Since rolling out his anti-Great Depression policies in 2002, Ben Bernanke has had the dubious distinction of being the major contributor to the worst financial and economic crisis to hit in the post-World War II era. His theory and practice was to fight an enemy that did not exist in 2002 – deflation. As a result, he ended a long period of economic prosperity.
As chairman of the Council of Economic Advisors and a Federal Reserve governor, Bernanke strongly supported policies that pushed the federal funds rate to 1% and inundated banks with liquidity during 2002-2005.
As prime markets had limited absorptive capacity for productive borrowing, banks pushed liquidity into subprime markets with little consideration of the attendant risks. US domestic credit kept advancing at 12%, US trade deficits widened to 7% of gross domestic product (GDP), and national savings became negative.
There is no banking system known to man, no matter how prudent, which could survive such credit profligacy. The financial crisis was a natural consequence of extravagant credit policies. Only believers in fairy tales would think that the financial crisis was a surprise and was the result of excessive risk-taking by financial institutions. With plenty of booze being served by the Federal Reserve, to which Bernanke was appointed chairman in February 2006, there was no way to avoid the drunken behavior of those being served – the bankers.
In 2007, renewing the monetary assault on an unimaginable scale, Bernanke ignited speculation, which quickly propelled oil prices to over US$147 a barrel and food prices to historic highs; and the US economy became engulfed in nightmarish conditions – with people cutting down on their driving, airlines disrupted, and farmers turning to mules for power.
Finally, the economy collapsed with unemployment exploding from to 9.8% in 2009 from 4% in 2007. Long-established banks disappeared and the fiscal cost of bank bailouts became staggering. Rushing blindly to monumental stimulus packages and record fiscal deficits to bring about full employment and strong growth, the US government pushed fiscal deficits to a record of 13% and US debt to $11.8 trillion. Such are the unavoidable consequences of cheap monetary policy.
Bernanke’s supporters claim that the US is lucky to have a Fed chairman who is an expert on the Great Depression. They forget that the US was unlucky to pursue anti-Great Depression monetary policy at a time when there was little danger of a new great depression. Had the Fed not followed Bernankeism from 2002 onwards, the US economy would have maintained the balanced economic growth that it had enjoyed over 1982-2002 and spared itself the dire consequences of Fed policies.
Yet, despite disastrous effects on the US economy and repeated reminders of the Japanese lost decade, Bernanke was adamantly persistent with his unlimited money supply and zero interest rates, claiming that Japanese were neither inventive in their policies nor experts in Great Depression policies.
Bernankeism is a form of voodoo economics. It assumes that the economy is constantly suffering demand deficiencies, in relation to supplies of basic products such as oil and food commodities, and that the remedy is sheer “money helicoptering”. This is different from the thinking of John Maynard Keynes, who called for infrastructure spending to stimulate the economy and discarded money injection into banks that can create a liquidity trap, or monetizing record fiscal deficits on current expenditure that cannot be rolled back later for political reasons.
Bernanke still has not distinguished whether the US economy collapsed because of excessive demand fueled by excessive credit, naturally followed by general bank failures, or because of deficient demand due to imaginary factors.
The US economy collapsed under huge indebtedness, mortgage defaults, and bank failures from non-performing loans that financed excessive demand.
It would appear that Bernankeism assumes abundant resources with no limit to oil production or output of crops as cultivable land must be unlimited and crops will be available instantaneously, regardless of seasons or ripening time. All that is required is printing money, reducing interest rates to zero and increasing demand for the economy to grow at fast rate.
Unfortunately, it would appear that Bernankeism has not been discovered in sub-Saharan African countries. If it had, these countries could become the most advanced countries by setting interest rates at zero and printing money at high speed.
Bernanke has constantly denied any link between monetary policy and commodity prices, even though all money injection was going straight to speculation in stocks and commodities. In a Financial Times interview on October 26, 2009, financier George Soros stated that Wall Street profits were gifts from the government; he noted that banks were taking free money from the Fed, buying government bonds, and making a 3.8% net gain. Such gift was a tax levied by Bernanke and awarded to banks.
It has been long established that empty money creation by the central bank or by banks is counterfeiting and pure taxation in favor of government or borrowers, including speculators, who enjoy free real wealth entitled by this money creation.
How is this tax paid in real terms? It is paid through an inflation tax. Namely, increases in oil and food prices represent a tax levy. Food prices are four to five times their level of eight years ago, and food price inflation is rampant is most countries.
Taxation by the Fed will go un-abated until the economy collapses as it did in 2008, or as it did in economies that resorted in the past to central bank empty-money creation. The Fed’s cheap monetary policy has in effect awarded a huge free wealth to speculators, financial institutions, and borrowers.
The unorthodox policies called for in the Group of 20 London and Pittsburgh summits this year have already impacted economic outcomes. Interest rates were kept at near zero levels, money stocks were growing at fast pace, and record fiscal deficits were being monetized.
In parallel, unemployment rose to 10%, oil prices rose from $40 a barrel to $80, the gold price rose from $865 an ounce to $1,065 – and this week to more than $1,080 – stock indices rose by 60%, and the US dollar fell from $1.3 to the euro to $1.5.
Most contradictory, G-20 countries have been accusing each other of currency manipulation. How could currencies be stable in an unstable environment? Or how could China be criticized for currency depreciation when it was strongly urged to expand its money supply at 30% a year?
Bernanke and his supporters have already announced strong recovery in the US and around the world and see the above indicators as a sign of strong recovery in perfect price stability. For Bernanke and supporters, inflation does not exist; it was something from the distant past. If ever inflation reappears, then Bernanke has already announced plans on how to exit and cope with inflation.
