The ugly misery of Bernanke's demagogy
By Noureddine Krichene
Only a government can destroy an economy. Only unrestrained demagogues in charge of key policy making can spread agony and misery. Back in the 1950s, professor Milton Friedman feared that a mad chairman could be in charge with the Federal Reserve (Fed) and play havoc with the United States economy.
Although the US Constitution Article I, section 8, clause 5 provides: "The Congress shall have power ... to coin money, regulate the value thereof, and of foreign coin, and fix the standards of weights and measures ... [and clause 6:] to provide for the punishment of counterfeiting the securities and current coin of the United States", he urged constitutional laws that would
restrain the discretionary power of a Fed chair and subject money supply to a fixed rule.
Friedman along other economists such as Ludwig von Mises, Maurice Allais, and Lionel Robbins rejected any central bank intervention in the labor markets, fixing of interest rates, or stabilizing prices. While famous writers (eg, Mises, Ron Paul, and Murray Rothbard) strongly called for abolishing the Federal Reserve, others, including Friedman, called for restraining money supply to a fixed growth rate of 2%-4% regardless of the state of the economy.
The prophecies and fear of Friedman have been fulfilled by the economic and money chaos of present Fed chairman Ben Bernanke's policies.
With an unorthodox and inflexible mind, Bernanke forced inflationism as a key policy maker of the George W Bush administration. His cheap-money policy caused the worst financial crisis in post-war period and undermined the US and other key economies. Years of disorders and misery followed two decades of prosperity.
In the United States, millions are unemployed; more than 50 million live on food stamps. Europe, Japan, and the US are all forced into reciprocal money destruction: the fight of the Kilkenny cats.
Bernanke is not the first stubborn leftist who never renounces his ideology no matter how destructive his actions turn out to be. Recent history is full of leftist leaders who relentlessly devastated economies without renouncing their policies as long as they have the power to do so. It took decades of devastation before populations start to realize the false promises of statists.
Inflationists strongly stated that inflationism, as stated by Keynes, turns stone into bread. They firmly believe in magic. If this is so, then Bernanke will eventually turn mountains everywhere into bread. Bernanke has continued to improvise magic since 2002 under different names: quantitative easing, buying mortgage bonds, buying government bonds, forcing zero-interest rates, etcetera.
For his supporters, he was demonstrating genius, providing stimulus, and saving the economy from a great depression. US politicians, media, and academics firmly believe in Bernanke's magic, just as many people around the world believe in magic; they seek medical care from magicians and never go to modern, trained doctors. If they are cured by magic, the magician wins credit and fame and attracts more customers.
For Bernanke, the same policies that brought the crisis are the policies, applied with maximum intensity, that will instantaneously restore prosperity and full-employment. If he were to practice medicine, he would prescribe to a patient who contracted cancer from smoking more nicotine to cure the cancer.
Back in 2008, Congressman Ron Paul vainly tried to explain to Bernanke that unorthodox money had already caused grave damage; more unorthodox money would only be injurious. Seven years later, Bernanke printed trillions of dollars in quantitative easing and various forms of stimulus, yet the economy never fully recovered nor was full-employment restored. He pushed stock prices to record highs, and he is trying to push housing prices to their highest possible level so housing becomes unaffordable for average American families.
Extremely high home prices mean for him a housing recovery. For seven years of zero interest rates, he has denied savers any income on their saving. With zero interest, government continues to borrow massively and consume capital that could generate growth and employment.
Bernanke's actions were only redistributive; he confiscates wealth from workers, creditors, pensioners in favor of beneficiaries of government welfare, borrowers, and speculators.
Inflationism causes mass-unemployment and never cures it. Inflationism is far worse than unemployment, its consequences are far-reaching; the medication is worse than the disease. Long ago, it was denounced by prominent politicians and writers.
The third US president, Thomas Jefferson, stated, "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
In respect to inflationism, US senator Daniel Webster (1782-1852) noted, "We have suffered more from this cause than from every cause or calamity. It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even arms and artifices of our enemy."
