Page 1 of 2 Bernankeism - the art of spreading starvation
By Hossein Askari and Noureddine Krichene
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.
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