the third of a four part series of lectures, Bernanke continues his PR crusade in order to fend off the growing criticism of the Fed which has snowballed and accelerated thanks to the 2008 presidential campaign of a lowly Texas Congressman.Â After its nearly century long existence, a sitting Federal Reserve chairman is actually feeling the proverbial heat of a public finally seeing the central bank as responsible for a business cycle marked by inflation-driven good times followed by sharp develeraging and economic bust.Â It only took trillions in secret loans in late 2008 and possibly trillions more in exposure and implicit guarantees to a financial system dependent on cheap liquidity to stay afloat.
With the printing press at your command, perhaps the price tag of untold trillions is fairly cheap.
The Fedâ€™s â€œforceful policy responseâ€ probably averted â€œmuch worse outcomes,â€ Bernanke said today in Washington in the third of four lectures to undergraduates at George Washington University. â€œIn terms of economic consequences, the Great Depression was considerably more severe than the recent recession.â€
The threat of a second Great Depression â€œwas very real,â€ Bernanke told the class.
The financial system came under pressure in the summer of 2007 as the market for subprime mortgage bonds began to collapse, and by August the Fed responded by cutting the interest rate it charges on loans to banks borrowing at its discount window.
The Fed lowered its benchmark interest rate in a series of cuts, to 3 percent in January 2008 from 5.25 percent in August 2007. Yet in March 2008, the crisis intensified with the collapse of Bear Stearns Cos., the fifth-biggest U.S. securities firm, prompting the Fed to intervene and help JPMorgan Chase & Co. acquire the bank.
That didnâ€™t end the crisis. In September 2008, Lehman Brothers filed the largest bankruptcy in U.S. history after the central bank and U.S. Treasury declined to intervene. One day later, the Fed made an $85 billion loan to American International Group Inc. (AIG) to avert the collapse of the New York- based insurance company.
Bernanke defended the central bankâ€™s bailout of AIG. Its failure â€œwould have had a massive effect on other financial firms and markets,â€ Bernanke said.
â€œThe rescue of AIG prevented even greater shocks to the global financial system,â€ Bernanke said in slides. â€œOver time, AIG stabilized. It has repaid the Fed with interest and has made progress in reducing Treasuryâ€™s stake in the company.â€
Rather than let the market clear itself of all malinvestment, Bernanke, his cohorts in the Fed, and the federal government decided to play their much favored game of picking winners and losers amongst an industry already tightly within its clutches.Â What emerged from the wholly bailout-laden affair is a banking system effectively zombified to the point of being “public utilities” as former Kansas City Fed president Thomas Hoenig labeled them.
The truth is Bernanke would be a fool to not play up his record and the continuing performance of the U.S. economy.Â He is, after all, trying to save the reputation of the Fed.
But to believe Bernanke saved the world by showering it with dollars is to believe that the creation of money in itself generates wealth.Â No amount of paper bills or digital entries into bank accounts brings consumer goods into existence however.Â The end result of all money printing, taken to its full extent, is to raise prices in proportion to the amount of money created.
Ironically, when Bernard von NotHaus was arrested and found guilty of “counterfeiting” Liberty Dollar coins to the tune of $7 million, he faced 25 years in prison.Â During the height of the financial crisis, Bernanke expanded the Fed’s balance sheet, and therefore the monetary base of the dollar, to $2.3 trillion from $900 billion.Â This author is no math expert but it would seem von NotHaus’ “counterfeiting efforts were a drop in the ocean compared to Helicopter Ben’s orgy of money printing.
Only one of the men faces a lengthy jail sentence.Â Only one of these men mints money not out of thin air but for the purposes of providing a medium and exchange and store of value.Â Â Only one of these men heads an institution that not only perpetuates the moral hazard of excessive fractional reserve banking, thus pyramiding thin-air credit creation on the back of Fed reserves, but monetizes the debt of the federal government.Â And only one of these men has the legally sanctioned permission to counterfeit to the benefit of bankers and of the profligates of stolen funds otherwise known as politicians.Â Is it any wonder why the latter is given the legal authority to counterfeit?
Ben Bernanke may have utilized the printing press and prevented a severe downturn for the time being but it will be the expense of a larger crisis in the future.Â Papering over losses and propping up failed investment decisions doesn’t clear or liquidate the market; it merely extends the damage to be dealt on another day.Â In this case, dollar users the world over had to pay for the popping of the housing bubble (caused, of course, by the Fed’s previous easy-money policies) with the diminishing purchasing power that follows any massive burst in currency creation.
In short, Bernanke saved nothing but his reputation for the time being.Â Money printing only creates the illusion of wealth.
To fully understand the logical contradictions of the Bernanke and central bank apologist, please consider investor Pater Tenebrarum’s pertinent questions:
In spite of all this we are now supposed to somehow believe that enacting the exact same polices that were tried then â€“ only on an even grander scale â€“ have ‘saved us from a depression’? That they somehow ‘will work’ this time around, only because the recent economic data look good and the stock market is in an uptrend? Three years of rising stock prices are ‘proof positive’ that Bernanke has ‘saved’ us?