Allais wrote: "In essence, the present creation of money, out of nothing, by the banking system is, I do not hesitate to say it in order to make people clearly realize what is at stake here, similar to the creation of money by counterfeiters, so rightly condemned by law. In concrete terms, it leads to the same results."
Bastiat (1877) deplored the redistributive injustice of paper money inflation. It steals wealth from losers and showers it for free on the gainers. He wrote: "I must inform you that this depreciation, which, with paper, might go on till it came to nothing, is effected by continually making dupes; and of these, poor people, simple persons, workmen and countrymen are the chief. Sharp men, brokers, and men of business, will not suffer by it; for it is their trade to watch the fluctuations of prices, to observe the cause, and even to speculate upon it. But little tradesmen, countrymen, and workmen will bear the whole weight of it."
In the same vein, Carroll (1848) severely condemned the redistributive of fictive money and credit; he noted that of all the contrivances for cheating mankind, none has been more effectual than that which deludes them with paper money. "This is the most effectual of inventions to fertilize the rich man's field with the sweat of the poor man's brow."
Keynesian diagnosis that mass unemployment was due to demand failure and that stimulating demand through government programs of digging holes and refilling them was pure demagogy. In no time or country has there existed a demand failure. In no time or country, has there existed natural mass-unemployment.
There is no single man who can be unemployed unless he has a means to be so, such as wealth, family support, or government support. Otherwise, he has to seek employment to earn a living even at the risk of perishing while crossing oceans, seas or desert. There is no single man who can depend on government food unless the government institutionalizes this dependency.
Mass unemployment in the United Kingdom or in the United States has not been due to demand failure. It was institutionalized by the government. In the UK, mass-unemployment was a government creation. The UK was the largest colonial power; it drew huge wealth from the colonies in favor of its citizens; it was able to finance large welfare programs and hand out substantial unemployment benefits with no pain; moreover, it supported strong unions and strong minimum wage laws that prevented any labor market adjustment.
Likewise, thanks to the dollar being a reserve currency, the US under Barack Obama's administration has been running mountainous fiscal deficits and showering generous welfare benefits to its unemployed labor force. Bangladesh, Burundi, or Chad can never do the same.
In contrast to Keynesians and leftists who call for big government and destroying a currency as a way to reestablish full-employment, Benjamin Anderson, Ludwig von Mises, Friedrich Hayek, Lionel Robbins, Ron Paul, and others called for a simple solution: the government stays away from the labor market. It has to renounce labor laws, unemployment benefits, and dismiss labor unions' power.
In fact, because there was no government institution that preserved unemployed, mass-unemployment was never an economic issue during the 19th century since it when it happened it was very briefly and labor markets were flexible in terms of re-training, mobility, and wages. With government support, there is no wage flexibility, no mobility, and no retraining.
Why has Bernanke kept spreading disorder and agony for more than a decade? Most likely disorder is his hobby. Had the Fed been under constitutional restraint as called for by Friedman, this decade of financial disorder and economic agony would have been avoided.
Absolute power since 2002 allowed Bernanke to inflict the worst possible damage on the US economy. Standards of living fell sharply. The US continued to grow only because of large external deficits. Without foreign resources, growth would have been largely negative. Worst, Bernanke has locked the US into zero-interest rates and unlimited money growth.
This policy will encourage government borrowing and consumption of capital, and discourage saving. It will erode the growth base. Bernanke got the seal of approval of the US Congress and was re-appointed by Obama, even though he was the main person responsible for the financial crisis and dislocation.
There is no prospect of ever reversing in an orderly manner Bernanke's policy. His legacy will be forcefully preserved for decades to come, until the economy is even more severely impaired. Politicians never accept any change unless under conditions force them to do so. Only more money printing, financial disorders, inflation, and economic decay are to be expected.
Noureddine Krichene is an economist with a PhD from UCLA.