In Doing the Twist, Bernanke Leaves Out Production
As is well known now, and similarly well commented on, Fed Chairman Ben Bernanke announced last week his latest attempt through central bank machinations to "revive" the U.S. economy. Bernanke's hubristic and absurd presumption that he possesses the ability to boost economic growth from Washington will only make things worse. Stock markets seem to agree.
Captive to the false notion that a revised housing sector, along with the wilting corpses that are U.S. banks will lead our rebirth, Chairman Ben is set once again to quadruple down on the various mistakes and authors of same who delivered on us our present malaise. All of this would be funny if it weren't so sad.
If he were head of Japan's central bank Bernanke would have long ago been forced to fall on his sword, but this being Washington, he'll get to persist in restraining our economy's natural ability to heal itself. Only in Washington do individuals get to fail upwards, and while history books will simply ask "Why" in addressing "Bernanke", "Fed Chairman" and "long, brutal tenure", those of us stuck in the present will continue to suffer a failed central banker's tinkerings.
As a Wall Street Journal news account of Bernanke's "Twist" plan observed, the idea behind it is to purchase long-term Treasuries and mortgages with an eye on lowering long rates, while boosting "investment and spending and provide a shot of adrenaline to the beleaguered housing sector." That too much debt, and specifically too much mortgage debt wrecked the banks and housing sector already doesn't seem to concern our micro-managing Fed head.
Needless to say, he gets it backwards. For one, assuming the failure of many banks absent Bernanke's relentless attempts to tweak interest rates in their favor, this does not in any way presume a major decline in available credit. Most lending, and this has long been the case, occurs outside the banking system.
Of course if a revival of credit is the goal, the last thing a wise central bank head would do is attempt to force rates down below their natural market level. This is true for three reasons.
For one, during downturns it's desirable that rates reach their natural, market-clearing level as a way of ensuring that failed ideas attain no more financial capital to destroy. For two, higher rates ensure that those able to attain credit will borrow with more circumspection such that credit reaches as many worthy economic concepts as possible.
Third, higher rates of interest will serve as a lure to those with savings to enter the marketplace with it; their savings replenishing the base of available capital. Applying the third point to nosebleed gasoline prices that prevailed in Louisiana after Hurricane Katrina, the high prices foretold lower prices for the former serving as a lure to new market entrants.
Looking at the purpose of the low rates sought by Bernanke, they delay the happy process whereby poorly run banks are swallowed by better managers. If allowed to be swallowed amid bankruptcy, the act itself ensures stronger economic growth as banks that didn't make mistakes would be allowed to enter the markets to buy up branches, customers and loans on the cheap. And having purchased on the cheap, they'd be able to aggressively lend in a way that a Bank of America still paralyzed by its past errors never will be able to.
The same applies to housing and commercial real estate more broadly. Rather than attempt to increase home construction and home prices amid a glut of housing, if left alone markets would have allowed a decline in both that would have shifted precious resources to where they're actually needed in a limping economy, while the prudent could have snapped up housing for a song on the way to the housing market reaching a necessary bottom.
Considering commercial real estate, a natural market correction would have allowed those with cash to buy up office space very inexpensively, and for doing so, they'd be able to lease office space to new and existing businesses at a much lower cost. The buyers of the real estate would of course mint money despite renting at lower prices, and businesses would be better situated to achieve profits for their rental costs being lower. This scenario won't reveal itself in an economy enhancing way for Bernanke continuing to gamble on the failures.
As for government spending itself, simple classical economic theory tells us that during downturns governments should rein in their spending as a way of leaving as much credit to the private sector as possible. But with the Bernanke Fed having telegraphed yet again that buyers of the waste that signifies government debt will be protected, there exists little incentive for investors to sell Treasuries in favor of redeploying capital to worthy economic concepts.
Not understood by Bernanke, or perhaps the Fed Chair is unaware, is the elephantine truth that the U.S. economy contracted far more in 1920 versus 2008; the reason we don't hear about that collapse (unemployment at 11.2%) a function of how short it was. Quite unlike today, government spending was cut in half, the dollar's integrity was maintained, and by 1923, unemployment sat at 1.7%. Bernanke is oddly said to be the Great Depression's foremost scholar, but due to his non-knowledge of what happens when economies are left alone - quite unlike during the 1929-30 downturn when Americans suffered mass, Bernanke style intervention - it's apparent once again that he learned all the wrong lessons from a period when government mistakes turned a downturn into a decade-long debacle.
Economists who should know better were trotted out to defend "Twist", and one news account referenced an economist who said Bernanke's latest arrogant attempt to oversee a command-economy style rebound will add .4% to GDP. Missed here is that economies aren't units within countries stimulated by distorted interest rates, rather they're individuals pursuing their economic specialties ideally free of government barriers.
In short, economic growth results from a productive idea being matched with capital; the scenario just described most stimulative in terms of real production when taxes are light, regulations largely non-existent, trade free, and money values stable. Chairman Bernanke, in pursuing his latest attempt at fine-tuning, ignores the all-important factor of production on the shockingly naïve assumption that more spending wrought by lower rates, more debt, and more subsidization of that which has already failed is the answer to what ails us. As individuals we'd never desire to load up on more debt during a downturn, but with Bernanke oblivious to the certain reality that we're an economy of individuals, he's proposing just that.
The deluded Federal Reserve Chairman couldn't be more wrong, and when his latest gambit fails like all the others, we can only hope that maybe, just maybe, our hopeless Fed head will be forced out. Barring that, it's possible that even inside Bernanke there exists a small bit of self-awareness that will drive him to analyze all the harm he's foisted on us such that he'll do us all a favor and simply resign. Hope springs eternal.