Page 1 of 4 Monetarism enters bankruptcy
By Henry C K Liu
The invasive dominance of monetarism in macroeconomics has been total ever
since central bankers, led by Alan Greenspan, who from 1987 to 2006 was
chairman of the Board of Governors of US Federal Reserve - the head of the
global central banking snake by virtue of dollar hegemony - embraced the
counterfactual conclusion of Milton Friedman that monetarist measures by the
central bank can perpetuate the boom phase of the business cycle indefinitely,
banishing the bust phase from finance capitalism altogether.
Going beyond Friedman, Greenspan asserted that a good central bank could
perform a monetary miracle simply by adding liquidity to maintain a booming
financial market by easing at the slightest
hint of market correction. This ignored the fundamental law of finance that if
liquidity is exploited to manipulated excess debt as phantom equity on a global
scale, liquidity can act as a flammable agent to turn a simple localized credit
crunch into a systemic fire storm.
Ben Bernanke, Greenspan's successor at the Fed since February 1, 2006, also
believes that a "good" central banker can make all the difference in banishing
depressions forever, arguing on record in 2000 that, as Friedman claimed, the
1929 stock market crash could have been avoided if the Fed had not dropped the
monetary ball. That belief had been a doctrinal prerequisite for any candidate
up for consideration for the post of top central banker by President George W
Bush. Yet all the Greenspan era proved was that mainstream monetary economists
have been reading the same books and buying the same counterfactual conclusion.
Friedman's "Only money matters" turned out to be a very dangerous slogan.
Both Greenspan and Bernanke had been seduced by the convenience of easy money
and fell into an addiction to it by forgetting that, even according to
Friedman, the role of central banking is to maintain the value of money to
ensure steady, sustainable economic growth, and to moderate cycles of boom and
bust by avoiding destructively big swings in money supply. Friedman called for
a steady increase of the money supply at an annual rate of 3% to achieve a
non-accelerating inflation rate of unemployment (NAIRU) as a solution to
stagflation, when inflation itself causes high unemployment.
Stagflation is a de facto invalidation of the Phillips Curve, which shows a
negative correlation between the rate of unemployment and the rate of
inflation. There is of course irrefutable logic within the workings of a
capitalistic labor market in support of the concept of structural unemployment.
Yet the conceptual flaw in NAIRU is its acceptance of a natural rate of
unemployment as a justification to abandon the social goal of full employment.
When unemployment of 6% of willing workers is accepted as structural in an
economic system, the fault is with the system, just as if a hospital accepts an
annual mortality rate of 6% of its curable patients as structural, the
hospital's operation needs to be reexamined. The fundamental flaw in market
capitalism is its inherent failure to deliver full employment as a social goal.
Monetary easing should only be tolerated in times of real systemic financial
distress in the economy. It should never be administered as a convenient
anesthetic to forestall market corrections. Instead, Greenspan in his 18 years
at the Fed repeatedly treated every cyclical market downturn as a potential
systemic crisis that justified massive liquidity injection by the central bank,
only to create larger and larger serial price bubbles as new phantom cycles of
growth to defy financial gravity.
Yet while the laws of finance can sometimes be violated with delayed penalty,
they cannot be permanently overturned. The fact remains that central banks
cannot repeatedly use easy money to fund serial economic bubbles without
cumulative consequence. Undetectable debt can be disguised by structured
finance as phantom equity, but it remains as liabilities at the end of the day.
Risk can be spread globally system-wide but it cannot be eliminated. The result
will be a global financial meltdown when this massive Ponzi scheme on the part
of central banks is finally exposed.
Greenspan, by his cavalier application of massive liquidity to sustain phantom
serial monetary booms, has driven the narrow validity of monetarism into policy
bankruptcy. Bernanke, by his blind faith in the power of misguided monetarist
measures to deal with a global credit crisis created by decades of runaway
monetary indulgence, has unwittingly neutralized even the antibiotic power of
Keynesian fiscal countermeasures against demand deficiency in a monetary bust
from excessive debt. Deficit financing in a recession does not work without a
reservoir of fiscal surplus from a previous boom.
