Federal Reserve Chairman Ben Bernanke flew into London to meet with Governor Mervyn King, his counterpart at the Bank of England, and Prime Minister Gordon Brown at #10 Downing Street on Tuesday. He then went on to deliver the annual Joseph Charles Stamp Memorial Lecture entitled “The Crisis and the Policy Response” to our current global financial system meltdown.
Human Events was there to cover the event — and to quiz Dr. Bernanke in the Q&A session on his Keynesian approach to the systemic money problem. The world’s media covered the event live, including the BBC, CNBC, Fox News, CNN, and Bloomberg. For a clip of our Q&A, see: CNBC Video.
OK. So here’s the problem. Keynesian solutions just don’t work. Throwing money from helicopters (or more likely C-17’s today) might just pull us out of the Great Depression II, but as we stretch the rubber band, eventually the block of deadweight banking system credit will finally spring to life and violently overshoot way before future Fed and Treasury Secretaries can reel in the excess money.
The result? Massive inflation from 2010 onwards. 25-30% would not be surprising through the teens.
Yikes! (That’s a techno-speak economist term for holy s***, it’s that bad…)
So if you think gold is high at $850 today, wait until it reaches $3,000 a troy ounce. Ditto commodities (especially agriculture).
Jim Rogers has been warning about this probability for the past year. He’s been riding the commodity prices all the way down in the process — and he’s still positive about their future. I, for one, wouldn’t easily bet against the co-founder (along with George Soros) of the Quantum Fund.
At the London School of Economics, former home (1931-1950) of Austrian-school founder and Nobel Prize winner Fredrich von Hayek, Dr. Bernanke went on to point out all the Keynesian goodies he has in his “toolkit” which the Fed is using to overcome the crisis.
Chairman Bernanke acknowledges that the bottom line problem — which began with the funny-money mortgages politically made to underqualified borrowers — has seqway’d into a full-blown global loss of trust by just about everyone, consumers and bankers alike, in the present financial system. Or, in FedSpeak: “Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels…Heightened systemic risks, falling asset values and tightening credit have in turn taken a heavy toll on business and consumer confidence and participated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial”.
Of course, the unspoken statement is that the reason that the people don’t trust the present fractional banking system — and are hording their precious cash — is that the entire system is a house of cards, or more like the game of chairs where the last person standing when the music stops doesn’t have a chair to sit on. And nobody wants to be that last person standing when the music stops.
Bernanke goes on to observe, chillingly: “the global economy will recover, but the timing and strength of the recovery are highly uncertain”. That’s telling it like it is.
The Fed’s toolkit — which has been newly invented over the past 18 months — has three groups. They “all make use of the asset side of the Federal Reserve’s balance sheet”. This means, they consist of creating more money out of thin air.
“The first set of tools, which are closely tied to the central bank’s traditional role as the lender of last resort, involve the provision of short-term liquidity”. It’s important to note that the reason the central bank is known as the “lender of last resort” is that when it collapses, the entire edifice falls and a new system must be built to replace the old.
In these cases, the political system often falls as well. Whether a free-market-oriented democracy or a socialist-oriented totalitarian system springs up to replace the former ruin depends on the people — both the average citizen and the elite.
The question is, what kind of new system will arise from the Federal Reserve ashes? Another Keynesian Ponzi-scheme or a solid hard-money-based Austrian-school bank? The reason, of course, that Austrians like gold is it can’t easily be counterfeited by the government. It’s quite a “barbaric metal”. In the people’s hands, it can’t easily be controlled by the bureaucrats. Darn.
It may just be possible, however, that Bernanke and colleagues can begin to move the Federal Reserve away from a fiat-based money system. You don’t really think there’s money in the banks to cover all your deposits, do you? And what do you mean by money, anyway: “legal tender IOU notes”?
Bernanke knows this all too well. And if he can get us through this Keynesian-induced hell with just one more dose of Keynesian money printing, then maybe he’ll have the time somewhere in the future to move the system back to a gold-standard dollar. Hmmm…
The tools in the first set are: 1) cutting fed funds and “discount window” interest rates, 2) increasing the length of the overnight “discount window” from 24 hours to 90 days, 3) the new “Term Auction Facility” which lends more money to the banks for “good” assets, 4) the new “Term Securities Lending Facility” which allows certain stock brokers to borrow money from the Fed for “less-liquid collateral”, and 5) the “Primary Dealer Credit Facility”, yet another bail-out loan facility for otherwise bankrupt stock brokers.
In addition to the above “short term” loan programs to US banks and stock brokers, the Fed has printed up more US dollars to convert into foreign currency using “bilateral currency swap agreements with 14 foreign central banks”. Why? Because the world has run out of dollars to spend in paying its bills! No problem, we’ll print up some more dollars for you too. Happy to oblige!
The second set of policy tools “involve the provision of liquidity directly to borrowers and investors in key credit markets”. They are: 1) money printed up to purchase commercial paper, 2) money printed up to purchase money-market funds, and 3) a Fed-Treasury joint money printing program to buy up AAA-rated student loans, auto loans, credit card loans, and SBA loans.
Finally, the third set of new “policy tools” includes creating more money to buy up longer-term securities including $600 billion in Government-Sponsored Enterprises (GSE’s like Freddie Mac and Fannie Mae) and GSE-backed securities. The home mortgage market “dropped significantly on the announcement of this program”. The message: don’t bet against the Fed’s ability to print mountains of dollars — at least in the short term.
The result of all this newly-created money is that the Fed’s own balance sheet — which took 90 years to reach the first $800 billion — is now well on the way to $3 trillion, and that’s all money created out of thin air.
Consequently over the next 6 months, look for the Fed to bail out ever more failing financial institutions — starting with another multi-billion-dollar kick to the near-bankrupt Bank of America. This second round of funny money will be followed by a third and perhaps more, until we’ll all be swimming in a sea of dollar bills. As the recession bites deeper, the velocity of money — how fast we spend it — slows precipitously, and huge doses of more raw money are perceived by the money controllers as the only way to pull us out of this government-created mess.
What else can they do? The Austrian economist Murray Rothbard revealed the simple answer in his History of Money and Banking. Politicians everywhere need to read it immediately.
Professor Bernanke is a genuinely likeable person with a good sense of humor and a deep knowledge of how the financial world really works. He was warmly received by the LSE students and faculty in London.
Unfortunately, he is also the head of the biggest fiat-banking scheme ever devised by mankind. And he knows it. (Thank you John Pierpont Morgan for your Jekyll Island creation.)
The tell is that his voice waivers when he is saying something that he hopes will come true but is unsure of. Listen to his speeches yourself and you’ll hear what I mean immediately. It’s the giveaway of a basically honest and decent man. Bernanke still needs to fully master the “FedSpeak” of his predecessor, Alan Greenspan.
Alan could easily tell the House Banking Committee about how the Fed was fully in control – and there was nothing to worry about. And they believed it. Yet he was a protégé of Ayn Rand and the author of a marvellous essay on the need for gold-backed central banking in his youth. Years before he too became the head of the Fed.
I truly hope that Chairman Bernanke can pull it all off just one more time. Like a junky hooked on ever-increasing doses of the good stuff, I need just a little more money, please. The withdrawal is too painful and I don’t want to hurt that much. I promise to go straight and reform in the future. Trust me. In fact, trust all of us. We’re all in this together.