Duty calls for Congress


By Hossein Askari and Noureddine Krichene
Asia Times
Nov 26, 2009


United States congressional confirmation hearings over the appointment of Ben Bernanke for another four-year term as chairman of the board of governors of the Federal Reserve System - his current term ends on January 31 - are set for December 3. It is now the Congress' turn to exercise its constitutional prerogatives and hold meaningful hearings before reaching a decision.

President Barack Obama nominated Bernanke for another term earlier this year, well ahead of schedule, ostensibly to "calm" the markets. In doing so, Obama broke his often-quoted campaign promise for "change" - in this case for a clear break from the George W Bush era's economic and financial policies.

Bernanke was the chairman of the Counsel of Economic Advisors during the Bush administration and was a Bush appointee as the chairman of the Fed. He was also one of the main, if not the main, architect of the Bush administration's financial and economic policies. As a Fed governor, and later as Fed chairman, Bernanke engineered about the most expansionary episode of monetary policy in US history, rejecting calls for restraint when unprecedented speculation in housing and out of control financial speculation were underway.

A person's record has to matter. His policies turned out to be devastating for the US economy and for the banking system, and they brought to a screeching halt two decades of prosperity, replacing them with a dramatic fall in real incomes, mass unemployment, millions of foreclosures, and continuing economic despair for millions of Americans.

These policies have cost taxpayers trillions of dollars in bailout funds for the banking system and have contributed to a rapid build-up of national debt, and with much more debt to be piled on over the next 10 years. His imprudent monetary policy and drive to print more and more money has deservedly earned him the nickname "Ben the helicopter," a dubious distinction for a central banker.

If Bernanke had been a prudent and a balanced policymaker, the US economy would have continued along the growth path enjoyed during 1982-2000. His rushed move in August 2007 to follow an overly aggressive policy has precipitated the worst economic and financial crisis of the post-World War II era.

Most ironic, Obama has lauded chairman Bernanke for his track-record: "As an expert on the causes of the Great Depression, I'm sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that's exactly what he has helped to achieve. And that is why I am re-appointing him to another term as chairman of the Federal Reserve ... I want to congratulate Ben on the work he's done this far, and wish him continued success in the hard work ahead."

That Bernanke did not imagine in 2002-2007 he would be part of the team responsible for preventing another Great Depression should be of concern for Americans - having the most important financial institution headed by someone who cannot foresee the consequences of his policies!

Bernanke did not lack creativity, however; he lacked monetary prudence. His "courage" for pursuing the most lax monetary policy, pushing interest rates to zero bound, spreading financial anarchy, and clearing the path for inflation, unemployment and economic agony should be compared to former Fed chairman Paul Volcker's courage for restoring money stability, and by pushing the federal funds rate to 20% extricating the country from a decade-long two-digit inflation and building a path for a long-term economic growth.

Obama noted: "Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall."

Bernanke's wisdom and bold action may have saved the banking system from ruins, but his policies played a crucial role in bringing about the financial meltdown in the first place. Unfortunately, no wisdom and creativity could recover the billions on billions of lost banking capital. It is gone forever. Besides US$1.5 trillion in writedowns, the burden of losses has simply been shifted from banks to taxpayers, pensioners, and working classes.

Pension funds have lost on average 25% of their assets, and retirees will have to live with smaller pensions that will be additionally taxed by inflation that is sure to be down the road. Bernanke saved Wall Street from free fall - bailing some institutions out with payments of 100 cents on the dollar on worthless loans - so its big banks could pay record bonuses on another day, but he crushed taxpayers, pensioners, and workers.

Obama's reappointment of Bernanke was not a surprise. It appears to be an integral part of the Obama administration's determination to carry on with Bush policies on an even larger scale. Fiscal deficits have been pushed to unprecedented levels, and are projected at a yearly 13% over the next four years. Money injection is proceeding at a frightening rate and money supply is expanding at 18% a year. Interest rates are being forced to near-zero bounds, causing tremendous distortions and destruction of savings and capital.

The superinflation goal of the Obama administration will be well served by a superinflationist Fed chairman. The Fed is intent, as it has been, to monetize the fiscal deficits.

"We will continue to maintain a strong and independent Federal Reserve," said Obama. Certainly, Bernanke's independent Fed fits perfectly into the Obama administration's most extraordinary fiscal deficits. The end of the Bush-Bernanke era has brought economic turmoil; spreading misery; an intoxicated banking system; a housing sector suffering millions of foreclosures; and mass unemployment in double-digit levels - "true" unemployment (commonly referred to as "U-6", including those that have dropped out of the labor force because of despair or who have only secured part-time work) is at 17.5% and still rising.

