In Praise of Scrooge

Federal Reserve Chairman Ben Bernanke did something extraordinarily remarkable on Tuesday…he did nothing.  Following the Federal Open Market Committee meeting, if you can believe it, Bernanke’s Fed statement made no monetary policy changes.

Certainly, this is an exceptional feat.  Remember, Bernanke’s the man responsible for covertly handing out $16 trillion of money created from thin air to U.S. banks, corporations, and foreign banks between December 2007 and June 2010.  Hardly a day goes by that he doesn’t give money to those who didn’t earn it and don’t deserve it.

Wall Street, of course, was disappointed by Bernanke’s inaction.  Surely, with the economy on the wane and the imminent crisis out of Europe, the Fed would come through with a big announcement – like QE3 – to buoy up stocks into the New Year…right?

Unfortunately for Wall Street, in the season of giving, Bernanke wasn’t his usual spendthrift self; he was Scrooge before Scrooge saw Marley’s ghost.  For the rest of us, off Wall Street, who earn and save our wealth in dollars, the additional pause in money printing, may preserve our paper money from turning to toilet paper for – at least – a little bit longer.

Price Discovery

Not that Bernanke’s non-decision is at all restrictive.  The federal funds rate still remains at effectively zero…a rate more accommodative than anything easy Alan Greenspan ever instituted.  But people have come to love and expect much, much more from Bernanke.

Master money printing schemes like CPFF, MMIFF, TAF, QE, and QE2, have become signature moves of the central banker par excellence.  Anything less is cause for intense Wall Street disappointment.

Markets, still dazed from Bernanke’s momentary rigidity, did what they must on Wednesday as traders went “risk off.”  Stocks, gold, oil…you name it, they all went down. Gold was hammered for a 4 percent loss and oil and copper were pounded for a 5 percent loss.

Yet not quite everything went down.  Treasuries, for example, didn’t go down; they went up.  Yields – which move opposite of price – on the 10 Year Note dropped all the way to 1.90 percent.

At the moment, without the explicit pledge of more funny money, markets are free to discover prices.  Obviously, asset prices have been pushed up by heavy Fed intervention over the last several years.  It’s about time they were allowed to clear out some of the price distortions.

In Praise of Scrooge

So has Bernanke had a change of heart and a clearing of the mind?

Not likely.  But after the inescapable attention and interest the Fed brought on itself since the big bailouts of 2008, they must stand aside and allow people a taste of the bitter medicine of unhindered markets.  Certainly, the people won’t be able to stomach much of it.  We suspect DOW 9000 will be enough pain for the masses to beg the Fed to “do something.”

“The sky is falling,” they’ll cry.  “You must save us from ourselves.”

That’s all it will take for Bernanke to regain the political will to crank up the digital monetary presses and add zeros to the back of the existing stock of money.  Just wait… By the second quarter of 2012 central bank money printing will be in full effect.

This time, though, the Fed may not call it quantitative easing…since everyone’s now averse to that.  Instead, they’ll call it something like interest rate targeting…and, at first, everyone will love it.  We’ll be sure to keep you apprised as the Fed rolls things out.  But in the meantime, some praise of Scrooge…

Despite what Dickens said, Scrooge wasn’t entirely a bad guy.  In fact, many of his traits, if practiced in greater numbers, could go a long way to help turn the economy around.  Hard work, prudence, diligence, saving, and capital accumulation.

These are behaviors that lead to real wealth creation.  Yet these characteristics go in and out of favor like tech stocks and turtlenecks…

One generation builds up wealth.  The next fritters it away.  One generation walks upright and cements their contracts with a handshake.  The next talks out of their neck and fills their agreements with conditions and releases of indemnification.  One generation requires their money be based on an unwavering foundation of gold.  The next demands that it floats on an expanding bubble of central banker gas.

In the end, all accounts must be reckoned.  No doubt, Scrooge’s coldhearted ledger books always balanced.

Sincerely,

MN Gordon
for Economic Prism

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