Page 2 of 2 Bernankeism - the art of spreading starvation
By Hossein Askari and Noureddine Krichene
A central bank should not create empty money. It creates money only against
tangible assets such as foreign assets, gold, or safe rediscounts. The dangers
of empty money creation have been analyzed in the Chicago Plan in 1935, which
called for reforms that would curtail money creation by banks by establishing a
100% reserve system.
There is little meaning to recent attempts for reforming banking regulations
when the central bank is destabilizing the banking institutions, fueling
speculation, and distorting the whole price structure. Banks face competition
from thousands of hedge funds and money market funds that are unregulated and
could force banks into higher risk. The Fed has decided to circumvent safe
banks and lend directly billions of dollars to high-risk borrowers through the
Fed’s "innovative lending facilities".
The control of interest rates at near zero bound by the central
bank has caused unimaginable distortions, huge speculation, excessive
redistribution of wealth, and misallocation of resources. To force interest
rates at near zero bound, the central bank stands ready to inject any amount of
money to prevent a rise in interest rates.
Any small retreat of the central bank from defending its near-zero interest
rate target will send interest rates skyrocketing. Speculators today are
presented with a world of near certainty. They are convinced that the US fiscal
deficits are only getting larger and US debt is building up more rapidly. The
US cannot finance such deficits through taxes. If it does, then the tax rates
have to increase from 33% to perhaps 80%. The only alternative is deficit
monetization.
In addition, they know perfectly well that a Bernanke Fed would never lift
interest rates above near zero bound or renounce unorthodox money policies. If
it wanted to, then it would be quickly opposed by the US Treasury. In view of
very low yields on bonds, speculators will aim at reaping large gains from
commodities, stocks, and foreign currencies. These are the only games left in
town.
A repeat of the speculative fever of 2007-2008 is inevitable as already shown
by recent trends in commodity prices and currency movements. Renewed inflation
of food and energy prices would end up disrupting real economic growth in the
same way it did in 2008, when oil and food prices hit a tipping point that
brought the world economy to a grinding halt.
Why is Bernankeism an art of mass starvation? The answer is provided by an
unemployment rate at 9.8% and more than 36 million people in the United States
living on food stamps - no to mention food riots in numerous countries in
2007-08. A main reason for a rising number of food-stamp recipients was high
food prices. The more food prices are jerked up, the more people are excluded
from decent standard of nourishment.
Countries that run monetized deficits suffer a tremendous fall in real incomes
and considerable impoverishment as capital flees to other countries. The faster
the value of money depreciates, the deeper the economy goes into decay. The
more inflationary expectations intensify, the more suppliers will be encouraged
to curtail commodity supplies.
It is a well documented fact that as inflation accelerates, commodities are
withdrawn from markets, leading to further inflation as too much money chases
fewer goods. Withdrawing commodities is a form of hedging and speculation as
suppliers anticipate faster appreciation of commodities.
An economic explanation for mass starvation is provided by complete depletion
of savings and erosion of capital and productive capacity. Wealth is earned
through speculation and borrowing and not through real sacrifice and
investment.
Bernankeism is an ideology similar to other ideologies such as Keynesian
economics, socialism, and communism, one that has supporters who argue for
unlimited fiscal deficits and unorthodox monetary policy as a way to ensure
economic recovery.
Most academicians, politicians, and bankers endorse Bernankeism. President
Barack Obama told the US Congress that his monumental stimulus package and
record fiscal deficits were elaborated by prominent scholars whose experience
and knowledge cannot be doubted. In a larger forum, Bernankeism was endorsed by
the G-20 as the only way to restore world economic growth in spite of the fact
that Bernankeism was the major cause of the financial crisis. In other words,
Bernanke fixes the past errors of Bernanke.
US policymaking under president Ronald Reagan and a narrow segment of the
economics profession offer an alternative approach to Bernankeism to lead the
economy back to growth. Proponents of neo-classical economics and monetarists
do not see the necessity for expanding fiscal deficits and call instead for
restrained monetary and fiscal policies. They believe in the role of the
private sector and call for freer prices and less distortion both in wages and
interest rates.
Freer interest rates would increase savings and allocate capital to the most
productive sectors and to safer investments. Near zero interest rates allow
undeserved accumulation of wealth and intensify the inflation tax burden on the
private sector. They provide distorted and wrong incentives to economic agents.
The main thrust of Bernankeism is to solve overnight an economic and financial
crisis that was in the making during many years of cheap monetary policy.
Bernanke had promised a quick turnaround of the economy and strong growth by
the end of 2007. Recently, Bernanke has announced that recovery was underway.
Unfortunately, the magic of unorthodox monetary policy has not yet occurred,
and more banks continue to suffer or fail under the effect of past excesses.
A combination of record fiscal deficits and unorthodox monetary policy shows
that US financial policies are out of control and are paving the way for more
economic disorders, such as high non-core inflation, unemployment and enduring
economic impasse.
There is no quick and instantaneous solution for the economic crisis. Only
stable and sustainable fiscal and monetary policies can restore satisfactory
level of economic growth and employment.
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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