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Is Mr. Bernanke Helping Or Hurting?

The market works because of the signal carried in prices.

When Mr. Bernanke pours money into securities attempting to raise their prices, the market naturally reacts by going for the items where money is most easily made, and ignoring other parts of the economy. As margin balances show, the market is even willing to take out money from other parts of the economy to "invest" in what seems to be the most productive investment. Mr. Bernanke is causing the slowdown in the economy and delaying its recovery, rather than boosting it! His actions show that he is acting on his conclusions regarding the 1930s rather than on what he (should?) knows about markets. I think history will eventually compare our times to the 1920s rather than the 1930s.

The best way to boost the real economy would be to make financial (rent-seeking) investment UN-attractive. Then money would go into other parts of the economy. It is especially necessary to make people wait for the results of investments before paying off on investments. And that is the role of government, to penalize the quick buck, and to ensure that real returns ensue from an investment before an investment pays off. Securitization and insurance from that point of view is a negative thing - regulation is needed to make sure that it is grounded in reality. For example - we need to enforce the rule of NO naked shorts - in all assets, including gold, silver, derivatives etc.

It is pointless to forbid something that is going to be done anyway. So, rather than making things illegal, a better way is to impose a cost, such as a tax, on returns on an investment that exceed the return on the underlying real economic activity.

A financial transaction tax effective on investments of less than a year is one way. Similarly, a financial transaction tax should be imposed on any futures or derivative transactions not settled in kind. Shorts and options not covered by delivery of physical shares would be subjected to the tax. Capital gain on shares would be subject to the tax if the percentage gain exceeded the prorated annual revenue increase of the underlying entity.

Or we can go back to making naked shorts (including via derivatives) truly illegal with real criminal penalties, and abolishing the Fed - making Congress again responsible and taking the political heat for increasing the money supply. Corporations that violate the naked shorting laws should be given "jail" sentences - i.e. they cannot transact any business for the same period of time that a person violating the law would be sentenced to.

Disclosure: I am long SLV, FCX, SH, ORCL, RAX, YHOO.