STAFF NEWS & ANALYSIS
Bernanke Says U.S. May Need to Expand Bank Rescue
By - March 04, 2009

Federal Reserve Chairman Ben S. Bernanke said policy makers may need to expand aid to the banking system beyond the $700 billion already approved and take other aggressive measures even at the cost of soaring fiscal deficits. "Without a reasonable degree of financial stability, a sustainable recovery will not occur," the Fed chairman said today in testimony prepared for the Senate Budget Committee. "Although progress has been made on the financial front since last fall, more needs to be done." Bernanke's comments suggest he sees a role for bigger federal outlays as the Obama administration seeks congressional approval for a budget of $3.55 trillion for the fiscal year beginning in October. President Barack Obama has already signed into a law a $787 billion economic stimulus package of tax cuts and government spending. Obama's first budget seeks standby authority for as much as $750 billion in new aid to the financial industry. Whether those funds will be needed "depends on the results of the current supervisory assessment of banks" and the evolution of the economy, Bernanke said. Bernanke said policy makers would have "preferred to avoid" what is likely to be the largest ratio of federal debt compared with gross domestic product since the end of World War II, and he urged lawmakers not to lose sight of fiscal discipline. – Bloomberg

Dominant Social Theme: The rescue will continue no matter what.

Free-Market Analysis: What exactly has Ben Bernanke gotten right? He has not recommended an asset-backed monetary system; he has not recommended an aggressive tax cutting regime; he has not allowed the biggest, ruined institutions to collapse as they need to; he has poured literally trillions into a banking sector that still remains in a bubble because the Fed is determined to keep it that way. And the result is a stock market that fell under 7,000 recently, a business climate that continues to sour and an economic recovery that appears to recede every time Bernanke shows up for a Congressional grilling.

Bernanke sees the world only one way. He cannot let big institutions fail. And he cannot let big banks fail especially. Yet the banking business remains the biggest bubble of all. Bernanke looks at Citicorp and still believes that the bank should be employing some 300,000-plus individuals … to do what? For him, the capacity of Citicorp to utilize the services of so many is to see "normalcy" descending once again upon the financial world. But it is not normalcy. Normalcy would be many fewer banks. The United States is over-banked; Europe is over-banked; the world is over-banked. But since central bankers are in charge of the financial system, overbanking is seen as the status quo, the place to which the world must return.

Bernanke is the Western world's most important banker. But every time he goes to Capitol Hill he looks more and more out of touch. It is morbidly fascinating to watch. Again, Bernanke was sitting in front of his interrogators on Tuesday and he must be fairly sick of it by now. This time, in fact, he didn't look or sound tentative; he sounded angry, defensive and, at times, arrogant. He told his questioners that he would not reveal the names of the banks that the Fed has helped; he indicated that even more money might be necessary to prop up the institutions in question; he discounted the idea of letting the insurer AIG disintegrate, which it would already have done had it not been for the additional US$30 billion that Bernanke has now injected.

Those on the other side of the table – the Congressmen – have ceased to be quite so respectful. They took turns warning this most powerful of bankers that he couldn't just keep on conducting bailout after bailout. The public wouldn't accept it, they told him. Of course, this brings up a pretty interesting point. Just what can the public do about it, exactly? The Federal Reserve is a private body, not an arm of the government. Bernanke – and you could see it in his body posture – was there to explain to Congress what he wished to explain, but he certainly wasn't going to explain himself. He would tell Congress what the Fed was up to, but he wasn't going to apologize for its actions, and he wasn't ever going to admit that he might have gotten it wrong.

As heart-wrenching as the economic crisis is for hundreds of millions, the spectacle of the unwinding of the infallibility of central banking is riveting – and we admit to being fascinated by it. The institution was not set up for this kind of stress and scrutiny, not in the era of cable TV and the Internet. Bernanke must wish himself back a decade. His predecessor, Alan Greenspan, appeared when bubbles were still in the ascendant. He could alternately warn about excesses to come and bask in the glory of a rising market and a profitable financial sector. And he could do so while using almost comical language. Nobody played a central banker better than Greenspan. But unfortunately, in 2009, the game is over. Reality bites.

After Thoughts

How will it play out? The longer it goes on, the less credibility the current financial regime will have. Perhaps for this reason the UK's Gordon Brown continues to rush around promoting a global solution that includes alternative energy packages, solar power and carbon traps. Exactly what all this has to do with the economic crisis is unclear. But one has to do something at such times, as a crisis is terrible thing to waste. Unfortunately, Bernanke is not party to political solutions. It is his job to "stabilize" the world's largest economy using the tools of fiat money. But since the entire system of fiat money has now pretty much collapsed, that is a tall order indeed. It cannot end well. The carping that Bernanke faces now is only the beginning. Before it really ends, the world may fall back to a defacto gold standard. Honest money would get us out of this mess.

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