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

Bernanke is Still Clueless

It has been a while since I criticized my favorite Federal Reserve chairman, Ben Bernanke.  I’ve been busy teaching school and Bernanke like always has been busy destroying the dollar and with it our economy and standard of living.  So, nothing new and out of the ordinary has happened to warrant a post about the 2^nd term Fed chairman.  However, last Monday night he made big news when he said that our current price inflation is “transitory”, and based on supply and demand issues in energy and commodities.  He went on to say, “Our expectation at this point is that in the medium term inflation, if anything, will be a bit low.”

So why do I consider Bernanke’s remarks to be big news?  Because when predicting the future economic prospects of our country his prognostications have been less than stellar to say the least.  He never saw the housing bubble coming; he misjudged the seriousness of the problems in the auto industry; and was totally clueless about the potential for big bankruptcies on Wall Street.  What’s worse is that he was still spewing his pablum about how everything was okay on the eve of the financial crisis!  Thus, with his newest pronouncements on our current state of price inflation, why would anyone give his remarks any credence?

We can give Bernanke credit for one thing.  He didn’t deny prices for many things are rising.  Cotton is at its highest level in a decade.  Copper is at its highest price in forty years.  Corn, wheat, and soybeans are up.  Of course, all Americans are seeing steeper price levels at the pump as oil has risen above and remained over $100 a barrel.  But, for Bernanke to state that the situation is temporary is not credible.  To be sure, there are extenuating circumstances behind some of the cost increases.  Weather conditions in some parts of the world and Middle East unrest have had an effect somewhat on crop and oil supplies.  However, given the trillions of dollars Bernanke has injected into the stagnant economy through low interest rates, quantitative easing, and monetizing of the federal debt it’s no coincidence that these commodities which are priced in and bought with dollars are seeing price increases.

In fact, since about 2001 when George W. Bush and the Republican Congress began doubling the national debt, the Fed’s monetizing and low interest rates caused steady commodity price increases.  Prices dipped in 2008, due to the recession, but have accelerated upwards again beginning in about May of 2009.  Simply stated, the current inflation is a continuance of the long term trend begun before the financial crisis.  Given even lower interest rates, quantitative easing, and the monetizing of an even larger debt load since Obama took office, a reasonable observer would assume commodity price increases will not be temporary and will be even more significant.  But the Fed chair insists that in the long –run prices will stabilize at lower levels.

In October of 2009 this commentator wrote an article indicating that Ben Bernanke was between an overheated printing press and a hard place.  The gist of the piece was that Bernanke’s reckless monetary policies were placing him in a bind.  If he continued down the path of loose money there would be high inflation to pay.  If he reversed course and tightened the money supply the stock market bubble would burst and his benefactors on Wall Street would be harmed.  It seems that Helicopter Ben is at the point where he has to make that decision.  Taking his most recent comments into account, it seems he has made his decision.  As usual it is in the best interests of Wall Street.

Article first published as Bernanke is Still Clueless on Blogcritics.

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

Your Vote Didn’t Count last Tuesday

Did you really think it was worth your time to vote last Tuesday?  Oh, Republican partisans will of course say an unequivocal “yes” as their party “shellacked” the Democrats and in the process picked up several Senate seats, governors’ mansions, and control of the House of Representatives.  But in actuality within 24 hours of the Republicans coup d’état all those Tea Party voters and others who crave small government had their votes negated and their victory smashed. 

How?  To begin with, South Carolina Senator and Tea Party Kingmaker Jim DeMint admitted on John King’s State of the Nation on CNN that Republicans will support raising the debt ceiling currently at $14.3 trillion, but only if massive cuts are included with the vote.  Ah, Senator, there is plenty to cut in the budget that will make raising the debt ceiling unnecessary.  How about ending our quest for World Empire by ending foreign occupations, closing down bases, and bringing our troops home?  How about abolishing the Energy, Commerce, and Education Departments for starters?  How about rescinding the balance of Obama’s “stimulus” program and ending corporate welfare as we know it?  Just these moves alone would save over a trillion dollars.  If there was ever a time for Republicans to be gutsy it is now.  They are riding a wave of voter anger unprecedented in our history.  They have a mandate from those same voters to cut, eliminate, and abolish anything and everything in the way of a balanced budget.  But within 24 hours of their mandate DeMint is already cutting deals on federal spending.