The Fed under Greenspan and Bernanke violated the basic rules of both
monetarism (money supply management) and Keynesianism (demand management). Fed
monetary policy created false prosperity with excess money supply to fund debt
manipulation and simultaneously to support income disparity as a source for
capital formation to exacerbate overcapacity amid demand weakness.
Illusory economic growth
The Greenspan Fed repeatedly provided easy money on a massive scale to fund
serial asset-price bubbles that were passed off as economic growth. Deregulated
finance globalization endorsed enthusiastically by Greenspan led to wide income
disparity in the entire global economy. Thus income in every economy eventually
failed to support rising asset prices pushed up by debt to unsustainable
levels. This forced the excess phantom capital in the global economy to seek
growth from manipulation of debt collateralized by a price bubble that was
destined to collapse from inadequate cash flow.
Structured finance allows general risk in all debts to be unbundled into
tranches in a hierarchy of credit rating, allowing even the most conservative
to participate in the debt bubble by holding the supposing safe low-risk
tranches. But the safety of these low-risk tranches is merely derived from an
expected low default rate of the riskier tranches. As the default rate of the
high-risk tranches rises, the safety of the supposedly low-risk tranches
vanishes. With runaway "supply-side" voodoo economics keeping wage income in
check during the boom phase in corporate profits, the resultant overcapacity
from demand lag resulting from low wages shuts off investment opportunities for
productive expansion and forces the excess money supply into speculative
manipulation of debt, giving birth to restructured finance and sophisticated,
circular hedging of risk.
A decade of excess money produced a credit overcapacity, which was solved by a
systemic under-pricing of risk and a lowering of credit standards for so-called
subprime borrowers. While subprime mortgages were at first mostly a housing
sector problem, the derivative effects of the subprime failure quickly infested
the entire global financial system. The interconnected factors that fueled the
spectacular process of serial bubble formation at an unprecedented rate and on
an unprecedented scale to support the false claim of neoliberal finance
capitalism as the most effective and efficient economic system in history
turned out to be the same factors that brought the entire global capitalist
financial system built on debt crashing down in July 2007.
Since Greenspan left the Fed in 2006, a year before the global crash, when
mainstream analysts were still praising him as a god-sent savior of
debt-propelled finance capitalism, it was left to Bernanke to continue the
Greenspan magic and keep the good times rolling perpetually. Not unexpectedly,
when the liquidity-fed debt tsunami hit the financial sector in July 2007,
Bernanke confidently assumed that the Greenspan "put" would again save the
financial system from another collapse of the latest of Greenspan's serial
bubbles.
When pressed by Congresswoman Rosa DeLauro (D-Conn) during a hearing whether
the economy was in a recession, Bernanke dismissed the question with the
professorial hubris reserved for a college freshman that "recession" is only a
technical description of economic conditions. "Whether it's called a recession
or not is of no consequence," declared the former Princeton professor. Still,
as there was even at the time general consensus that market confidence had
emerged as a major issue, whether a slowdown is classified officially as a
recession has serious consequences in market attitude.
Bernanke's arrogant brush-off to a perfectly valid commonsense question from a
concerned legislator presumed to be unwashed in economics theory showed how
disconnected the elitist high priest central banker was to earthly reality.
Confident, complacent and wrong
Bernanke was complacently confident he could stop the wave of massive financial
destruction caused by decades of abuse of liquidity excess by again adding more
liquidity through massive creation of new money. The Fed under Bernanke,
instead of saving the economy form the cancer of debt, actually continues to be
part of the problem by feeding the spreading cancer. (See
US government throws oil on fire, Asia Times Online, October 23, 2008.)
Eight years earlier, Bernanke had declared his faith in aggressive
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