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Impoverisher of the Year

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12/18/2009

As readers of this blog know, in an astounding feat of oblivious irony, Time magazine has chosen the man who very likely just broke the world as “Person of the Year”. In my last post, I commented on the propaganda aspects of the choice. In this article, I would like to address the woeful economic content of Time’s corresponding hagiographic piece on Ben Bernanke and the Federal Reserve, line-by-line.

the Fed controls the money supply. It is an independent government agency that conducts monetary policy, which means it sets short-term interest rates…

Indeed, in other words it sets the gross market rate of interest. It has absolutely no control over originary interest (the actual ratio of prices of present goods over future goods). Therefore, whenever it manipulates the former, it keeps it from trending toward the latter, which can only lead to malinvestment. The world might be a much better place, if Ben Bernanke simply read Human Action, chapter 19.

…which means it has immense influence over inflation, unemployment, the strength of the dollar and the strength of your wallet.

…AND over the structure of production: and a wholly pernicious influence, at that. Let’s take the items under the Fed’s purview which Time listed in turn.

  • Inflation: Over the long term, ALL the Fed has ever done with inflation is modulate how fast it inflates.
  • Unemployment: The only way the Fed “alleviates” unemployment is by inducing unsustainable structures of production, thereby creating jobs which, while surely appreciated by those who get them, on balance only serve to consume capital, thereby impoverishing society as a whole.
  • Strength of dollar/wallet: The only thing the Fed has done since 1913 to the strength of the dollars in our wallets is to dwindle it.

And ever since global credit markets began imploding, its mild-mannered chairman has dramatically expanded those powers and reinvented the Fed.

Global credit markets needed to implode, because they were inflated all out of proportion in relation to the actual amount of capital on the planet, given the going rate of time preference. By trying to keep it from imploding, Bernanke only prevented the loan markets from adapting themselves to that reality.

Professor Bernanke of Princeton was a leading scholar of the Great Depression. He knew how the passive Fed of the 1930s helped create the calamity — through its stubborn refusal to expand the money supply and its tragic lack of imagination and experimentation.

This is either unacceptable ignorance or unforgivable deception. Central banks lower interest rates by expanding the money supply and flooding the loan market with new money. And to what degree did the New York Fed (which was then in the monetary saddle) do this after the 1929 stock market crash? As economist Robert Murphy tells us, in The Politically Incorrect Guide to the Great Depression and the New Deal, the New York Fed responded to the crash with unprecedented easy-money measures:

On November 1, 1929, just three days after Wall Street’s Black Tuesday, the Fed slashed its discount rate by a full percentage point. Then fifteen days later it cut again, to 4 1/2 percent. Throughout the following year, it cut five more times, so that by December 1930 the New York Fed’s discount rate had fallen to 2 percent. This was already a record-low for the Fed, but it cut further still, reaching 1 1/2 percent in May 1931.

I guess central bank measures only qualify as “imaginative” if you push rates down to practically 0% like Helicopter Ben has done. We should all be glad the New York Fed wasn’t anymore “imaginative” (irresponsible and foolhardy) than it already was.

Chairman Bernanke of Washington was determined not to be the Fed chairman who presided over Depression 2.0. So when turbulence in U.S. housing markets metastasized into the worst global financial crisis in more than 75 years…

…turbulence made necessary by a housing bubble inflated by Bernanke and his predecessor, Alan Greenspan…

…he conjured up trillions of new dollars and blasted them into the economy

…which are nothing but media of exchange, and will only serve to transfer and destroy wealth, but create none…

…engineered massive public rescues of failing private companies;

…which only created oceans of moral hazard and propped up wealth-destroying ventures at the expense of foregone wealth-creating ventures…

…ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds;

…all of which will only serve to induce unsustainable business projects and consumption levels…

…blew up the Fed’s balance sheet to three times its previous size;

…which while also contributing to the previously listed effects, may very well end up leading to Weimar-level hyperinflation.

…and generally transformed the staid arena of central banking into a stage for desperate improvisation.

…because apparently markets reallocate capital better when there is a single central planner “desperately improvising” with crude aggregate numbers.

He didn’t just reshape U.S. monetary policy; he led an effort to save the world economy.

“Effort” being the operative, and perhaps generous, word here.

No wonder his eyes look tired.

Poor thing; squandering the world’s wealth must be exhausting business.

The last Fed chair, Alan Greenspan, inspired an odd cult of personality. Bernanke hoped to return the Fed to dull obscurity. But his aggressive steps to avert doomsday — and his unusually close partnerships with Bush and Obama Treasury Secretaries Henry Paulson and Timothy Geithner — have exposed him and his institution to criticism from all directions.

“Unusually close partnership”? Is this the “independence” Bernanke’s so worried about with regard to the Audit the Fed bill?

Bleeding-heart liberals and tea-party reactionaries alike are trying to block his appointment for a second four-year term. Libertarian Congressman Ron Paul is peddling a best seller titled End the Fed. And Congress is considering bills that could strip the Fed of some of its power and independence.

Those dread populists obstructing an honest technocrat! Nicholas Biddle must be sympathetically rolling in his grave.

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