Jim DeMint aside, the biggest negation of the voters’ wishes on Tuesday came on Wednesday.  The Federal Open Market Committee (FOMC) of the Federal Reserve Bank announced that it would begin a new buying spree of between $600 and $900 billion of U.S. Treasury bonds over the next 10 months. This so-called quantitative easing is necessary according to the FOMC because, “…the pace of recovery in output and employment continues to be slow”.  Thus the Fed must step in, purchase Treasury Bonds from banks so the banks in turn can loan that liquidity to businesses to get the economy moving again.

You see Congress and the president are not the only big spenders in Washington.  The Federal Reserve also exercises the power to essentially spend our money through monetizing government debt.  Thus, on the very day voters across the country were saying no more reckless spending and voting spendthrifts out of Congress the unelected Fed decided to usurp the People’s power by deciding to spend hundreds of billions of dollars to purchase Treasury bills from member banks.

Based on past experience, here is how the Fed’s spending spree will work.  The Fed will create between $600 and $900 billion of liquidity (dollars) out of thin air.  It will then use that liquidity to buy up massive amounts of Treasury bonds from the big banks.  The banks are supposed to use the proceeds from the sales to make new loans and to get the economy moving again.  Keep in mind that what the Fed is about to do, it has already done in the not so distant past. Beginning in March of 2009 the Fed injected about $2 trillion into banks to buy up toxic assets.  Precisely at that time, the S&P 500 stock index bottomed out after falling by 57 percent from its historic high.  Since the Fed began that round of “quantitative easing” in March of 2009 the S&P has rebounded a remarkable 80 percent.  With the economy still stuck in a deep sewer there is no reasonable explanation for the sudden, renewed health of the stock market except that Wall Street invested their Fed funds in themselves instead of in Main Street.

And that is what banks are going to do this time as well.  It is bad enough that an unelected central bank has the power to print our money like crazy with no Congressional restrictions placed on it, but to give it to the big banks without any stipulations like they have to make loans or face penalties is just plain criminal.

Look, our political and financial systems are corrupt and rigged.  They make a Mafia bookmaker look honest.  Think of it like a happy love triangle between Congress, the Fed, and Wall Street.  To protect itself politically Congress has contracted out management of our money supply to the Federal Reserve.  In return, the Fed prints money out of thin air to support Congress’ deficit spending which ensures its high reelection rate.  The Fed supports big banks by loaning them our money at very low rates.  It bails them out when they don’t have enough reserves to meet obligations.  It allows fractional reserve banking whereby banks are guaranteed solvency by the Fed even though they loan out up to 90 percent of deposits on their books.  The final link in the cycle is the contributions given by Wall Street banks to members of Congress.  We’ve heard DeMint, McConnell, Cantor, Boehner and other Republicans decry the deficit spending of Democrats but when have we ever heard them decry the Federal Reserve?  Never.  There is a good reason for this:  the Fed is their meal ticket to reelection through the financing of deficit spending and campaign kickbacks from Wall Street.

This whole rigged system has been destroying our standard of living for decades.  By adding more dollars to a low producing economy the value of our currency will continue to deteriorate and prices will spike.  Previous “stimulus” spending of Congress and quantitative easing by the Fed has already caused commodity prices to rise hugely in the last year:  Agricultural Raw Materials up 24%, Industrial Inputs Index up 25%, Metals Price Index up 26%, Coffee up 45%, Barley up 32%, Oranges up 35%, Beef up 23%, Pork up 68%, Salmon up 30%, Sugar up 24%, Wool up 20%, Cotton up 40%, and Rubber: 62%.  You get the idea.  Imagine price increases after this next round of easing.  But don’t worry, because the Fed’s member banks will know when to pull out of the stock market before it busts.

At the end of the day, if you voted for smaller, less expensive government last Tuesday your vote was negated by the unelected economic central planners at the Federal Reserve.  It took the FOMC just 48 hours in closed door meetings to undo what candidates across the country spent billions of dollars on in the last year to achieve on Election Day.  What a pity since you thought your vote was really worth your time.

Article first published as Your Vote Didn’t Count Last Tuesday on Blogcritics.