Money creation to expand demand, or an equivalent unbacked credit policy, has long been denounced by economists including Adam Smith and Jean-Baptiste Say. Such policy was seen as distortionary, resulting in financial crises, unemployment, and social disorders. Early monetarists, called the Currency School, noted that a central bank should not attempt to manage the economy and should limit its role to managing the money supply and safety of banks.
Financial crises of early banking systems in 18th and 19th centuries were attributed to easy credit and excessive money printing. David Ricardo (1817) stated such simple truths, opening the door to the legislation of the Peel Act in 1844 that separated the issue and the banking departments of the Bank of England.
A central bank should not create empty money. It creates money only against tangible assets such as foreign assets, gold, or safe rediscounts. The dangers of empty money creation have been analyzed in the Chicago Plan in 1935, which called for reforms that would curtail money creation by banks by establishing a 100% reserve system.
There is little meaning to recent attempts for reforming banking regulations when the central bank is destabilizing the banking institutions, fueling speculation, and distorting the whole price structure. Banks face competition from thousands of hedge funds and money market funds that are unregulated and could force banks into higher risk. The Fed has decided to circumvent safe banks and lend directly billions of dollars to high-risk borrowers through the Fed’s “innovative lending facilities”.
The control of interest rates at near zero bound by the central bank has caused unimaginable distortions, huge speculation, excessive redistribution of wealth, and misallocation of resources. To force interest rates at near zero bound, the central bank stands ready to inject any amount of money to prevent a rise in interest rates.
Any small retreat of the central bank from defending its near-zero interest rate target will send interest rates skyrocketing. Speculators today are presented with a world of near certainty. They are convinced that the US fiscal deficits are only getting larger and US debt is building up more rapidly. The US cannot finance such deficits through taxes. If it does, then the tax rates have to increase from 33% to perhaps 80%. The only alternative is deficit monetization.
In addition, they know perfectly well that a Bernanke Fed would never lift interest rates above near zero bound or renounce unorthodox money policies. If it wanted to, then it would be quickly opposed by the US Treasury. In view of very low yields on bonds, speculators will aim at reaping large gains from commodities, stocks, and foreign currencies. These are the only games left in town.
A repeat of the speculative fever of 2007-2008 is inevitable as already shown by recent trends in commodity prices and currency movements. Renewed inflation of food and energy prices would end up disrupting real economic growth in the same way it did in 2008, when oil and food prices hit a tipping point that brought the world economy to a grinding halt.
Why is Bernankeism an art of mass starvation? The answer is provided by an unemployment rate at 9.8% and more than 36 million people in the United States living on food stamps – no to mention food riots in numerous countries in 2007-08. A main reason for a rising number of food-stamp recipients was high food prices. The more food prices are jerked up, the more people are excluded from decent standard of nourishment.
Countries that run monetized deficits suffer a tremendous fall in real incomes and considerable impoverishment as capital flees to other countries. The faster the value of money depreciates, the deeper the economy goes into decay. The more inflationary expectations intensify, the more suppliers will be encouraged to curtail commodity supplies.
It is a well documented fact that as inflation accelerates, commodities are withdrawn from markets, leading to further inflation as too much money chases fewer goods. Withdrawing commodities is a form of hedging and speculation as suppliers anticipate faster appreciation of commodities.
An economic explanation for mass starvation is provided by complete depletion of savings and erosion of capital and productive capacity. Wealth is earned through speculation and borrowing and not through real sacrifice and investment.
Bernankeism is an ideology similar to other ideologies such as Keynesian economics, socialism, and communism, one that has supporters who argue for unlimited fiscal deficits and unorthodox monetary policy as a way to ensure economic recovery.
Most academicians, politicians, and bankers endorse Bernankeism. President Barack Obama told the US Congress that his monumental stimulus package and record fiscal deficits were elaborated by prominent scholars whose experience and knowledge cannot be doubted. In a larger forum, Bernankeism was endorsed by the G-20 as the only way to restore world economic growth in spite of the fact that Bernankeism was the major cause of the financial crisis. In other words, Bernanke fixes the past errors of Bernanke.
US policymaking under president Ronald Reagan and a narrow segment of the economics profession offer an alternative approach to Bernankeism to lead the economy back to growth. Proponents of neo-classical economics and monetarists do not see the necessity for expanding fiscal deficits and call instead for restrained monetary and fiscal policies. They believe in the role of the private sector and call for freer prices and less distortion both in wages and interest rates.
Freer interest rates would increase savings and allocate capital to the most productive sectors and to safer investments. Near zero interest rates allow undeserved accumulation of wealth and intensify the inflation tax burden on the private sector. They provide distorted and wrong incentives to economic agents.
The main thrust of Bernankeism is to solve overnight an economic and financial crisis that was in the making during many years of cheap monetary policy.
Bernanke had promised a quick turnaround of the economy and strong growth by the end of 2007. Recently, Bernanke has announced that recovery was underway. Unfortunately, the magic of unorthodox monetary policy has not yet occurred, and more banks continue to suffer or fail under the effect of past excesses.
A combination of record fiscal deficits and unorthodox monetary policy shows that US financial policies are out of control and are paving the way for more economic disorders, such as high non-core inflation, unemployment and enduring economic impasse.
There is no quick and instantaneous solution for the economic crisis. Only stable and sustainable fiscal and monetary policies can restore satisfactory level of economic growth and employment.
By Hossein Askari and Noureddine Krichene – atimes.com
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