Federal Reserve Chairman Ben Bernanke should never have left Princeton. He’s much better suited for a lifetime of pontification than real work. Not that chairing the Federal Reserve is real work. Yet, even so, at least as a professor his theories would’ve been mostly harmless.
But the world doesn’t always operate in the ideal; where politics is concerned this is rarely the case. Idiots become president practically every election. Congressmen take digital photos of their most private parts and blast them across the internet. Maxine Waters casts her vote…this is nearly always problematic. But, in the end, their actions don’t largely affect people.
The worse kind of central planners are the ones that actually believe in their powers; that, somehow, they have the ability to control the world and make it a better place. They are the most dangerous. And they will not stop carrying out their splendid plans until they’ve totally destroyed the world around them.
No doubt, the most ardent central planner always has the best of intentions. In their dense skull they believe that if people would just behave how they wanted the money problem would be solved, there’d be full employment, and the coming of the new utopia. Throughout history, grand experiments in paper money have always ended in tears. We don’t think the current affection with Federal Reserve Notes will end any different…that it has gone on so long is what’s truly astounding.
Eventually, Bernanke or one of his predecessors, having the best of intentions to save the economy, will maneuver the financial system off a cliff. In the meantime, there’s no escape. Bernanke will continue to use his role as the central planner extraordinaire – the central banker of the world’s reserve currency – to meddle in the lives of millions.
Extending A Little More Rope
For example, on Wednesday, Bernanke announced his latest scheme to improve the world by monkeying with credit markets. In a rehash of the 1961 “Operation Twist,” the Fed will cash in $400 billion in short term treasuries to buy longer term treasuries with the goal of lowering long term interest rates.
Upon Bernanke’s utterance of the plan, the DOW promptly fell over 250 points. Then, on Thursday it dropped nearly 400 points more. Even more remarkable was the action in treasuries, where yesterday bond traders rushed in to beat the Fed to the punch – driving yields on the 10-Year Note down to 1.69 percent. This must be, without a doubt, the lowest they’ve been in living memory…if not ever.
From what we gather, the move to lower rates will make it cheaper for individuals and businesses to borrow money. But more importantly, after they borrow the money, the Fed wants them to spend it. Since consumer spending makes up 70 percent of the economy, the Fed is hoping to engineer a cheap credit induced spending boom to goose the economy.
Here at the Economic Prism we understand the mechanics of the plan. Yet we don’t comprehend its functionality. