STAFF NEWS & ANALYSIS
Ben Bernanke's Hollow Victory
By Staff News & Analysis - March 11, 2013

Most of the unorthodox steps Mr Bernanke has taken since 2008, such as the galaxy of lending windows he set up after the Lehman bankruptcy, or the various quantitative easings, may seem obvious in retrospect. But it is not clear any of his former rivals for the job would have responded the same way … Mr Bernanke's grounding has given him the authority to dismiss those who view the meltdown through a moral lens and want to purge society for its excesses. Had he embraced this popular intuition, the US would now be following the UK into triple-dip recession. – Financial Times

Dominant Social Theme: The Fed came through and surprised its doubters. Imaginative central banking works!

Free-Market Analysis: The US as a nation owes more money than it can possibly pay back and has had its credit downgraded, unemployment is around 20 percent (or more), though the official figures don't reveal that, inflation is probably close to 10 percent or more and there is probably no "recovery," despite media reports to the contrary.

But let the coronation begin. Perhaps we are now to be subject to a torrent of pro-Fed and pro-central banking articles. Certainly this article appearing in the Financial Times hints at the possibility. Lord, spare us …

Is this an initial attempt in a campaign to provide Ben Bernanke with another term as chairman? If so, it is an early gambit, as his second term doesn't end until January 31, 2014. Also, Bernanke has indicated that he doesn't want to serve another term.

Perhaps the article marks the beginning of a counterattack by those who support central banking and are well aware that the concept has run into stiff resistance in the early 21st century. It is the Internet, of course, that has provided the pushback to central banking and the theories that support it.

The Federal Reserve, in particular, was supposed to act as a bank of last resort in case of a general banking crisis. But even though – theoretically speaking – such a bank of last resort is a dubious invention, what the Fed has become is much more. It is a money manipulator, an agency of currency devaluation and the leader of 150 central banks around the world.

As the article itself indicates, the Fed is the only "serious actor" in Washington and one could argue that it is the leading actor for the world itself. Here's more from the article:

The Federal Reserve under Ben Bernanke has been the only serious economic actor in Washington … At the start of this century the journalist Bob Woodward anointed Alan Greenspan as "the symbol of American economic pre-eminence". Ben Bernanke must pray that he never attracts that kind of praise. As a student of business cycles, the current chairman of the US Federal Reserve knows all about reputational bubbles – and few have burst more convincingly than Mr Greenspan's.

With just seven Fed open market meetings before he completes his second term, Mr Bernanke is in no danger of emulating the maestro's former heights. Last week, the Dow broke its historical record. There were no Greenspan-style celebrations. Conservatives dismissed the surge as a "sugar high" caused by quantitative easing. The left saw it as yet more Fed-fuelled froth that was bypassing Main Street.

Both contain some truth. The $85bn a month in QE3 is fuelling a "reach for yield" that is driving a mini equity boom. And America's wealthiest 10 per cent are its main beneficiaries. But they ignore the big picture. Without the Fed's easy money, the stock market would be languishing and unemployment would be rising. Instead of "helicopter Ben" dropping reserves from the sky it would be "lawnmower Ben" shredding the green shoots of the recovery.

History is likely to treat Mr Bernanke more kindly. Peter Drucker, the management consultant, once said: "The greatest danger in times of turbulence is to act with yesterday's logic." Mr Bernanke's chief virtue has been to ignore the normal rule book. As a scholar of the Great Depression, he understood its chief cause was the extinction of credit: the US escaped the slump because it went off the gold standard. The New Deal had little to do with it.

This is an interesting statement, indeed, implying that credit loosening can allay the effects of a massive economic crack up. The article quotes Drucker as if there is no alternative, opposing view but, of course, there is. The Austrian free-market approach provides us with a completely different analysis.

Murray Rothbard and others within the field have pointed out that after a credit boom must come a credit bust. Drucker's statement that the US "avoided" such a bust by going off the gold standard is questionable, indeed. Those trapped in the 1930s Depression probably were not aware that they had escaped it as a result of US officials repudiating the gold standard.

From what we can tell, the massive mobilization of the Second World War was responsible for breaking the Depression. People were finally employed again, if only for small amounts of money via military service. And then, of course, the post-war years presented the US with a unique opportunity as one of the only developed countries in the world that had retained an intact infrastructure.

There is no war – or none that has been engineered yet – to employ the millions of unemployed in the US … or Europe, for that matter. More and more, the Austrian analysis looks correct: One can delay the full effects of a bust by flooding the economy with money (specifically the affected facilities) but this only puts off the reckoning.

The reason that Western economies have been so slow to rebound is because Bernanke and other central bankers have refused to let banks go bust and have artificially stimulated a system that is in dire need of cleansing. Without this cleansing, no one knows who to lend to or do business with. No one knows what venture is fiscally solvent and what venture is on the proverbial "life support."

None of this matters to those elites running the world's financial structure. They are fully vested in the financial system as it is – with all of its glaring contradictions and inadequacies – and as the system struggles they only seem to grow more defiant.

The article itself asserts this tone of defiance … even as it proclaims the virtues of the Fed and its "solutions." The editorial in the Financial Times, an elite organ of modern Money Power, states the Fed's success bluntly:

In recent years it has become common to worry about weakening democracies and fraying institutions. Moisés Naím's new book, The End of Power, crystallises that view well. Since 2008, the Fed has proved a notable exception to the trend. "When the Fed has met a new problem it has usually engineered a new solution," one of Mr Bernanke's Group of Seven counterparts told me. "It has used its power effectively."

Every part of this editorial provides us with dubious assumptions: The Great Depression was not alleviated by the abrogation of the gold standard, so far as we know; Bernanke's "bold" solutions mostly amount to printing money-from-nothing, and this has debased the dollar without appreciably alleviating unemployment or resuscitating a moribund economy.

The powers-that-be are desperate to justify the current system, as control of central banking provides those in charge with an almost impossible-to-grasp power of the purse. The riches and power that accrue to those who control these banks are almost unfathomable to a normal person.

But, no matter … They will have to do better than flawed editorials such as this. Asserting success is not the same as achieving it. Plenty of people understand that central banking money debasement leads to the kinds of recessions and depressions that the West is now experiencing.

After Thoughts

To suggest then that central banking policy has alleviated what was caused by the same mechanism is to proclaim a hollow victory, indeed.

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