Page 2 of 2 Time for prayer
By Hossein Askari and Noureddine Krichene
recover to speculative levels, the economy will also recover. His theory of the
Great Depression was that the Fed was liquidationist; unfortunately, his unsafe
monetary policy has been liquidating banks, stocks, growth, employment, and
imposing trillion of dollars in bailouts, activities aptly coined by Joseph
Stiglitz, as "cash for trash".
In spite of a commitment by the Group of Twenty countries to strengthen banking
safety, Bernanke has remained imprudent about monetary policy and totally
oblivious to financial safety. His unlimited liquidity creation will defeat all
bank safety regulations. He has ignored the extensive and predictive literature
on financial
crises that has been expounded since the 18th century, the strong warnings
since 1998 following the Asian financial crisis and the collapse of hedge
funds, expressed by the likes of Maurice Allais and Joseph Stiglitz, about
securitization and the imminent collapse of highly inverted credit pyramids,
and the warnings about the housing bubble.
As a chairman of the Council of Economic Advisors and a voting member in the
Fed, he has never addressed the safety of the policies he was advocating or the
risks of the ensuing asset bubbles.
Bernanke has seemingly ignored capital theory as developed by Eugen von
Bohm-Bawerk and others. Such lack of understanding about capital and money was
indicated from his statement:
With the federal funds rate near its
floor ... the Federal Reserve also established new lending facilities and
expanded existing facilities to enhance the flow of credit to businesses and
households.
Bernanke was certainly fooling the public. The
credit system works from depositors and savings to banks then to borrowers. It
never works from central bank money creation to borrowers. That is pure
counterfeiting, confiscatory, inflationary and totally irresponsible central
banking.
Borrowers do not borrow money for itself. They borrow it to buy real capital.
It is the loss of real capital that is at the heart of the banking crisis. The
Fed's new facilities are not backed by any real capital, and as such they
cannot be enhancing the flow of credit; they are purely redistributive of
wealth in favor of new debtors. If Bernanke's money creation was the creation
of true wealth, all what we need to do to create wealth for Africa is to tell
African countries to run their money printing presses at high speed to have
unlimited wealth! Unfortunately, Bernanke was not the first central banker to
be attracted to printing money. Germany 1920-23, Zimbabwe 2008, and so many
others before, and all with the same result - hyperinflation and unbearable
decline in real per capita income.
As banks have piled up excess reserves, not generated by depositors but
injected by the Fed, that they could not lend safely and profitably, the Fed
has been short-circuiting banks and lending directly at extremely low interest
rates to non-banks, raising serious concern about transparency.
Lack of understanding of capital theory is substantiated by zero-interest
rates. As printing money is costless, the Fed can afford to push interest rates
to zero. However, production of real capital is costly in terms of real
resources. Such a huge distortion of the price of capital goes against
classical capital theory that prices capital in line with its productive power
and time preference, that is, abstinence. Forcing interest rates to abnormally
low levels will undermine banks by making banking unprofitable, squeeze
savings, and undermine investment. As real capital keeps shrinking as it has
been doing in recent years, economic growth and employment will be severely
undermined. Simply put, zero interest rates will give the US the Japanese
economic experience of the 1990s.
Bernanke has forecast recovery and almost no inflation in 2010. Can we believe
these latest Bernanke predictions if his previous forecast of rapid turnaround
thanks to magic interest rates cuts and vast monetary and fiscal stimuli
packages turned out totally wrong? He might be surprised at each testimony by
failing indicators; others, such as Ron Paul, hardly were.
President Barack Obama has announced a blueprint budget that would push
government spending to an unprecedented level, the fiscal deficit to an
unimagined level of $1,750 billion, or 13% of GDP in 2009, and public debt to
the sky, and that makes a mockery of fiscal discipline and restraint. Such a
budget could be the most unsustainable in US history and a blueprint for
long-term economic instability.
If not heavily financed by foreigners, it will swallow all domestic savings and
demolish private investment. Combined with Bernanke's gigantic money creation
and zero interest rates, real savings most likely will disappear for many years
to come and inflationary financing could be unavoidable. Intensifying
inflationary dynamics will erode real activity and accentuate financial chaos
and economic decline.
Let's just pray that somewhere in the ongoing fiscal and monetary chaos there
is a miracle coming to the rescue.
Hossein Askari is professor of international business and international
affairs at George Washington University. Noureddine Krichene is an
economist at the International Monetary Fund and a former advisor, Islamic
Development Bank, Jeddah.
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