Monday, January 4, 2010

"Helicopter Ben" Is An Asset Bubble That Should Be Popped

My old pal, Benjamin. This entry, as they say, is a great "teachable moment". Now, please let me share a disclaimer that my title does not mean any physical harm whatsoever on the distinguished Federal Reserve Chairman. To say the least, the man should most definitely be replaced by someone who is not a Keynesian/Monetarist sycophant. Rather, if anyone should be re-elected to this post (if we must have one), the role should reside with someone who actually knows how business, capital, production, profit, and savings coexist in the private sector. Oh, and another requirement for employment would be that he/she was not born in a think tank.

Ben Bernanke today played the "it wasn't me, it was the lack of regulations" excuse in a purely political and distasteful speech. His reluctance for taking any type of personal responsibility for not monitoring, overseeing, and recognizing the obvious housing (asset) bubble that formed throughout both Bernanke and Greenspan's tenure is just simply astounding. One could even call this act cowardly. The Fed's easy money actions despite numerous forms of empirical evidence that an obvious "carry trade" was taking place is the epitome of dishonesty.

I have numerous problems with Bernanke's policies, economic reasoning, and monetary theory; but this notion that the fault lies with not enough regulations really infuriates me to the bone. Can someone as intelligent (from an IQ standpoint) as Bernanke honestly say with a straight face that ultra low interest rates will not generate cheap capital into sectors of the market that would not otherwise be possible? That dog just won't hunt. When you throw cheap money out of the air from your helicopter, Ben, the money is going to find somewhere to land and collect and it usually goes into places that it should not.

That is the equivalent of saying a bartender (Bernanke) offering an unlimited amount free beer and liquor all night to patrons of his watering hole could NOT have known or even foreseen how people would get wasted or even cause bodily harm to themselves or others when they walk out of the bar and drive home in their car. Any person with an ounce of sanity knows that this would cause (at minimum) some sort of binge drinking reaction and at worst some folks getting really sauced and going on a drunk driving rampage. I guess Bernanke's solution to avoid and prevent this scenario would be to keep the beer/liquor flowing, but to just install a bouncer or two to check the patron's id's to make sure they are of the right drinking age. We all know it's a moral hazard of bad things that are going to happen no matter how many bouncers you hire and what age limit you set for those who can drink. As Senator Bunning mentioned a month or so back: "You, Ben, are the moral hazard."


Easy money is by definition a recipe for creating an asset bubble somewhere. The only question is when and where and how will the bubbles form. As with the current housing bubble, the GSE's Fannie and Freddie were the primary buyers of mortgages (both prime and sub-prime) on the other end that led to the bubbles growing larger and larger. If we were to compare it to the bartender article... the Fannie and Freddie institutions are comparable to the tavern itself providing "get out of jail free cards" after everyone leaves so as to exonerate any of the actions from the drunk patrons who may get into mischief. Then, all of the patrons are basically risk adverse to any harm that may become of them. This is the role we see with Fannie and Freddie. But, there are only so many cards and there is only so many free drinks available. The party has to stop sometime. This is when the party crashes and proverbial bubble bursts.

This boom/bust cycle of creating and then popping bubbles is the very essence of how harmful the Federal Reserve can be to the economy dating back to 1913. This is not to say that without the Fed we would never have asset bubbles. But, the very institution of the Fed and it's modus operandi of central planning monetary policy by artificially setting interest rates, the money supply, and supply of credit to all banking institutions is a detriment to our nation and the free market.

We can already see now the effects of new carry trade plays with the cheap dollar in gold, bonds, equities, and other commodities. The most obvious carry trade going on today seems almost intentional by the Federal Reserve. The Fed has set the Federal Funds Rate/Discount Window price to between 0 & 25 basis points (0% to 0.25%) and the 10 year Treasury increasing to as high as 3.8%. So, at virtually no risk, the banks can borrow money from the Fed at 0% and turn around to lend that money to the Treasury at 2% (5-year bond), you have a carry trade asset bubble in bonds.



If Bernanke wants to really understand how to avoid asset bubbles in the future, re-regulation or more restrictive central planning of key economic sectors is the exact opposite way of averting disaster. His flawed ideas of interventionist monetary policy "pump priming", monetizing debt, and dumping billions of dollars from his helicopter could very well plunge our country into another a very dangerous stagflationary situation the likes of which the world has never seen. I hope that we can avert this and bring back sound economic and monetary sanity before it is too late.

1 comment:

  1. I agree with the carry trade analysis and the Federal Reserve being the main instigator in the whole asset bubble issue we have been dealing with since at least the 80's (savings & loan). The amount of currency they are printing to cover their "friends" and stop deflation from occurring is immoral and unethical. Having a Federal Reserve, in theory, would not be so bad, would they limit themselves to increasing the money supply at a limited rate of say 1%-2% a year and let interests rate float per money demand in the economy as a whole. This way you have a demonstrated restrained money supply that still is growing at a "natural" level relative to the economy writ large. The problem is that people fold to pressure, political and economic, and are unable to control themselves. As the old adage says, "Power corrupts, absolute power corrupts absolutely."

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