Simple principles of monetary economics elaborated in the 16th century about quantity of money have continued to elude the Fed and its supporters. The Fed has been injecting billions of dollars into the economy. Yet how much additional crude oil has been created by such money creation? The answer is zero barrels. How much additional rice, corn, vegetables, and fruits have been created by Bernanke's new money? Given limited land and other inputs, additional production has been insignificant.

Although the Fed has always ignored food and energy inflation, yet prices of food and energy products not surprisingly have doubled, tripled, and quadrupled since Bernanke has became a key policymaker in the Fed. Such food inflation has put 36 million Americans on food stamps. Since crude oil output would hardly exceed 85 million barrels per day, the Fed's money printing will simply translate into oil price inflation, already doubling this year. The same applies for limited food output. Food prices will keep on rising.

"In essence, the present creation of money out of nothing by the banking system, is similar - I do not hesitate to say it in order to make people clearly realize what is at stake here - to the creation of money by counterfeiters, so rightly condemned by law." So commented Nobel Prize winner Maurice Allais. Bernanke's creativity in injecting unlimited dollar liquidity is pure counterfeiting. Since a multi-fold rise of basic food and energy product prices has been accompanied by stagnant or falling nominal wages, Bernanke's actions have imposed a formidable tax and deteriorating nutrition on millions of Americans, with one in eight Americans now going to bed hungry.

Besides ignoring the distortionary and inflationary effects of lax monetary policy on food and energy products, Bernanke has been mistaken in his view that the US economy suffers from deficient demand. By deploying the most aggressive monetary policy, he wanted to repair a deficiency in demand. Such a view is incongruous with the sizeable fiscal deficits and large and widening external current account deficits, which averaged about 5-7% of gross domestic product during 2005-2009. Ever-growing external deficits are clear proof that spending has exceeded income and external savings have filled the gap. More monetary expansion would simply mean more external deficits.

Bernanke was portrayed as an expert of the Great Depression. However, he is not an experienced banker. Most of his career was in a classroom as a teacher. There is no banking system in the world, no matter how perfectly capitalized, regulated, and supervised, that could have survived the record low interest rates pushed by the Fed during 2002-2005.

Extremely low interest rates expose even the best-regulated banks to two unavoidable risks: a credit risk and an interest rate risk. Both risks have fully materialized in 2007-2009 and have precipitated the collapse of the US banking system. The credit risk has materialized through the meltdown of subprime loans. The interest rate risk has materialized through the collapse of asset prices and the value of asset-backed securities, commonly referred to as toxic assets.

The current near zero interest rates will inevitably expose US banks to the very credit and interest rates risks they have already suffered in the recent past. John Maynard Keynes rightly pointed out that low interest rates would cause prudent banks to hold liquidity and short-term riskless bonds. Consequently, US banks have learned the hardest lessons and become resolved to avoid both risks. They are accumulating excess reserves at amounts never seen before and are essentially buying short-term government securities and making a killing in the market.

By setting interest rates at near zero bound, Bernanke would like to achieve strong and lasting growth. How can we ignore Japan's decade-long stagnation, brought about by near zero interest rates?

Obama's policymakers have been mired in fallacies. They have been tempted by money counterfeiting to exit from crises that were themselves brought about by loose monetary policies. They have all along seen the Fed as the most important body for economic management and creating employment in the economy. Such misconceptions has led to the most extreme uncertainties in the economy and to banking and exchange rates instabilities, and has fostered speculation.

The concept of safe central banking aimed at safeguarding money and bank safety has long been abandoned in favor of central banking that manages economy and employment. This misconception was deeply rooted in Bernanke's nomination acceptance speech, when he asserted himself as a ubiquitous power that will create growth and employment, stating: "I will work to the utmost of my abilities to help provide a solid foundation for growth and prosperity."

He could not limit his power to that of a central banker who would only stabilize money conditions, maintain a low rate of inflation to prevent social inequities created by inflation, and devolve growth and employment to the real economy.

Prosperity has ended with chairman Bernanke's cheap monetary policy. The crisis is still unfolding. How he can provide a solid foundation for growth and prosperity, which he has already compromised, in such an environment of loose money and fiscal deficits remains a puzzle that only Bernanke and his supporters can answer.

Four more years of the same ultra-expansionary fiscal and money policies can only promote more financial disorder and will be far from conducive to lasting economic and financial stability.

Far from reversing Bush era policies with "change", Obama has embraced Bush's policies with injurious effects on the US and the world economy. His choice of Bernanke for another four-year term will ensure an acceleration of the same policies.

The Congress now has a solemn duty to look into Fed policies and open up the central bank's balance sheet. Congress must also take this opportunity to examine how the financial bailouts were implemented and whether some institutions received sweetheart deals at the expense of the taxpayer and the nation.

Congress must act diligently and not be a rubber stamp for the administration.

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