The Case against Ben Bernanke‘s Reconfirmation as Fed Chairman

Federal Reserve chairman Ben Bernanke is up for reconfirmation. He was initially appointed in 2006 and will soon receive a vote in the senate for a second term. He is a trained classical Keynesian economist and studied the Great Depression for this PhD. His actions have been classical Keynesian which believes when the economy is under performing the magic bullet is for the government to increase spending to “fill the full employment gap”. Basically if the Gross Domestic Product at “full employment” is $1,000 and current production is $900 then the government steps in and spends $100 to get the economy back to $1,000 or full employment. Simplistic concept but vehemently opposed by “Austrian” economist who oppose deflating the currency by printing excess paper money and artificial stimulus that will mis-allocate resources towards unproductive uses. Austrian economists argue printing money will create a monetary bubble and inflation similar to the housing bubble. Additionally they argue mis-allocation of resources towards unproductive pursuits do not lead to permanent long term sustainable job or economic growth. So let’s bypass the argument and look at the results.

When Bernanke was appointed in February of 2006 the GDP was about $14.1 trillion. It peaked at $15.3 in 2008 and dropped down to $14.4 and is currently at $14.6.

When Bernanke was appointed in February of 2006 the GDP was about $14.1 trillion. It peaked at $15.3 in 2008 and dropped down to $14.4 and is currently at $14.6.

Clearly after Alan Greenspan mismanaged the Federal Reserve laying the foundation for the housing bubble with a 1% federal funds rate the downturn cannot be blamed on Bernanke. But how did Mr. Bernanke react?

M-1 is the notes, traveler checks, demand deposits and other checkable forms of on demand cash like brokerage checking accounts

Bernanke has increased M-1 money supply. Notice how the money supply jumps from $785 billion when TARP was passed to $860 billion now. A staggering 9.6% in little over a year. This expansionist monetary policy has been going on for decades but has accelerated under Bernanke.

M-2 is M-1 plus savings and time deposits

M-2 Money stock under Bernanke. An increase of 25.5% or an annual rate of 6.5%. Many economists argue for a money supply growth rate of 3% plus or minus 1%. Some argue for the gold standard and virtually zero inflation or “hard money”. Not many support inflationary policies above 5%.

MZM or M-1 + M-2 + M-3 and all money market funds

MZM or all funds combined has increased 38.6%.

And finally the last straw the monetary base. This is what has Peter Schiff, Dan Mitchell and any reputable economist basically freaking out over Bernanke, Bush, Obama, bail outs and stimulus plans. This is a money bomb just waiting to explode. You think the Savings and Loan, NASDAQ and housing bubbles were bad? You ain’t seen nothing yet. When this baby explodes you will see $10 or maybe $20 gallon gasoline. Interest rates will skyrocket and housing will be a cash only business because no one will be able to afford a mortgage. Housing prices in real terms will plummet. Milk will be $10 a gallon. But where is all this money?

The Monetary Base has increased 154% under Bernanke

Where did all that bail out cash go? It’s sitting in banks everywhere. From 45.2 billion to 1,140.5 billion. A 2,400% increase! This is not going to end well.

Total Reserves. Where did all that bail out cash go? It’s sitting in banks everywhere. From 45.2 billion to 1,140.5 billion. A 2,400% increase! This is not going to end well.

To translate the Fed gave their buddies on Wall Street first dibs to the devalued cash so they can get ahead of the inflationary curve and divest themselves from American assets including the dollar. Why would a banker make a loan to a medium sized firm at 5% when they clearly see 10% maybe even 20% interest rates in the not to distant future? The bankers are taking the almost free cash at 0.5% from the federal discount window and loaning it back in short term notes at 3%. Basically all that cash we paid the bankers to get back to making loans is sitting on the sidelines until the banks most likely go bankrupt again and all hell breaks loose or the Fed pulls a magic trick out of its hat. The banks are in a rock and a hard place. Make loans now at 5% and get crushed in the future or try to build up reserves off the spread from the discount window funds. This is why for a lot of economist it would have been better to let the insolvent banks go bankrupt in 2008. All we have done is postpone the bankruptcy to a future date and spent a few trillion in the process. A few trillion that will come back to haunt us with inflation and more taxes at the very time we need less taxes.

Federal investment into the economy has gone up 25% but GDP has risen 3.5% during that same time frame. Spending doesn’t seem to be filling up the “gap” very well.

Greenspan was committing sabotage against the Bush administration and the economy. Maybe he hates Republicans, white guys, who knows? But the destruction he caused was intentional. Greenspan knew exactly what he was doing. Bernanke is more of an accommodating tool used by both Bush and Obama to finance their political objectives. Bernanke is a true believer in Keynesian economics. He may truly believe that he is doing the right thing for the economy. But we don’t need a yes man in charge of the Federal Reserve. Unfortunately it will take a man of iron will and a lot of pain with an intimate knowledge of Milton Freidman and his monetary policies. We need a man who will be the equivalent of a butcher chopping up the carcass of our previous monetary policy and someday reinventing it into something we can all stomach.

Finally the last two nails in the coffin.

Federal tax receipts have gone down 11.5% from 2006. Bernanke, Obama, Bush have all “stimulated” the economy with spending and cash. Is this what we want?

Federal investment into the economy has gone up 25% but GDP has risen 3.5% during that same time frame. Spending doesn’t seem to be filling up the “gap” very well.

Federal tax receipts have gone down 11.5% from 2006. Bernanke, Obama, Bush have all “stimulated” the economy with spending and cash. Is this what we want?

During the same time the federal government Keynesian economic policies have increased unemployment. This unemployment graph is deceptive. It does not count underemployed, illegal immigrants moving out of the United States, and those who have given up looking for work. Most economics think the true number is around 17%.

This unemployment graph is deceptive. It does not count underemployed, illegal immigrants moving out of the United States, and those who have given up looking for work. Most economics think the true number is around 17%.

America has received a strong dose of Keynesian economics quite some time now. Bubbles have been created in the savings and loan financial firms under Bush 41, NASDAQ under Clinton, housing under Bush 43 and now the looming monetary bubble under Obama. All the Federal Reserve and congress do is to kick the can down the road. The bubbles get bigger and the pain harder. We have got to change. Obama is more of the same. Bernanke is more of the same. The pain is coming far worse than today. Bernanke needs to go and a Federal Reserve Chairman appointed who understands where inflation comes from and how to run a responsible banking institution in a manner that will provide a stable currency. That’s it.

No politics, no special deals. Print the money and keep the currency value stable. When that is accomplished then advocate for the repeal of the Federal Reserve and a return to free banking. In a few years from now the public will look at the Federal Reserve and Keynesian economics the same way it views the Vietnam War. A waste of lives and money.