Yesterday, Mr. Bernanke's price-fixing scheme ran over a speed bump. The Dow dropped 216 points. Just a jolt, for now. The brick wall is still ahead.
But we will try to give the devil his due.
First, this from our own right-hand man, Chris Hunter (investment director for the Bonner & Partners Family Office) with a more generous assessment of Fed policy:
I'm not sure it's right to say that the Fed has been retarding a recovery…
If you look at the US, things aren't perfect, but they're a hell of a lot better than they are in Europe, where the ECB is not engaged in QE…
Well, maybe. Almost the entire difference in performance from Europe to America can be explained by the way they jiggle and jive the numbers… and the rigidity of the European labor market… but let's move on.
More from Chris:
I think it's more accurate to say that Fed money printing is unable to get credit into the hands of those who need it – small businesses…
But do lower interest rates make it harder for small businesses to access credit? Surely, it's more a case of banks being unwilling to lend… not lower rates making credit harder to access…
Protected by the Fed
Why are the banks unwilling to lend? Because there is a Great Correction going on… long, drawn-out… and delayed by the Fed.
Lending money to small businesses is risky, particularly in a correction. Big businesses, on the other hand, are protected by the Fed.
Fixing prices always results in shortages. Artificially low interest rates – the price of credit – stifle real savings and real credit. Fed credit – phony savings – goes only to the largest borrowers, especially the US government and government-owned borrowers Fannie Mae and Freddie Mac.
What's notable is that when central banks are running loose monetary policy during a deleveraging (US in 1933-37, Britain in 1947-69 and US from March 2009 to present), we see:
1. Positive GDP growth
2. A drop in debt-to-GDP levels.
But during deleveragings when central banks ran tight monetary policy (US in 1930-32, Japan 1990 to 2013 and pre-QE US 2008-09), we see:
1. Negative GDP growth
2. A rise in debt-to-GDP levels.
I think it's valid to argue that the Fed is overstaying its welcome with QE…
But the evidence suggests that monetary easing can prevent depression-like phases in the economy…
We'll hold our disagreement for a moment while another central bank fan has his say. Here's Martin Wolf at the Financial Times, who thinks the Fed has prevented "depression-like" conditions in the US:
Central banks, including the Fed, are doing the right thing. If they had not acted as they have over the past six years, we would surely have suffered a second Great Depression. Avoiding such a meltdown and then helping economies recover is the job of central banks…
The financial crisis coincided with falling real house prices in the US and triggered deleveraging among financial institutions and households. It took strong monetary and fiscal action to offset these contractionary forces. Since fiscal support was, alas, withdrawn prematurely, the burden fell on the Fed. With short-term interest rates at the zero bound, it had to influence longer-term rates if monetary policy was to gain traction.
Exceptional times call for exceptional measures. Those who criticise the Fed so bitterly either lack imagination or are indifferent to what would have happened to the economy and fellow citizens if the Fed (and other central banks) had sat on their hands.
Are you convinced, dear reader? We're not.
First, because the comparisons offered purporting to show that loose monetary policy works better than tight policies are not persuasive. This isn't science. This isn't even pseudoscience. This is just pure guesswork based on half-baked conclusions that themselves are grounded in dubious statistics and improbable assumptions.
Second, unless this really is a new era, it is still impossible for professors of finance to do a better job of setting prices than the market system. These guys had no idea what would happen. They had no idea what was happening when it happened. And they had no idea what to do about it after it happened.
And now Ben Bernanke sets the price – as near as he is able – of short-term credit. Using his ZIRP and QE, he aims to set prices for stocks and bonds too.
Housing, too, is sensitive to Bernanke's heavy-handed interventions. Trying to raise the CPI, he is explicitly working to raise prices for all consumer items. Did price fixing work for Diocletian? Nixon? Hitler? Stalin? Peron?
Show us the case in which price setting by government hacks has outperformed a market system. Show us the hack who is smarter and better informed than 300 million consumers, investors and businesspeople. Show us a single instance in which the hacks have actually made people better off.
Third, the great claim made by both our own colleague and by Martin Wolf, not to mention Mr. Central Banker himself, is that central bank economists have avoided depression-like conditions.
Dumping More Goo
Well, if you were one of the 3 million Americans whose job doesn't exist, you might think that depression-like conditions weren't avoided at all. Stocks went up. Housing is going up. But the economy?
Do the math correctly – GDP and unemployment – and you see conditions that look "depression-like."
What the Fed has produced is depression-like conditions without the salutary effects – the creative destruction – of a real depression. A depression is like Drano. It's a good thing – when it is short, swift and thorough. It flushes the gunk out of the economy's pipes.
But the Fed didn't permit a real depression. It stopped the cleansing… and then dumped more goo down the kitchen sink. Deadhead bankers got more grease. So did big corporations and the government. And now, for six years, the system has been blocked up with yucky stuff, retarding real growth.