Ben Bernanke and his merry band were again under the big top in the continuing circus that ever-more-accurately describes the US financial markets. This time the heavens have opened and Bernanke’s pixie dust has made everything better. Wall Street has reacted as if a celestial airdrop of cheap money will summarily stay the tsunami of defaults; reverse the dwindling jobs growth; compensate for the new highs in consumer debt burden; ease the energy crisis and most importantly justify the lofty market. It is flesh-toned spray paint over a severed artery. “Step right up folks and se the illusion of perpetual prosperity.”
Fed Chair (emeritus) Alan Greenspan sounded more like Bart Simpson in his recent” I didn’t do it” speech. Ben, as did his predecessor Al, hoped that publicly ignoring a bubble would help it deflate in an orderly manner. After the nervous tap-dancing routine failed to convince the market that the housing bubble was only a flesh wound, Uncle Ben has been forced to admit evidence of gangrene. Like Napoleon in Animal Farm, now bellying up to the Discount Window is goooood, four legs baaaaad. If ever anyone wondered why confidence starts with “con” they need no longer. It begs the question of why anyone trusts the Federal Reserve to act as the adult on the economic playground.
So powerful is the US consumer that keeping him spending now dictates economic policy. The Fed has made the markets more of a circus by casting a blind eye to credit bubbles they can see forming better than anyone. This bailout, to artificially sustain another Federal-Reserve-sanctioned bubble, will be by fiat and further depress a dollar dredging the depths of value on a world stage. Cheerleaders hail the rise of our manufactured exports while forgetting we were steadily moving toward higher paying service jobs. We should not want to compete with China or Viet Nam for cheap goods. Demolishing the dollar through such short-sighted reality-deferring measures only willingly cedes our first-world status.
This circus need not be. The Fed has always had the power to stem runaway credit expansion by several mechanisms, but every time they choose to play on while the crowd goes wild. The notion that more lose credit can fix the ravages of more lose credit has temporarily intoxicated the market, but it can’t last. The map is not the territory. Treating a mild deflation with over-the-top preemptive inflation only treats the symptom. Not allowing markets to take a recess only increases the probability and magnitude of a deflationary event otherwise known as a depression. “Don’t worry folks; you can still get in for one thin dollar.”