Despite vocal criticism of the United States Federal Reserve's stewardship of
the economy over the past decade, President Barack Obama's re-nomination of Ben
Bernanke to a second term as Fed chairman nevertheless served to reassure and
boost financial markets.
While it is true that markets tend to crave predictability from government,
rewarding the continuation of horrible George W Bush-era policies is perhaps
pushing the boundaries of nostalgia. More interestingly, Obama, who campaigned
for "change", has clearly come down once again on the side of continuity.
In supporting his nomination, the president described Bernanke as "an expert on
the causes of the Great Depression", reminding
everyone that Bernanke had "approached a financial system on the verge of
collapse with calm and wisdom".
These were fine-sounding words, but they ignore the crucial fact that, long
before he moved into the chairman's office, Bernanke was an active member of
the Federal Open Markets Committee, the Fed's ruling body, which systematically
stoked and disguised the American financial crisis.
While there, he consistently downplayed the danger signs that others brought to
his attention. It appears that these experiences failed to widen the chairman's
perspective, as he continues to ignore the same voices now warning that current
policy will make our fiscal wounds deeper.
From his senior position under former chairman Alan Greenspan, Bernanke watched
as president Bush doubled the US Treasury debt to US$10 trillion and raised the
total federal debt to a staggering $48 trillion. He stood on the sidelines as
Greenspan pushed a decline in the dollar's value of more than 50% since 1987.
This effectively robbed not just taxpayers, but all holders of US dollars of
half their wealth.
Most troubling is the fact that Bernanke was a chief advocate of "easy money"
in the Greenspan-led Fed, earning the nickname "Helicopter Ben" for his threat
to throw cash from helicopters to boost spending. This, along with
risk-eliminating federal policy, encouraged the formation and hugely profitable
growth of casino-style behemoth banks, which became "too big to fail".
Thankfully for his friends on Wall Street, Helicopter Ben was still at the helm
when the system came crashing down. This translated into massive bailouts,
funded with trillions of dollars of taxpayers' wealth. Accounting rules were
changed to allow for the further camouflage of toxic assets held by the banks.
Bernanke himself engaged in some mafioso behavior in forcing Bank of America to
absorb an ailing Merrill Lynch.
On top of it all, to keep the appearance of solvency at bankrupt institutions,
banks were allowed to borrow from the Fed at 0% and were paid interest on the
reserves they held at the Fed!
Now, the same behemoth banks are even larger, with the same pit-boss managers
in charge, continuing to pay themselves tens of billions of dollars in bonuses.
The federal government, already encumbered with a staggering debt, has had to
rely on the creation of dollars by the Fed to finance its economic "stimulus"
and its massive corporate bailouts. This has led Congress to question where
sovereignty truly lies: with the people or the bankers?
Judging by the recent spate of tea parties and town-hall meetings, significant
forces are rumbling at the grassroots level. Though the protesters are not so
versed in economics as to understand the source of their grievances, it most
certainly lies with the Fed first and foremost. Fortunately, they are
sophisticated enough to understand that they are being cheated - and Bernanke
is the chief cheat.
While keeping Helicopter Ben in office was a politically safe decision, it
comes with its own dangers. There are efforts to cast this crisis as a failure
of capitalism, as personified by Alan Greenspan. Greenspan has gone so far as
to claim that his faith in markets was misplaced, and that more regulation is
needed. Bernanke concurs, and his continued professional success only serves to
cement this erroneous viewpoint.
The line of official history is hardening, and the characters are becoming more
firmly cast. Bernanke is emerging as the anti-Greenspan, the banker who
resisted the "seductions" of the free market. Of course, this plot fits nicely
into the current administration's plans for greater government control of
everything.
The truth is that the Greenspan-Bernanke Fed was to blame for the asset bubble,
but not because it trusted too strongly in capitalism. Quite the contrary,
Greenspan-Bernanke ushered in a new era of big government through their
Faustian bargain with administrations from Ronald Reagan to Bush Jr. In this
deal, popular social and military spending could continue indefinitely, to be
repaid through the printing press. In turn, the federal government would become
dependent upon the Fed for funding, and the central bank could paint itself as
the savior of a disintegrating financial system.
This wasn't so much a conspiracy as an alignment of interests, and it developed
quite organically. To call this a failure of capitalism is to call pollution a
failure of air - it is not inherent to the thing, but a corruption of it.
If Bernanke is distinguished by posterity, it will be in the manner of
Argentine president Juan Peron, a man who was popular, powerful, but ultimately
destructive. Perhaps after another four years of Bernanke's "courageous"
intervention, and its disastrous effects, America will tire of populist
economics and return to the calm and wisdom of the free market.
John Browne is senior market strategist, Euro Pacific Capital. Euro
Pacific Capital commentary and market news is available at
http://www.europac.net. It has a free on-line investment newsletter.
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