Bernanke: Maestro of misery
By Noureddine Krichene
The US enjoyed two decades of prosperity initiated by Ronald Reagan's policies. Come Ben Bernanke, the top economic policy maker of the George W Bush administration, and prosperity ended and was succeeded by falling real incomes; financial chaos spread in the United States and elsewhere.
Bernanke's cheap money policy set off housing, stocks, and commodity booms; all these booms had to crash in 2008 leaving behind bankruptcies; millions of foreclosures; inflation and poverty; debt crises; massive unemployment in the US and Europe; record fiscal deficits; and rapidly rising public debts. With all this lousy record, Bernanke should have retired as Federal Reserve chairman in 2008, along with Bush and the Bush team, or even
rightly been dismissed by the US Congress.
No surprise, Barack Obama entrusted Bernanke to restore prosperity and full-employment. The CEO of Asiana would never retain the pilot of the recent doomed 214 flight; nor would the owner of the Costa Concordia retain the captain of the doomed cruise liner.
Yet Obama wanted a most extreme fiscal policy, which relied on Bernanke's most extreme policy of near-zero interest rates and rivers of money called quantitative easing for its financing. Fanatical about their ideologies, both men were confident that ultra-expansionary policies would yield prompt prosperity and full employment.
Unfortunately, these policies are failing now as they did in the past; economic growth is slow; unemployment and inflation remain high; stock prices have shattered records amid economic stagnation; a housing boom is underway; a currency war is raging; crude oil prices remain high; and massive wealth redistribution is under way via asset speculation, credit, and welfare. Europe and Japan are forced into producing cheap money.
Uncertainty is very high. Bernanke keeps reassuring speculators that near-zero interest rates and rivers of money are to stay around forever (though occasionally hinting at the prospect of a change in tack). He considers money printing a panacea for all: firing up stock and home prices; depreciating exchange rates creating full employment; financing deficits; growing corn; pumping oil; constructing houses; and so on and so on.
Obama and Bernanke have created the most unmanageable fiscal and money disequilibria. US government debt, at 120% of GDP, is still building up due to exceptionally large fiscal deficits; domestic debt, at about 400% of GDP, is rising fast. Bernanke has tied himself to no exit except push forward with more inflation.
Bernanke is like a man who jumps from a tall building and thinks he can stop anywhere he wishes in mid-air. Gravitation forces work differently. He is out of control. If interest rates rise, as in 2005, all credit will tumble; stocks, already highly overvalued, will crash.
To avoid a gigantic collapse, he has to keep printing trillions of dollars. Moreover, Obama has created a large dependency on welfare programs; any cut will severely affect the livelihoods of 100 million or more people who depend on these programs and will be met by ferocious opposition. It is difficult to roll back government spending once it has been put in place.
The US faces a process of large fiscal deficits; trillions of dollars in money printing; near-zero interest rates; and inevitable economic disintegration. The redistributive policy of Obama and Bernanke has maintained rising living standards for its beneficiaries thanks in part to imports and to the status of the dollar as a reserve currency. The US is still able to print dollars and pay for imports of luxurious foreign cars, crude oil, and consumer goods.
US conditions in 2013 are far worse than they were in 2008; the fiscal deficit and public debt have been pushed skyward; the balance sheet of the Fed, at US$3.5 trillion, has no upper bound. Prices of assets and necessities are rising by the day. The situation will be far more intractable by 2016. Somehow, the government causes crisis; it then prevents full recovery and full-employment.
Prior to the popularity of the so-called fiscal, money, and anti-market policies in the 1930s no economy suffered unemployment longer than a short while. Economies hit by crisis returned promptly to near or full employment within a short time thanks to flexible wages, interest rates, and a reallocation of resources.
The data speaks for itself; the unemployment rate was negative in 1906 (ie there was high demand for labor including people not usually reckoned as members of the labor force); it was 2.1% in 1907; 6.3% in 1908; 1.9% in 1909; and 1.5% in 1910. The unemployment rate was again negative in 1919; 1.3% in 1920; 11.2% in 1921; 6.8% in 1922; and 1.7% in 1923. The unemployment rate was 0.9% in 1929; 7.8% in 1930; 16.3% in 1931; 24.9% in 1932; 25.9% in 1933; 20.2% in 1934; and 18.8% in 1938.
The figures show the devastating role of the government. In any country, there is no market mechanism that maintains unemployment above a seasonal and frictional 2%-3%. Only government institutions and laws permit this. The US acquired an institution, called the Federal Reserve, to carry out a cheap money policy; it put in place policies that prevent wage and price flexibility; very high income taxes and tariffs; programs to cut farm output and expand farm subsidies; it devalued the dollar; confiscated gold; and so on.
The more the government intervened, the worse was unemployment. Ten years after the onset of the Great Depression, unemployment was 18.8% in 1938 and it has never returned to the 0.9% of 1929.
Ineffective government policies are not peculiar to the US; the United Kingdom suffered from these policies and left gold forever in 1931. Japan in the 1990s similarly suffered from inefficient government policies.
Academics and media support these policies; they call restraining the fiscal deficit as austerity and condemn it; both academics and media call for more government spending and money printing as a way to prosperity.
The textbook principle is that demand creates supply; the more government creates demand the more supplies of everything are forthcoming; and the more employment is created. Since money is the only constraint to demand, print unlimited money at no cost; hand it over to people through credit or welfare; and the constraint is removed.
Adherents of this principle condemn Say's law of the markets - which stipulates that supply creates demand and in all markets including the labor market.
Five years after the 2008 crisis, Bernanke has continued to improvise Ponzi schemes as the way to prosperity. With near-zero interest rates and unlimited money printing, demand has no limit. The beneficiaries of speculation, credit, and welfare are reaping large free real wealth thanks to Obama-Bernanke unorthodoxy. The money constraint is removed; money is unlimited.
Both Obama and Bernanke are baffled as to why growth and full-employment are so tardy to arrive. If money is free then no one ought to work, except those who print money. At some point, free money becomes worthless; and the economy is without real money.
Bernanke does not understand capital and growth theory. He does not grasp that money creation is not capital creation. Technically, his quantitative easing is counterfeiting, which only steals wealth from losers to hand it to profiteers. Technically, he is no different from jailed Ponzi schemer Bernie Madoff or disgraced Goldman Sachs trader Fabrice Tourre. Counterfeiting can lead to fast consumption of capital and worsening poverty.
Likewise, Obama does not understand that large deficits, high taxes, and inflation cripple economic growth. Unproductive government spending and currency depreciation are no stimulus to the economy. They steal away savings, reduce real wages, and overtax the economy.
Printing trillions of dollars and setting near-zero interest rates are theft and are no remedy to unemployment. Yet, Bernanke and Obama will never renounce their dangerous fallacies. Since printing money is costless, every government can indulge in fallacies and carry out anti-market policies as long as the agony is bearable or until money is extinguished.
Obama and Bernanke's model offers a perfect model of chaos and misery. Any country that follows it will suffer poverty and social disorder. Unfortunately, Europe and Japan are forced into the same model.
Noureddine Krichene is an economist with a PhD from UCLA.