STAFF NEWS & ANALYSIS
Bernanke Weighs Limits on Bank Consolidation, Asset Bubbles
By - October 16, 2008

Federal Reserve Chairman Ben S. Bernanke said the central bank will consider discarding its long- standing aversion to interfering with asset-price bubbles and warned that the banking business may be concentrated in too few companies. Officials should review how supervision and interest rates can minimize the "dangerous phenomenon'' of bubbles in housing, stocks and other assets that risk bringing the financial system and economy down with them when they burst, Bernanke said. "There is no doubt that as we emerge from the current crisis that we are all going to look very hard at that issue and what can be done about it,'' he told the Economic Club of New York in his broadest remarks on future regulatory changes since the credit crisis deepened last month. – Bloomberg

Dominant Social Theme: That Ben Bernanke is always thinking!

Free-Market Analysis: Actually, it is starting to seem as if Bernanke will say virtually anything to sound like he knows what he is doing. But what he's saying seems to get increasingly bizarre. Alan Greenspan, Bernanke's predecessor was always talking about asset bubbles (even if he claimed he could do nothing about them) and trying to raise and lower interest rates gradually so as to keep the economy on a fairly even keel. Didn't work in retrospect, nor will Bernanke's newest brainstorm. Of course, why Bernanke is treated as some sort of market savant is beyond us. When he came in, he raised interest rates quickly, and that well may have contributed to the sudden puncturing of the latest bubble.

But, hey, that's what happens when the world's monetary policy is conducted basically on the whim of one man, in this case a mild-mannered MIT professor who is supposed to be an expert in monetary policy during the great depression. Of course if things keep unraveling the way they are, it could be that Bernanke will be able to live the dream of every academic – testing his hypotheses in real-life conditions.

So far there are not many who would give Bernanke much credit for a job well done. In fact, many more down days and Bernanke will probably be targeted as a living, breathing scapegoat while in office. Already, CNN is putting up mug shots of those it wants to make culpable for the great unraveling of 2008 – as if somehow Lehman Brothers, or even AIG or Wachovia were responsible for a worldwide asset de-leveraging.

Meanwhile, here comes Bernanke with his latest brainstorm. The Fed will fix itself! The system will be made perfect! The wise men will succeed finally where they have previously failed. Yet, as always, when reporting on such things, no one in media, least of all Bloomberg, seems willing to ask publicly the one single fundamental question that would bring the whole central banking charade to a crashing close …

How do you know how much money to print?

Understand please, those who run central banks do not know. They have no idea. They always print too much. And eventually you get an asset bubble. It has nothing to do with regulation or morality or fiscal discipline. It is part of the nature of the beast. But, in fact, that discussion must never happen. Anything to avoid touching the third rail of financial reporting. Everything else apparently is allowed (recently the rules seem to have changed more quickly than ever).

No, the monetary elite, like a wolf in a trap, will turn on its own limbs, even to the point of tearing off a paw to avoid the terrible calamity of pondering, even for an instant, the wretchedness of central banking. Reputations will be sacrificed and careers shattered. If Paulson is nervous, or Bernanke is talking compulsively, it is because they know how high the stakes are. Not for us, but for them. Their bosses, those who stand behind the system and cosset it, will likely not let the conversation begin, much less end.

Greenspan himself, who could until recently command tens of thousands of dollars for a single hour's work is likely among the first to feel wrath of the popular press, directed increasingly generously in his direction. Of course, the finger of blame pointing in Greenspan's direction might be aimed there by the current crop of central bankers, themselves. But just as likely it is part of a larger policy of blame.

See, that's the downside of working for those wealthy families and corporate leaders who want to control, in some sense, the world's economy and for the most part have the resources to think they can do it. They can't, but that is beside the point. If you want to work for such powerful people and reap the generous rewards, you need to remind yourself that when the going gets really tough, it is you that will be served up to the ravening masses. Not the system. Not the mechanism. Not the engine. You.

Here's something else that Bernanke said yesterday in his speech:

The U.S. faces "a very serious too-big-to-fail problem,'' in which the insolvency of a large financial company could threaten a market collapse, Bernanke said in reply to an audience question. "There are too many firms that are in some sense systemically critical."

Actually, it is systemic gobbledygook. The Fed creates inflation by printing money and offering too much credit, and then its top men (they are mostly men) trot onstage and hold long, grave press conferences about how they are working diligently to control and contain inflation. Some, in fact, are known as "hawks" while others are known as "doves" – as if the semantics will make a difference to the mechanism which grinds on impervious to it all, printing money, printing money…

And the firms that are "too big to fail?" That's a polite way of saying that the entire system, this time round, has been infected by fiat money and that even the biggest institutions don't trust their counter parties – mostly because when push comes to shove fiat money has no intrinsic value.

The idea that the Federal Reserve under Bernanke and Paulson can formulate policy to prevent asset bubbles is as likely to work as using the wind to control whirlwinds. The Fed is the PROBLEM. Central banking is the PROBLEM. Those who use its awesome (and growing) power are part of the PROBLEM. Central banks produce inflation, so how can those who run them "control" inflation, let alone asset bubbles.

And central banks, sooner or later, produce terrible asset bubbles because those who control the printing press never know when to stop. There is no regulation that can halt the process, no wise men who can craft the foolproof defense. The only way to puncture asset bubbles once and for all is to remove the process of central banking along with its distortive economic elements.

The sad thing is that Bernanke knows it. They all know it. But they are all, Bernanke included, willing to say just about anything at this point to shove away the finger of doom that is gradually being levered in their direction.

Examine it from a psychological point of view as well. If Bernanke is talking about institutions that are "too big to fail" or the "looming threat of inflation" you can be sure that's because he is well aware those issues are about to become the topic du jour on the Internet, where the real economic conversation is happening. And if Bernanke is talking about asset bubbles suddenly, and controlling them through regulatory means, it is most certainly because he has the inkling that somehow the blame for this latest and greatest financial debacle is moving inexorably in his direction. And he is probably right. But he is wrong about using central banking authority to ameliorate financial disasters as a matter of policy.

It is he, Bernanke, who presides over the root cause. But he can't say that. So, just like another fairly prolix individual on the national scene – Barack Obama – he keeps on talking and talking, putting out a new plan every day in the quest to be perceived as in charge and of course "confident."

Remember, confidence is the most important thing when it comes to fiat money, which has no tangible asset base to secure it. Of course, you probably won't hear Bernanke talk about that either. Or that a free-market gold and silver standard is self-regulating (too much gold and silver circulating and mines shut down; too little and high prices open them back up again). See, that's the magic of the marketplace. But Bernanke isn't buying. He wants the system of fiat-money to regulate itself under his morose authority.

After Thoughts

Bernanke really should start to speak about a gold standard again. We thought that might happen, but so far nobody is taking the plunge. Certainly gold is anathema to monetary elite who want maximum flexibility when it comes to controlling fiat currency. But perhaps even here we can find a gold standard of sorts. Only when Bernanke is really, truly, absolutely desperate will he perhaps squeak out the words "gold and silver." Using this methodology, which is just as good a gauge as the one used by central banks to regulate money and credit, we can perhaps begin to understand when even the most miraculous remedies have been put aside and the end-game has begun in earnest.

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