Frankly speaking, reappointing Bernanke would be a reward for many failures, both as an economic theorist, and as Fed Chairman.
Back in 2003, Mr. Bernanke was a member of Alan Greenspan’s Federal Reserve Board of Governors. The housing bubble was already blooming, but, at that time, there was still an opportunity to keep it under control. Primarily, the nascent bubble was the result of ultra-low interest rates, championed by Mr. Bernanke, and agreed to by Greenspan. Transcripts of the Fed Meetings at that time indicate that Bernanke was a driving force behind the huge increase in so-called "liquidity" and abnormally low interest rates. He continued to support keeping rates abnormally low when his then-boss, Alan Greenspan, began to slowly raise them, in 2003. Indeed, until 2004, he not only wanted to keep rates abnormally low, but, more disturbing, he wanted to reduce rates below 1%. Had Bernanke gotten his way, the housing bubble would have been even bigger than it was, and the resulting collapse we are now experiencing would have been even deeper.
But, the mistakes didn’t end there. During his confirmation hearings in 2005, Bernanke stated:
With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.
As we all now know, derivatives were a key factor that caused the current Financial Crisis. Many others were warning about the dangers inherent in uncovered derivative obligations. Yet, Benjamin Bernanke, supposedly a knowledgeable economist, was entirely oblivious to the danger. But, that's not all. There’s much more.
Bernanke didn’t stop being wrong after his appointment to the position of Federal Reserve Chairman. He continued being incorrect, time and time again. Here is a small sampling of statements he has made, during the Financial Crisis, which show he was out of touch with reality, and unable to competently perform his job functions.
- March 28, 2007: “The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
- May 17, 2007: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
- Feb. 28, 2008, on the potential for bank failures: “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.”
- June 9, 2008: “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
- July 16, 2008: Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.”
The primary duty of the Chairman of the Federal Reserve is NOT to create dollars out of thin air, and give them away to favored banks at near-zero interest rates. On the contrary, the Fed Chair is supposed to act to protect the economy of the United States of America.
Protecting our economy includes, perhaps most importantly, protecting the value of the U.S. dollar. With a worthless dollar, getting people employed and wages paid doesn’t mean very much. Preserving the value of the dollar, and protecting the nation from runaway inflation is critical to the long term health of the economy. Chairman Bernanke has utterly failed to do fulfill his job duties, and instituted policies that will, eventually, destroy the value of the U.S. dollar.
Starting in September, 2008, he began a massive half-trillion dollar program called “central bank liquidity swapping” which transferred about $567 billion dollars to European and other central banks for distributiion to banks that had been short on the dollar prior to the implosion of Lehman Brothers. Had he not done this, the value of the dollar would have gone up far higher than it would have otherwise. The foreign banks that had bet against it would have been severely “burned”. That would have taught a severe lesson to all those who, in the future, might decide to short the dollar, deterring such speculation.
No doubt, the dollar’s value would have returned to normal in a few more months, but those same big foreign banks would never have been reckless enough to short the dollar again. Instead, as with later bailouts of American banks, Bernanke reinforced the level of moral hazard. Foreign banks shorting the dollar now are confident that the Federal Reserve, under Ben Bernanke, will always come to their aid in a pinch. The level of moral hazard is far greater now than before. This has proven lethal to the dollar as it has become vulnerable again. Once again, foreign banks are shorting it, and it is collapsing under the weight of near-zero interest rates, a flood of newly printed so-called "liquidity", and a renewed carry trade. Speculators on Wall Street are siphoning hundreds of billions of dollars out of the American economy, placing them overseas, doing nothing productive except collecting interest differentials, and draining much needed capital from domestic businesses.
Inside the U.S.A., Bernanke has already nearly doubled the monetary base. Based on his announced plans, by March, I expect the monetary base to have tripled. The massive dollar printing program that he has embarked on is as reckless as any possible activity can possibly be. It has panicked the foreign exchange market, and given great strength to both the banks now shorting the dollar, and the gold and commodities market as hedges against a weakened dollar. The U.S. dollar is plummeting at a time when it would, normally, be rising strongly, thanks to Benjamin Bernanke. Meanwhile, the price of gold and critical commodities such as oil soar. Runaway commodity prices will destroy any possibility of our economy having a sustainable recovery.
To make matters worse, Bernanke has given away trillions of dollars to the combination of internationally oriented American and foreign banks who control the Federal Reserve. He has supplied them with so-called “loans” that are, in reality, nothing less than gifts, because many of them are perpetually renewed, given at nearly zero interest rates, and non-recourse. The "banks" have used this money to play with their balance sheets, engage in carry trade, and create new bubbles in the stock and commodities markets. In the long run, by printing trillions of new funny-money dollars, Bernanke will have rewarded speculators and punished careful savers and retirees on a fixed income.
As an example of the harm that Bernanke’s policies can do to America, we need look no further than the implementation of the ideas of one of his “soulmates” and strong supporters, former Fed Board Member, and Columbia University Economist Frederic Mishkin. Mr. Mishkin belongs to the same school of Keynesian dollar printing gusto. They were “allies” on the Board of Governors, and Mishkin continually makes public statements in support of current Fed policies.
In late 2006, Mishkin was a consultant to the Iceland Chamber of Commerce, and did a careful study of the Icelandic economy. He even wrote a detailed paper about it, concluding that the Icelandic Central Bank was conducting a well designed monetary policy, that Iceland’s banks and its economy were stable and would continue to be stable for years to come, and that Iceland would be likely to continue to grow as time passed. A little over a year later, Iceland’s economy imploded.
I am sorry to say that men like Benjamin Bernanke and Frederic Mishkin, and others who think like them, are some of the most dangerous men in America today. Their policies will destroy our beloved nation from within. This nation would be wise to close down all of the Federal Reserve’s monetary policy and regulatory functions. Fears that, in the absence of the Fed, there will be runaway money printing, are unjustified. Indeed, it is the Fed that started printing excessive numbers of dollars, and began the massive dollar devaluation since the turn of the previous century. During the period between 1776 and 1913, aside from many mini-booms and busts, Congress showed that it was more capable of running monetary policy than the Federal Reserve. Indeed, during that time period, other than during the Civil War period, there was little inflation, and the dollar retained a majority of its value.
The Federal Reserve should be retained only for the things it has managed to do in a competent fashion. This includes ACH transfers and Fed wires, but not much more. Yet, if we do not close it down entirely, we must, at least, find someone willing to do what is needed to protect our nation from economic implosion. The history of this Fed Chairman shows that he is not willing, and never will be willing to take the hard steps needed to withdraw liquidity from the system and raise interest rates.
The next Fed Chairman must be a person willing to quickly raise interest rates before it is too late, resorb reserves back from the banks, and severely curtail monetary accomodation, slowly but surely reducing the monetary base back to the $900 billion we started with at the beginning of this Financial Crisis. We must reverse all of the dollar destructive policies put in place by men like Bernanke and Mishkin.
If, on the other hand, we let Bernanke continue in his position as Fed Chairman, there is little doubt that the U.S.A. will become another Iceland. There will be one significant difference, however. The American economy is at the center of the world economy, and the U.S. dollar is the world's reserve currency. It's implosion will not be a mere "blip" on the economic map, like that of Iceland. When the U.S. dollar collapses, it will trigger a chain reaction event most similar, in historical context, to the Fall of Rome. Indeed, much like what happened immediately preceded the collapse of the Rome, monetary authorities are debasing the currency, and citizens are reacting by buying gold, and putting it in secret places.
Disclosure: No positions