Bernanke’s Publicity Stunt

Federal Reserve Chairman Ben Bernanke has taken his defense of the Federal Reserve System on the road.  In response to recent critics of the central bank, notably Republican presidential candidate Ron Paul, Bernanke is scheduled to deliver four classroom lectures at George Washington University.  In his first discourse, Bernanke was Bernanke, extolling the virtues of the Fed while criticizing calls to return the dollar to a gold standard.

One of Bernanke’s criticisms of a return to the gold standard is that it is not practical.  By that he means “it can be a waste of resources to secure all the gold needed to back currency, moving it from South Africa to the Federal Reserve Bank of New York’s basement”.  But, the benefit of using gold to back currency is precisely because it is scarce and difficult to dig up and transport. Otherwise, it would have little value and be about as valuable as paper money.

A more significant criticism lodged by Bernanke against the gold standard is that it doesn’t prevent “short-term volatility”.  According to the Fed chairman, “Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy”.  By short-term volatility, Bernanke must be referring to those periods in the 19^th Century when the Second Bank of the United States and the federal government from time to time allowed banks to suspend payment in species thus enabling widespread currency inflation and financial volatility.  The fact is that under a true gold standard short-term volatility would not exist.  Prices would be stable and the artificial booms and inevitable busts caused by Fed monetary price fixing would not happen.

But, to his credit, Bernanke did acknowledge that historically countries using the gold standard have experienced long periods of price stability.  In fact, in the United States from the mid-Nineteenth Century until 1940 prices in the United States actually fell on average from year to year – the main exceptions being during war years.

So while even Bernanke admits that the gold standard is an effective means to produce stable prices which after all benefit the poor, the elderly, and others on fixed budgets, why is he still so resistance to a return to the gold standard?  The key is in the answer he gave to one student’s question about why Fed critics are pushing hard to return to a gold standard. Bernanke indicated that they want to remove some “discretion” the Fed has over the economy.  It is this “discretion” that Bernanke and his monetary oligarchs used to dole out trillions of dollars in secret loans to their bank buddies who nearly brought the whole financial system to its knees.  Many of them got a piece of the action – Citigroup – $2.513 trillion, Morgan Stanley – $2.041 trillion, Merrill Lynch – $1.949 trillion, Bank of America – $1.344 trillion, Barclays PLC – $868 billion, Bear Sterns – $853 billion, Goldman Sachs – $814 billion, Royal Bank of Scotland – $541 billion, JP Morgan Chase – $391 billion, Deutsche Bank – $354 billion, UBS – $287 billion, Credit Suisse – $262 billion, Lehman Brothers – $183 billion, Bank of Scotland – $181 billion BNP Paribas – $175 billion, Wells Fargo – $159 billion, Dexia – $159 billion, Wachovia – $142 billion, Dresdner Bank – $135 billion, and Societe Generale – $124 billion.  You see with a gold standard these loans and other Fed schemes to benefit the bankers would not be possible.  Thus, when Bernanke criticizes the gold standard it is more than just professorial theorizing, it is a defense of the current corrupt banking cartel in America.

In the final analysis, Bernanke’s lecture series at G.W. is nothing more than a publicity stunt and not a very good one at that.  The Federal Reserve is an indefensible institution.  Compounding his problem are arguments he is attempting to make against the gold standard which served our country well for so long.  Anything he says cheats the students of valuable educational time.  Perhaps the powers that be at G.W. should invite Ron Paul to debate Bernanke.  Only then will the students get their money’s worth.

Article first published as Bernanke’s Publicity Stunt on Blogcritics.

 

The Gold Standard would Prevent Economic Bubbles

By just about every measure the U.S. economy continues to be mired in a depression.  Unemployment remains high.  Housing prices are still falling. Retail sales are lackluster.  Since Barack Obama became president in 2009 the national debt has ballooned by about $4 trillion with very little to show for it – unless you consider the rebound and hearty growth of the stock market.

Yes, while Main Street continues to struggle to make ends meet, Wall Street is prospering.  After losing more than half of its value due to the financial crisis of 2008, the Dow Jones Industrial Average has bounced back brilliantly recapturing more than 75 percent of its value lost.  The numbers are enough to make even a casual observer of the markets sit up and take notice.  The big question is why the disconnect between a significantly rising stock market on the one hand and a depressed economy on the other?

When the Dow was making its precipitous decline in November 2008 Ben Bernanke and his Federal Open Market Committee (FOMC) announced Quantitative Easing 1 (QE1).  From November 25, 2008 to March 31, 2010 the Federal Reserve Bank pumped about $1.5 trillion into the economy by purchasing treasury bonds from its primary dealers (banks such as Goldman Sachs and J.P. Morgan).  After bottoming out at 6626 in March 2009, the Dow went up a remarkable 65 percent to 10927 by the end of March 2010.

