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Bernanke's Banking Misdirection

Ben Bernanke tells EU to clean up banks ... Federal Reserve chairman Ben Bernanke has exhorted Europe's leaders to take further action to beef up banks and help southern Europe claw its way back to health, warning that the world financial system is not yet on a sound footing. Strains in global financial markets "continue to pose significant downside risks", said Bernanke. – UK Telegraph

Dominant Social Theme: You've got to get your banks in shape, the way they are in the US.

Free-Market Analysis: This is surely a dominant social theme – that banks can be seen as healthy due to so-called stress tests. The whole idea is that the paper money reserves held by banks must be adequate to surmount any larger financial downturn.

This is part of a larger dominant social theme of the power elite, that central banking economies have banks or even money in the normal sense. In the modern world, money is anything but "normal." 

But the elites that want to create world government want to insist on mimicking pre-modern monetary environments. They need to create the perception that the faux-money of central banking is every bit as valid as previous monetary systems.

They are driven to do this because central banks that they apparently control are their cash cows. Without the trillions thrown off by central banks, the elites would not have the funding and time to create the conditions for the looming "new world order."

And so the elites and their enablers such as Ben Bernanke resolutely pretend that the current system is analagous to previous "honest money" environments.

Nothing could be further from the truth. In fact, the exercise is useless for two reasons. First, the paper reserves held by large banks are not really "money" as previous generations understood it. They are simply central bank-issued pieces of paper with fancy printing, or more likely electronic digits.

Stress tests might have made sense when banks held fractional elements of gold and silver, but how do they make sense when central banks print paper or simply push a button and send electronic digits from one computer to another?

Second, even assuming that what banks hold is actually "money," the exercise is disingenuous. Fed chairman Ben Bernanke knows quite well that another profound market shock may not occur for a long time.

The crashes that signaled the beginning of what may be a current worldwide depression took place in 2008. In fact, it was at the end of 2007 and moving into 2008 that this worldwide business cycle experienced the second leg of a bull metals market and a bear securities/stock market.

The business cycle actually turned in 2001, when gold and silver finally began to move up after about a 20-year hiatus. The last big bull metals market ended in 1980 and began in 1970.

That market lasted a decade. But this one has been going on far longer because there is so much more economic distortion to unwind. Additionally, the top central bankers have flooded banks with "liquidity" that has prolonged this leg of the business cycle.

To prep banks for another crash is like prepping the financial system for another "event" after the Great Cash of 1929. Business cycles don't usually work that way. (Though, in fact, given how much liquidity Bernanke has tried to introduce into the system, the likelihood of another bubble and crash has grown considerably.)

We're on the downside of the bubble economy, or at least we should be. Free-market economics – and an analysis of the business cycle – shows us that modern central-bank economies inflate because central bankers inevitably print too much money.

Once all that money is circulating, it creates new demand as people feel wealthy and begin to spend and borrow injudiciously. After a while a boom is created and then, eventually, a bust.

A bust takes place once the market itself has figured out that there is too much economic activity and that much of the activity is misdirected. Usually markets crash and so-called "recessions" begin.

Bernanke, in his zeal to defend the system at the behest of the larger power elite, has kept the dysfunctional financial industry afloat. He may have basically aborted the business cycle for the moment. Certainly he may have prolonged this leg. It might have been over in a couple of years. Now it could stretch to 15 or more.

We've pointed out that he and his cronies may have printed up to US$50 trillion (no one knows how much) in additional liquid reserves. Actually, most of this money printing is simply the addition of electronic digits.

Much of this "money" actually hasn't begun to circulate yet because the demand isn't there. It is demand, not velocity, that creates the price inflation that can further destroy the value of "currency."

Bernanke of course, will explain none of this. He is merely interested in creating a public relations spectacle. He wants to make the point that he has done a good job in the US and that US banks are healthier than European ones. Here's some more from the article excerpted above:

"More needs to be done. Full resolution of the crisis will require a further strengthening of the European banking system," he told Congress, calling for a "significant expansion of financial backstops, or 'firewalls', to guard against contagion in sovereign debt markets."

Strains in global financial markets "continue to pose significant downside risks", he said but stopped short of criticising EU bank stress tests for banks. However, his comments reflect strong doubts in Washington over Europe's strategy.

The US stress tests are widely viewed as more rigorous, modelling the shock effects of a 5pc fall in GDP, a 52pc drop in equities, and a further fall of 21pc in house prices. By contrast, the EU tests have already been overtaken by events, with both economic contraction and unemployment in Spain certain to exceed the worst case scenario for 2012.

Europe's banks have a loan-to-deposit ratio of almost 1.3, we learn from the article, while the ratio for US banks is close to historical norms at 0.7. This means US banks are a good deal less leveraged.

But "leverage" means nothing under this sick system. Bernanke was willing to loan out tens of trillions around the world to ensure that the faux-economic system now in place didn't collapse, and this means the financial system itself is still gravely distorted.

US banks may be less leveraged, but there are still too many of them. Bernanke salvaged all the big ones. He salvaged the entire perverse system, which deserved to die a quick death.

The world is not just over-banked; it is swimming in banks, financial firms, financial products, gimmicky and complex financial schemes, etc. Why is this? Because central banking itself guarantees a perpetual financial bubble of sorts.

Until competition is reintroduced into the larger money system, this bubble will perpetuate itself. People think that the current climate is normal, but they've never experienced a normal money system.

In such a system financial activity would be far less than it is now. Wall Street would be shrunken as well. Money would likely be a depository of value and people might focus more on professional achievements than investment related ones.

Bernanke is nothing but a glorified PR man at this point, trying to keep all the balls in the air. He is running around the world now trying to convince the media and average people that the banking system has grown healthier under his watch. In fact, it is as swollen and unstable as ever.

Conclusion

Stress is not the problem and stress tests are not the solution. It's the entire system of monopoly fiat money that needs changing. Introduce monetary competition and do away with legal tender laws and you'll see some real stress introduced into the system. Stress that will provide the cleansing this financial bubble really needs.

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The Daily Bell is published by a dedicated team of experienced researchers and writers who utilize Anthony Wile’s VESTS model to analyze sociopolitical, economic and financial information from a free-market perspective, debunking mainstream media memes and providing insights and analysis derived from business cycle analysis that yield timely insights into profitable investment trends.

 
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