Federal Reserve Chairman Ben S. Bernanke (left) said officials must act strongly to overcome a financial crisis and that the central bank's emergency authority helped stem the 2008 banking panic. "Policy makers must respond forcefully, creatively, and decisively to severe financial crises," Bernanke said last night in a speech in Washington. While Bernanke didn't comment on congressional proposals to curtail emergency powers, he said programs created under the authority helped the Fed "restore the flow of credit to American families and businesses." The former Princeton University economics professor and Great Depression historian won a second four-year term in a 70- 30 Senate vote in January, as supporters who credited his actions to counter the crisis and recession prevailed over opponents saying he failed to prevent them. Bernanke yesterday focused on the Fed's actions during the crisis. The notion that "economic prosperity depends on financial stability" was less understood during the Depression, Bernanke, 56, said in at a dinner hosted by the Center for the Study of the Presidency and Congress, which gave him its annual Hamilton Award for government leadership. – Bloomberg
Dominant Social Theme: Without the Fed, we'd be dead.
Free-Market Analysis: Ben Bernanke is back and talking tough! According to the Bloomberg article excerpted above, the mild-mannered Princeton economics professor has a "strong man" inside of him dying to get out. Bernanke wants to portray himself as decisive, a Federal Reserve chairman who took some powerful actions that stopped an unfolding economic crisis dead in its tracks, but is this actually true? Here's some more from the article (excerpted above):
Former Fed Chairman Paul Volcker, who raised interest rates as high as 20 percent in the early 1980s to subdue inflation, went on stage to introduce Bernanke, saying history books will mark his tenure at the Fed a "watershed" in the institution's history. While "inevitable" questions will be raised about the Fed's actions, Volcker said the financial system has been "stabilized" and the economy is recovering.
Some of those questions were raised yesterday by a former president of the Federal Reserve Bank of St. Louis, William Poole. "The Fed did not provide assistance to all on an equal basis but tilted the playing field," Poole said in remarks prepared for a lecture at the University of Delaware, where he is a scholar in residence.
"Why should the Fed have had a program to buy commercial paper from large corporations and no program to help small businesses starved for funds?" The Fed's program to purchase $1.25 trillion in mortgage-backed securities issued by government-sponsored enterprises probably contributed to the demise of the market for non-government mortgage-backed securities and will "complicate monetary policy in the years ahead," Poole said.
For us, Poole's statement touches the heart of the matter. In watching how the financial crisis unwound, one was struck by the alacrity with which Treasury and the Federal Reserve provided funds to large institutions so that they would not fail. This was done, it was explained, because without large institutions there would be no lending.
But why does the West need lending from large institutions? Couldn't small institutions lend just as well? For that matter why is it necessary that banks lend at all? Are banks the only institutions that can lend? As the bailouts continued it must have become clear to many – not just to the alternative media in fact – that the reason banks especially were being stabilized by the central banks was because banks were the distribution arm of central banks' paper-money fiat printing.
It was, then, all about securing the distribution mechanism! These institutions were effectively finished – bankrupt across the board – but central bankers were not about to let their networks fail. So money poured into large banks throughout the Western world. This did absolutely nothing to help the credit crisis, however, as the banks would not lend.
Poole is correct. If the central banks had wished to unlock the financial crisis, they would have lent directly to industry and to entrepreneurs. But central banks were not about to do so. If they had bypassed their distribution channels, it would have become abundantly clear that the current financial system is simply a kind of fiction, replicating what was established hundreds of years ago in a real private marketplace.
Before the advent of the current mercantilist fiat-money system, banks actually did make lending decisions. It was their money after all. But today it doesn't matter. Banks are provided with the funds they are to lend, and in the event of a downturn or a large financial crisis, the bigger entities will be protected and their customers compensated.
Bernanke can claim that his decisive actions saved the banking system – and even the larger financial system. But the institutions receiving the money did not lend. Some of the money eventually found its way into stock markets, especially in America. The stock markets began to rise, and it was hoped this might ignite a feeble recovery of some sort. But it is a most roundabout methodology.
What is abundantly clear is that the powers-that-be are willing to tolerate severe joblessness and continued economic misery rather than go outside the pretend-system of money distribution. It would have been relatively easy to take a tiny percentage of the trillions distributed and provide those funds directly to the West's industrial base. Such a precedent, which likely would have done a great deal to ease the "credit crunch" would have revealed the fiction of the current system, however.
NOTED: Unexpected rise in US jobless claims … The number of US workers claiming jobless benefits for the first time recorded an unexpected rise last week, diminishing some of the recent signs of hope for the labour market. Initial jobless claims rose by 18,000 to 460,000 last week, labour department figures showed on Thursday. Economists were expecting claims to decline. … "The level of claims is higher than one would expect it to be if private non-farm payrolls were really poised to begin sustained gains," said Joshua Shapiro, chief US economist at MFR. –Financial Times (Ed. Note: Another reason why the dominant social theme of a US recovery is having a difficult time gaining traction?)
Bernanke may believe he looked strong and decisive, but he took his actions under the full glare of the Internet. Millions, tens of millions, therefore, watched the scenario unfold and were educated as to the true nature of the paper money charade. This all-too-clear education is the end result of Bernanke's "decisive" actions. It is indeed an important contribution, but maybe not in the way Bernanke intended.