After QE1 ended, the markets began to drop once again.   In August 2010 Bernanke formally announced that QE2 would start in November.  On August 27, 2010 the Dow closed at 10150. When QE2 concluded at the end of June 2011 after close to $700 billion more was pumped into the economy through treasury purchases the Dow closed at 12582 – a 24 percent increase.

When QE2 ended the Dow experienced a 15 percent drop in value.  But In the last two weeks with no fan fair, the Fed has purchased $39.9 billion of treasuries from banks in the same fashion it did during QE1 and QE2.  Needless to say, stocks made an about face and have rebounded higher by about 9 percent.

So what does all this tell us?  It tells us that the boom and bust theory of the Austrian School of Economics is vindicated.  That is to say that monetary policy conducted by the Federal Reserve (low interest rates, monetizing federal debt, and asset purchases) causes artificial booms (bubbles) in the economy.  There is no economic reason for the stock market to be up in the current economy except for the aforementioned correlation between Fed asset purchases and rising stock prices.  It is clear over the long haul that the current stock market cannot maintain its price level without the Fed propping it up. Similar to the dot.com and housing bubbles before it, when the Fed pulls support from the current stock market bubble it begins to burst.  It is only a matter of time before a permanent bursting of the bubble happens.

There is only one way to prevent the Fed from inflating the dollar to benefit its member banks and therefore wreak havoc on the rest of us.  There is only one way to prevent the Fed from inflating the dollar thereby causing financial bubbles which have contributed greatly to the widening gap between rich and poor.  A gold backed dollar would restrict the Fed’s ability to manipulate the currency.  It would protect savings and purchasing power.  And in the above case it would have prevented the current stock market bubble which when it bursts will devastate millions of Americans who will then realize how phony their financial health actually was.

What does Bernanke have up his Sleeve after QE2?

One thing is for sure, Federal Reserve chairman Ben Bernanke’s second round of quantitative easing (QE2) will come to an end sometime this month.  Since November of last year the Fed has pumped close to $600 billion into the economy by buying treasury bonds from the balance sheets of banks.  This was intended to keep interest rates low, encourage lending by banks, stabilize housing prices, and consequently stimulate growth in our economy.  As of yesterday, interest rates are still low and banks have begun to lend some, but housing prices are lower than before QE2 began, economic growth has slowed, price inflation is significantly higher, and unemployment has climbed back up to 9.1 percent.  For the average American trying to eke out a living, QE 2 has been an utter disaster.  Of course for Wall Street banks it has been another bonanza courtesy of the Creature from Jekyll Island.

After all, Chase, Wells Fargo, Goldman Sachs and Bank of America are all doing fairly well given the general economic misery still experienced by the rest of us.  Interest bearing reserves of depository institutions held at the Fed are way up and the Dow Jones Industrial Average is 1100 points higher than it was at the end of the first month of QE2.  Why are these two facts so important?  You see even though banks still are not lending a lot to businesses and ordinary Americans they are making huge amounts of profits using our money courtesy of the Fed to save at the Fed and invest in the stock market.  Once again Bernanke inflates, his buddies on Wall Street cash in, and the rest of us are left holding the tab in the form of higher debt and prices.

The big question is what comes next?  After QE2 expires will we see a QE3?  Chances are good.  Let’s be honest, the economy is still in awful shape.  This is because Washington did not allow it to liquidate all the mal-investments from the financial crisis of 2008.  The only thing that has kept the economy afloat is the monetary and fiscal stimulus coming out of Washington.  The fact is that if Uncle Scam had let nature take its course and permitted the economy to crash there would have been intense short-term pain, but by now we would be well on the way to recovery.  Instead, Bernanke and first Bush then Obama have pumped trillions into the economy to “stimulate” it back to health.   What has transpired are new bubbles notably in the stock market and mergers and acquisitions.

And that is why I believe we will see QE3.  When QE2 ends the money supply’s rate of growth will slow.  Somewhat similar to an interest rate hike the end of Bernanke’s largess will put pressure on the new bubbles.   Given that a presidential election is just around the corner and member banks will see their bottom lines slashed, Bernanke will accommodate his benefactors in the White House and on Wall Street by commencing QE3 to stave off the next crisis.  The can will be kicked down the road at least until after Election Day 2012.  Hundreds of billions of dollars more will be pumped into the economy.  If you think price inflation is bad now you ain’t seen nothing yet.

The bottom line is that whichever course Bernanke chooses QE3 or no QE3 the economy will eventually have to crash.  Because it was not allowed to do so in 2008 the crash will be bigger and probably longer in duration.  So I guess I was wrong at the outset of this article.  Two things are for sure.  QE2 will end in June and  inevitably Americans are screwed economically.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina