Stress Test Farce and A Message to Euro-Land



Following the Fed's bank stress test farce, which Jonathan Weil has expertly skewered here, Ben Bernanke saw fit to extend advice to his counterparts in Europe. Let us briefly look at the meat of Weil's critical assessment of the 'stress test' first, which is neatly encapsulated in the following snip:

„Of the 19 bank-holding companies tested by the Fed, four failed: Citigroup, SunTrust Banks Inc. (STI), MetLife Inc. (MET) and Ally Financial Inc., which is majority-owned by the U.S. government. Nobody would have seen the Fed’s exercise as credible if all 19 had gotten passes. On the flip side, just because some banks flunked doesn’t mean the test was credible. Quite the contrary, to buy into the Fed’s conclusions, you would have to accept the theory that market values for many types of financial instruments don’t matter in a crisis. This would be foolhardy.“ How stressful were the Fed’s tests? One anecdote stands apart: Regions Financial Corp. (RF), which still hasn’t paid back its bailout money from the Troubled Asset Relief Program, passed. The footnotes to the company’s latest financial statements tell the story. There, the Birmingham, Alabama-based lender disclosed that the loans on its books were worth $8.1 billion less than what its balance sheet said, as of Dec. 31. By comparison, the company’s tangible common equity, a bare-bones measure of net worth, was $7.6 billion. So if it weren’t for the inflated loan values, Regions’ tangible common equity would have been less than zero, with liabilities exceeding hard assets. In short, the test was a joke, although it had its intended effect. Shares of Regions and other large banks soared, and Regions raised $900 million selling common shares on Wednesday. The company, which hasn’t reported an annual profit since 2007, plans to use the money to help repay the $3.5 billion it got from the Treasury Department in 2008.“

(emphasis added)

So a bank that would be de facto bankrupt if it were forced to mark its assets to market has 'passed' the 'stress test'. You couldn't make this up. Our main conclusion from this is that in spite of all the machinations to bail out the banks on the back of tax payers and savers, these zombies are still insolvent in reality. Needless to say, a 'stress test' that assumes that the market value of assets doesn't matter in a crisis is simply a completely futile and meaningless exercise.

The Fed however managed to get the intended PR effect out of it: after the meme that 'US banks are perfectly fine' has been circulated almost obsessively in the financial media for the past year or so, we now have the official seal of approval on it, which serves to make it 'true', even if it remains a big load of malarkey.

Anyway, having attested that the US banking system is deserving of a clean bill of health regardless of its advanced state of zombification, the good chairman felt he should admonish the guardians of the equally if not more insolvent European banking system to strive for more banking excellence.

According to Bloomberg:

„Federal Reserve Chairman Ben S. Bernanke said Europe must further strengthen its banks and that its financial and economic situation “remains difficult” even as stresses have lessened, according to testimony today to U.S. lawmakers. “Full resolution of the crisis will require a further strengthening of the European banking system,” Bernanke said in testimony to the House Committee on Oversight and Government Reform. The region’s leaders also must “increase economic growth and competitiveness and to reduce external imbalances in the troubled countries,” he said.

Is it even possible to put together a more meaningless pile of pablum? The above elicits a 'duh'. Yes, it would be good if somehow those banks could be be 'strengthened' and if 'growth and competitiveness' could be increased and 'external imbalances reduced'. Thank you oh Great Poobah for letting us in on this!

The Daily Bell has published a brief analysis of this nonsense. Below are a few pertinent snips:

„This is surely a dominant social theme – that banks can be seen as healthy due to so-called stress tests. The whole idea is that the paper moneyreserves held by banks must be adequate to surmount any larger financial downturn. This is part of a larger dominant social theme of the power elite, that central banking economies have banks or even money in the normal sense. In the modern world, money is anything but "normal." […] „And so the elites and their enablers such as Ben Bernanke resolutely pretend that the current system is analagous to previous "honest money" environments. Nothing could be further from the truth. In fact, the exercise is useless for two reasons. First, the paper reserves held by large banks are not really "money" as previous generations understood it. They are simply central bank-issued pieces of paper with fancy printing, or more likely electronic digits. Stress tests might have made sense when banks held fractional elements of gold and silver, but how do they make sense when central banks print paper or simply push a button and send electronic digits from one computer to another?“ […] „Bernanke is nothing but a glorified PR man at this point, trying to keep all the balls in the air. He is running around the world now trying to convince the media and average people that the banking system has grown healthier under his watch. In fact, it is as swollen and unstable as ever.“

Let us also not forget what the call to 'strengthen Europe's banks' really means: it is essentially an admonishment to get on with the socialization of their losses, Fed-style. Taxpayers, savers and all current holders of the euro must be roped in to share in the losses, so that the thousands of banks in the euro area can be kept afloat by hook or by crook (there are over 7,000 banks in Europe. Upon entering the downtown area of a large city, what you see is one marbled bank building after another. Imagine seeing such a concentration of, say, bakeries. Surely everyone would find that odd. Not so with banks apparently). As it were, if Jens Weidmann has anything to say about it, then that won't happen. Unfortunately we can't be sure how much heft his opinion actually has. Weidmann, readers may recall, is on record for stating that he doesn't believe it is the ECB's business to keep insolvent banks afloat.

Keep in mind here that only a tiny percentage – 5.3% as of January 2012 – of the euro area's outstanding money substitutes in the banking system were actually covered by standard money. The rest, some € 3.7 trillion in toto, consisted of fiduciary media. This is a de facto insolvent system, as it could not possibly pay all depositor claims on demand.

The Bloomberg article continues:

„Bernanke said reduced stress is a “welcome development” for the U.S., which echoed the Federal Open Market Committee’s statement last week that “strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.” U.S. banks “have limited exposure to peripheral European countries” such as Greece and Portugal. Their exposure “to the larger, ‘core’ countries of Europe are more material,” Bernanke said. “Moreover, European holdings represented 35 percent of the assets of prime U.S. money market funds in February, and these funds remain structurally vulnerable despite some constructive steps,” he said. The Fed is “not considering” purchasing any of Europe’s sovereign debt as the purpose of the central bank’s authority to buy such debt is only to maintain foreign exchange reserves, Bernanke said in response to questions from lawmakers. He also said the Fed has reviewed the credit-default swaps, contracts that U.S. banks have used to insure against defaults in Europe, and that they are “widely dispersed.” The central bank does not expect a repeat of 2008, when American International Group Inc., a large counterparty on swaps, collapsed, Bernanke said. AIG is “an example of what we don’t see now,” he said.“

(emphasis added)

We were literally in stitches upon reading the last sentence highlighted above. Should the central bank-led fiat money cartel's financial bubble eventually collapse, a second career as a comedian surely awaits Bernanke.

Just let that sentence sink in for a moment: „AIG is an example of what we don't see now.“

Well, AIG is also an example of what they didn't see „then“ either!

Bernanke in late March of 2007:

"The impact on the broader economy and financial markets of the problems in the subprime markets seem likely to be contained."

And what do you know, it really did end up 'contained' – to planet earth!

At least we haven't heard any news yet about subprime related troubles from Betelgeuze and Rigel II, but that could of course be due to the limitations on the speed of communication imposed by Einstein.

Ben Bernanke, dispensing advice to Europe about strengthening its floundering banks.

(Photo via AP)

Central Planning Whitewash



1. The Gold Standard



In an ongoing attempt to enhance the Fed's 'transparency' and 'explain' to the commoners why they absolutely need a benign central economic planning agency to pump up the money supply, distort prices, create boom-bust cycles, bail out banks and retard economic progress, Bernanke has begun a series of lectures consisting of pro-Fed propaganda. This is bound to backfire just as badly as previous 'transparency' exercises. Apparently the Fed doesn't realize that in an age of declining social mood, the organization that is at the heart of the burst credit and asset bubble would do better to keep a low profile if it wants to survive what's coming.

The first part of his lecture dealt with the history of the Fed and contained an attack on the gold standard brimming over with the etatiste Keynesian inflationist shibboleths that have been used as the standard excuse by the purveyors of the fiat money system for a long time. They have also been refuted long ago by a number of eminent economists.

This brought forth a few hysterical headlines, such as the one on Business Insider which boldly proclaimed: “Bernanke just murdered the gold standard“.

Allow us to point out here that governments have 'murdered' the gold standard a good while ago already. By the time the gold standard allegedly 'failed' (in reality, it was simply ditched), they had sabotaged it to such an extent that to even call it a 'gold standard' was a hopeless exaggeration. So there was really nothing for Bernanke to 'murder'. However, if you want to propagandize in favor of a centrally planned inflationary socialist monetary system, you are simply forced to explain why it is allegedly superior to a gold standard. With a gold standard and a free banking system, Bernanke and a great many of his interventionist colleagues in the economics profession would be out of a job after all.

Here are the hoary arguments he fielded:

„Bernanke pointed out various reasons that there's simply "not enough gold" to sustain today's global economy. First, extracting gold from the ground is a costly and uncertain endeavor. There is a limited amount of gold in the world, and it just doesn't make sense in the modern world for central or commercial banks store large amounts of gold in vaults. The size of the gold supply and inconvenience of the metal renders it too impractical to keep up with the pace of global commerce“

There's 'not enough gold' to sustain the global economy? It is in reality completely immaterial how big the money supply is. Imagine that the money supply were to grow tenfold overnight. What would that change, except that we would have to add a zero to every price? Imagine conversely that the money supply were to shrink by 90%. Again, except for having to delete a zero after every price, or rather, move the comma one step to the left, what would that change? Money is the only good that confers no social benefit whatsoever if its supply is increased. As Murray Rothbard explains in 'What has government done to our money':

„What is the effect of a change in the money supply? Following the example of David Hume, one of the first economists, we may ask ourselves what would happen if, overnight, some good fairy slipped into pockets, purses, and bank vaults, and doubled our supply of money. In our example, she magically doubled our supply of gold. Would we be twice as rich? Obviously not. What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor, and capital. Multiplying coin will not whisk these resources into being. We may feel twice as rich for the moment, but clearly all we are doing is diluting the money supply. As the public rushes out to spend its new-found wealth, prices will, very roughly, double—or at least rise until the demand is satisfied, and money no longer bids against itself for the existing goods. Thus, we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not—unlike other goods—confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value. Other goods have various “real” utilities, so that an increase in their supply satisfies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange value, or “purchasing power.” Our law—that an increase in money does not confer a social benefit—stems from its unique use as a medium of exchange. An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit. There is no need to tamper with the market in order to alter the money supply that it determines.“

(emphasis via bolding added, italics are Rothbard's own)

So you can see, the 'there is not enough gold' argument is simply complete bunkum. Note here that like Rothbard, we are not saying that a 'gold standard' is necessarily what is required. What is required is that the free market determine what is used for money. Historical experience shows us that gold is uniquely qualified for this role and is therefore the commodity most likely to be chosen by the market to fulfill this function, but other media of exchange may of course also emerge.

Bernanke then argued:

„Second, while advocates of the gold standard are right that prices remain stable in the long-term, "on a year to year basis, that's not true." Limited supplies of gold—or changes to the supply of gold—cause prices of goods to be volatile in the short term, regardless of long-term price stability.

This totally lame argument is one we actually haven't come across hitherto, probably precisely because it is so utterly lame that no-one else thought to mention it yet. We should reject gold due to 'short term price volatility' in spite of the fact that prices will remain 'stable' under gold in the long term? (actually, prices would likely decline under a gold standard). Is he really serious? There's no 'short term price volatility' under the fiat money system? Can someone please show him a chart of crude oil?

The error come of course from Bernanke looking at a chart of the gold price in dollars and concluding: see, gold is volatile! He completely forgets that one could just as well look at that chart and exclaim: 'wow! See how volatile the dollar is!'

Bernanke's next argument consisted of the typical ex-post rationalization that is always raised once a crisis begins. It is erroneous both theoretically and empirically.

„Bernanke explained, "the commitment to the gold standard is that no matter how bad [the economy gets] we're going to stick to the gold standard." He pointed to a substantial tome of economic research finding that the gold standard aggravated the Great Depression, saying "the gold standard was one of the main reasons the Great Depression was so bad and so long." The inability of the Federal Reserve to control monetary policy—open up credit, address unemployment, and drive business demand—left it with much less power to avert or mitigate the decade-long crisis.“

OK, we'll try to take a deep breath and explain it slowly, so even Bernanke will perhaps understand it. Boom-bust cycles are the inevitable result of credit expansions, this is to say the expansion of fiduciary media in the system which banks create out of thin air by means of fractional reserve banking.

The only reason why the economy gets 'bad' in the first place – leaving aside natural catastrophes and war – is because of these credit-induced cycles. Institute a free banking system on 100% reserves, i.e., a banking system that actually respects property rights and can only lend out funds that have been entrusted to it in the form of savings and its own capital, but not deposits it is supposed to keep available on demand, and there no longer will be boom-bust cycles. A central bank tends to aggravate these cycles by greatly extending the boom periods and putting obstacles in the way of the corrections, so it would certainly not be missed by anyone.

The reason why the Great Depression lasted as long as it did was precisely that both the government and the Fed intervened massively to avert it. If it were true that monetary pumping could be 'helpful' in averting economic contraction, then how do we explain the brevity of the recession of 1920 to 1921 when the Fed refused to pump during a downturn, for the first and last time in its history? How do we explain that in spite of the Fed increasing free bank reserves by 404% between the fall of 1929 and the summer 1933 and slashing its administered interest rate to the bone, there was a 'Great Depression' instead of the brief downturn of 1921?

Bernanke neglects to mention that the true US money supply increased by a hefty 66% in the boom years 1923 to 1929. The faux 'gold standard' did not keep this from happening – the fractionally reserved banks increased fiduciary media in the system anyway and the Fed aided and abetted this.

When FDR first devalued against gold after confiscating it from its rightful owners in 1934, an inflationary echo boom ensued, which was unmasked as completely unsustainable as soon as the inflation and deficit spending were stopped for a mere instant. What could have been a natural and sustainable economic recovery was sabotaged left and right by the interventionists in the administration and at the Fed.

The idea that the Fed had 'far less power to intervene' in the 1930's than today is not entirely incorrect (the monetary bureaucracy's powers have been vastly increased since then), but it proved perfectly capable of inflating all out, which, after all, is exactly what it is doing today as well.

Bernanke's great error is to believe that somehow, the economy was 'short of money'. However, as noted above, wealth creation is not dependent on the money supply. Economic wealth is defined by the capital stock and the production of capital and consumer goods this capital stock enables. Money is merely a medium of exchange – it is not 'wealth' as such.

The error of the interventionists of Bernanke's ilk is that they mistake the resurgence in capital malinvestment that their ministrations routinely bring about for 'economic growth'. It is of course not possible to quantitatively disaggregate the amount of genuine wealth creation the market economy is generating from the amount of capital consumption and waste that results from monetary pumping. However, it can be shown theoretically and irrefutably that increasing the amount of fiduciary media in the system and artificially suppressing interest rates will make society as a whole poorer than it would be otherwise, even while a tiny circle of profiteers near the trough is greatly favored by the policy at everyone else's expense.

The US monetary base from 1920 to 1945. As can be seen, the only time the Fed actually was acting with restraint was in the 1920-1921 recession, as base money was allowed to decline sharply. The recession was over so fast, no-one remembers it today. The gold standard evidently did not keep the Fed from attempting to actively pump up the money supply quite extravagantly after the crash of 1929 (this failed to have an effect in the first three years of the depression, as many banks went under and took their deposit money with them to money heaven). Note that the money supply expansion of the 1920's was mainly achieved by an inflationary credit expansion on the part of the commercial banks, aided and abetted by the Fed. In spite of a relatively stable monetary base, the true money supply expanded by about 66% during the boom – click chart for better resolution.

Bernanke concluded:

„Ultimately, he concluded that the gold standard hasn't really worked since the end of WWI. "Economic historians argue that after World War I the labor movements became much stronger," so we consequently saw, "much more attention to employment and business cycles." That prevents our economies from suffering exaggerated boom and bust cycles, and allowed the Fed to mitigate the effects of the recent financial crisis.“

It is probably no coincidence that it seemingly 'hasn't really worked' since the end of WW I, since the Fed was founded right on the eve of this war – which incidentally, we do not believe to be a coincidence. One of the main raisons d'etre of the central bank administered fiat money system is that it makes fighting endless wars so much easier. By hiding the costs of a war via inflation, governments do not face the same obstacles they would face if they had to raise taxes in order to finance wars.

As noted above, the banking system with the Fed's active participation, increased the money supply by 66% during the 'roaring twenties'. Naturally a gold standard could not protect the economy from the resulting distortions and the eventual denouement. Note that similar to Bernanke today, the people who were at the helm of the central bank at the time and their apologists in academe to a man believed and said precisely what Bernanke apparently believes today: namely that the Fed had 'smoothed the business cycle' and that 'nothing could go wrong' as it could always intervene in the event of a bust. Irving Fisher famously proclaimed the stock market to have reached a 'permanent plateau' in 1929 due to the successful arrangements of the Fed-planned economy. He mistook the absence of rising consumer prices for the absence of inflation, even while the money supply surged and financial asset prices entered a bubble.

To claim that the Fed's existence has somehow protected the economy from 'exaggerated boom and bust cycles' really takes some chutzpa in the face of the 2008 crisis, which according to Bernanke himself was the 'worst crisis since the Great Depression' (over which the Fed presided as well, nota bene). What happened? Did the planners plan to have a crash at the time?

Regarding the 'mitigation' of the crisis via new never before seen extremes in monetary pumping, as we never tire to point out, the short term illusion of lessening the pain of the downturn will once again extract a heavy long term price. The victory laps are both unseemly and way premature.

2. Bubble Apologia



Bernanke apparently used the second part of his lecture to exonerate the Fed from its responsibility for the housing bubble. This takes even more chutzpa than his assertion that the Fed has 'mitigated' the boom-bust cycle.

As the WSJ reports:

„Most evidence suggests the Federal Reserve‘s policy of low interest rates in the early 2000s didn’t cause the recent housing bubble, Chairman Ben Bernanke said Thursdayin slides prepared for a college lecture. While some have argued the Fed’s low interest rates in the early 2000s contributed to the U.S. housing collapse, international examples and the timing of the bubble show otherwise, Bernanke said Thursday in slides for the second of his four lectures atGeorge Washington University this month. For example, house prices rose sharply in the United Kingdom in the same time period, even though the U.K. had tighter monetary policy than the U.S., Bernanke wrote. He also noted housing prices began to pick up in the late 1990s before the Fed began cutting interest rates and rose sharply after the central bank began tightening.“

(emphasis added)

Please keep in mind here that this man is not only a trained economist, but was one of the most prolific writers of peer-reviewed papers in academic journals prior to becoming Fed chairman. Apparently this doesn't keep him from failing to grasp even the simplest economic concepts. Instead he relies on cherry-picked empirical data that seem to buttress his case (and have been helpfully assembled by the Fed's large cadre of professional apologists who often depend on the central bank for much or even all of their income).

You can look at his slides (pdf) if you want, but you will learn nothing from them. Economic theory can not be built upon 'empirical evidence'. It is exactly the other way around: empirical data can only be interpreted with the aid of a correct economic theory. No matter which empirical examples one uses, they can always be interpreted according to the bias of the person doing the interpretation. This is because the market data of the past always describe unique constellations, which have occurred exactly once. They can not be repeated in controlled experiments in order to prove or disprove a hypothesis.

It should be clear that when the central bank artificially depresses interest rates and pumps up the money supply as the Fed did following the Nasdaq bubble, some sector or sectors of the economy will experience a boom. It didn't have to be housing, but real estate is of course very often susceptible to such monetary pumping machinations, due to the long-lived nature of the assets concerned, which makes them analytically akin to capital goods. Let us also not forget that the Über-Keynesians Paul McCulley and Paul Krugman both called on Alan Greenspan to replace the expired Nasdaq bubble with a housing bubble by 'acting irresponsibly', which he promptly did.

Doug French has examined the question of whether houses are more akin to capital than consumer goods in 'Is Housing A Higher Order Good?'. As he points out, one must not forget that land is a major factor in housing related investment. An excerpt:

„In May of 2000, the federal-funds rate was 6 ½ percent and the prime lending rate used by most banks to price construction loans was 9 ½ percent. But with the recession of 2001 and the events of 9/11, a panicked Federal Reserve lowered the federal-funds rate to 1 percent by June of 2003 and banks lowered their prime rates to 4 percent. This lowering of rates made hundreds of housing projects around the country viable, and developers and their lenders reacted accordingly. Billions in development loans were made to finance projects with the contemplated payoff coming from home buyers. In 2001, the Bureau of Land Management (BLM) sold government-owned land to developers for $26,672 per acre in Las Vegas, Nevada. Four years later, BLM acreage was going for $270,000 per acre. So while land prices were increasing tenfold, the medium new-home price shot from $130,000 in December 2000 to $350,615 in early 2006. The raw land cost is generally 10 to 25 percent of a home. And it was low interest rates that were spurring these huge increases in hot markets like Las Vegas. "As in the case of any other good," Murray Rothbard explained in Man, Economy, and State, "the capital value of land is equal to the sum of its discounted future rents." The value of the land increases as the capitalization rate falls with interest rates. Thus when the Fed lowered rates, the present value of the implied future rents on land became more valuable. "Ground land, then, is 'capitalized' just as are capital goods, shares in capital-owning firms, and durable consumers' goods," Rothbard wrote. Although there were increases in materials and labor during the housing boom, the primary factor that drove up housing costs was the cost of land. Human resources especially were directed away from producing consumer goods and services towards the development of housing projects. People flooded into real-estate-related industries — the obvious being construction and real-estate sales. At the height of the boom, 11 percent of employment in Las Vegas was directly in construction, while at the same time one in every hundred people in Sin City had a real-estate license. But jobs indirectly involved in real estate also boomed: title-insurance companies couldn't hire enough people, along with engineers, architects, appraisers, and the like. Plus, furniture stores popped up everywhere, because every new home needed new furniture and appliances. And when houses are built, the signal is sent to commercial developers that more shopping centers are needed. It is thought more office space will be needed because of the increase in indirect real-estate-related jobs, and more industrial space will be required because contractors are expanding to participate in the home-building boom. In mid-2004, the Fed began to raise rates and by June 2006, the federal-funds rate was 5.25 percent and bank prime rates were 8.25 percent. The punch bowl had been taken away, and the cost of interest for development more than doubled. And the land underneath these houses became less valuable as capitalization rates rose with interest rates. Now there are said to be 2.4 million redundant homes in America — the result of real-estate developers being induced by low interest rates to undertake the long and risky development process.“

(emphasis added)

In other words, there can be no doubt whatsoever that the Fed's policies were the primary cause of the housing bubble. It should be obvious also when looked at from a different angle: for instance, between 2001 and 2002, the true US money supply grew by 21%. It moderated thereafter, but money supply growth only really slowed down from 2004-2007. Would people have been able to pay higher and higher prices for houses absent this vast increase in the money supply? Of course not! If the money supply had been stable, then higher prices for some goods would have automatically lowered the demand for other goods, causing their prices to fall.

Bernanke's slides 'prove' only that he is eager to see to it that the Fed escapes blame for having been instrumental in causing the biggest economic catastrophe of the post WW II era. He himself was among the group of men that have been responsible for this calamity and knowing his views, we would bet that he was among those most forcefully arguing in favor of lowering administered interest rates to a ridiculous level of 0.75% at the time.

Bernanke also couldn't keep from mentioning the so-called 'Great Moderation', a term he coined himself:

Bernanke noted an earlier period called the “Great Moderation,” mostly under former Chairman Alan Greenspan, enjoyed economic stability, in part from structural change and also “simple good luck may also have contributed.”

The 'good luck' part was due to technological progress (productivity increased sharply due to the advent of the computer) and the opening up of world markets as the communist system was abandoned. It had nothing whatsoever to do with the central bank's policies, which were wholly irresponsible throughout the great credit bubble's build-up phase. Similar to the Fed of the 1920's which allowed a boom to get out of hand because the 'general price level' appeared to be stable, the Fed in the 1980's and 1990's allowed a boom to go unchecked for exactly the same reason.

This shows why it is such a big mistake to rely on empirical data: during times of great economic productivity increases, prices for goods and services should decline under a stable monetary system (by 'stable' we mean a monetary system that does not increase the money supply willy-nilly ex nihilo). It follows logically from this that a policy of 'price stability' will result in a massive inflation of money and credit during such periods – and this is exactly what happened.

Can anyone point out to us on the charts below at which point exactly a responsible monetary policy was pursued? Great Moderation, my foot!

The growth of total credit market debt took off into the blue yonder during the 'Great Moderation' – click chart for better resolution.

The growth of the broad true US money supply TMS-2 under the stweardship of the 'inflation-fighting' Fed – click chart for better resolution.





Conclusion:



Bernanke convinces no-one, except those who are already in the central planning camp. Economists appear to have an odd blind spot when it comes to money: what is widely regarded as economically harmful everywhere else (namely, price controls) appears not to concern them when it comes to money and credit. In those areas governmental price fixing seems to be perfectly fine, even though it has a dismal record of failure throughout history. This is probably due to the fact that so many influential economists are nowadays either directly or indirectly dependent on the State and its agencies for their income, primarily the Fed itself. Unbiased critiques of the central bank and its policies are rare as hen's teeth in the economic mainstream.

Bernanke disingenuously claims that the Fed's policies were the cause of all the good things that have happened in the economy over the past several decades, but denies that it bears any responsibility for the calamities. This is can only be called 'transparency' in the sense that it represents laughably transparent propaganda.

Addendum: Summers Should Better Fall Asleep Again



Surprise, surprise, Keynesians Larry Summers and Brad DeLong are 'pushing for more government spending'. Their new paper tries to add some pseudo-scientific gloss to Tim Geithner's recent 'we must bring the fiscal house in order, but not now', idea, as it proceeds along exactly similar lines. The argument seems to be that it will actually be easier to bring the deficit under control by spending even more money now. Only in the upside-down world of modern mainstream economists can such miracles be achieved. Other than that, you need Jesus at your side at a minimum.

“While the conventional wisdom rejecting discretionary fiscal policy is appropriate in normal times,” in situations resembling the current U.S. economy, additional government spending “will ease rather than exacerbate the government’s long-run budget constraint,” Summers and DeLong wrote” […] It’s important that the stimulus actually boost spending — not just increase the deficit — for the economy to reap a benefit, Summers and DeLong stress, just before launching a brief defense of the often-criticized fiscal stimulus package passed by Congress in 2009 when Summers worked in the Obama White House. The paper cites a string of economists who suggest “that a very substantial fraction of the fiscal stimulus enacted in the 2009 Recovery Act translated rapidly into increased spending.”

If you want to bring your debt down, the conventional wisdom that this is best achieved by spending less is wrong! You can only bring your debt down by spending even more! Let's see how successful the first 'stimulus package' was in this specific regard. After all, it was a great success in terms of 'translating rapidly into increased spending'. So how much money did it shave off the public debt so far, given that the way to bring down the debt is to spend more? Just asking, so let's have a look:

Total Federal Debt: so far, the attempt to lower it by spending more has not been crowned with success – click chart for better resolution.

Maybe Larry and Brad must go back to the drawing board and try again. Of course, they have the 'formulas' to prove that the economy will do just what their model says. The long discredited and probably actually negative 'Keynesian multiplier' probably plays a prominent role in it.

The world would certainly be a safer place if Larry Summers went back to doing this:

When he sleeps, the economy is safe.

(Photo credit: Chip Somodevilla / Getty Images)

Charts by: St. Louis Federal Reserve Research, Miachel Pollaro

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA