Bernanke: Maestro of misery

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.


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