by Jack Crooks
Sometimes the most interesting remarks don't come from the pundits or the floating talking heads on CNBC. Instead, the really intriguing insights come from normal investors like you and me, who aren't afraid to tell it like it is.
I had such a reader write me recently. He wrote: "Ben Bernanke is like the death star. Destroyer of worlds."
In case you're wondering, the comment refers to the movie, Star Wars. In the film, the evil empire builds a moon-sized space station that can (and does) obliterate an entire planet with a single shot.
Of course, Bernanke's official job doesn't involve destroying planets, but some might argue that his official mandate has been destroying the U.S. economy lately.
Two Days before Congress, Two Days of Lip Service
In fact, last week Bernanke had to answer for his actions during two days of Congressional testimony.
Accompanied by Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox, Big Ben paid lip service to the panel of Congressmen bombarding him with questions. Bernanke gave the normal reassurances about the state of the economy and inflation. He also asked for additional Fed regulatory responsibilities. That made for a heated discussion.
The best quote came from Senator Jim Bunning. When it was his turn to address the Fed Chairman, he noted, "The Fed is the systemic risk."
Both my Star-Wars-loving reader and that Congressional testimony basically say the same thing: People are sick and tired of the Fed's decision to fight fire with a lot of hot air.
Let the Good Times Roll...Even if the Economy Rolls Right Over Us
Almost any economist will tell you that every boom period is followed by a bust period. And typically, the larger the boom, the larger the bust.
But it seems like lately the Federal Reserve is disregarding the historical boom-bust cycle. Instead, Bernanke and his team are doing everything in (and beyond) their power to keep the good times rolling.
Sounds nice, but there comes a point when the economic system needs to cleanse itself. Hence the subsequent bust to every boom.
By making every effort to sustain the boom when it's already naturally run its course only delays the inevitable. The impending bust will be that much more painful, if you keep putting it off.
Many analysts, including myself, are beginning to believe the Fed needs to stop fighting the fire with bailouts and cheap money. Instead, they need to tighten up and let the market process work things out from here.
Right now, the Fed is no doubt in bailout mode. The Bear Stearns bailout is still fresh in investors' minds. (No doubt that bailout will go down in market infamy for quite some time.) Now we have the Fannie (FNM)/Freddie (FRE) fiasco. And who knows how many other firms the Fed has saved - so far - by opening up the vault doors to nearly everyone?
Free Fed Money Anyone?
Check out the two graphs below. This first one shows how many banks borrowed from the Federal Reserve from 1980 until 2006:
You can see a major spike to roughly eight billion dollars of borrowing in 1984. That spike is probably from the economy's recovery from recession in years prior.
This spike in total borrowings was also coupled with a brief surge of inflation (of similar proportions to what we're experiencing today) after Fed Chairman Paul Volcker brought the inflation rate down from 13.5% in 1980 to as low as 3.2% in 1983.
Now, this next chart shows the exact same series of data, only it takes us through the present...
As you can see, the period up through June 2008 completely dwarfs how much the Fed lent out prior to that year. In fact, it makes all other periods look like a flat line!
The spike to more than $170 billion dollars of borrowings reflects the newly created auction facilities.
How Do the Fed's Actions Affect Your Savings?
Bernanke recently admitted that the U.S. dollar needed to work off some of the excesses from the rally that began in the mid 1990s. That's part of why the bear market has extended so deep for the buck.
The dollar has done that — and more. But the charts I just showed you prove that the dollar is not nearly out of the woods yet.
Bottom line: If the Fed doesn't change its attitude and stop feeding debt creation, asset prices will spiral higher, and more pain will be crammed into the closet until someone or something knocks the door open.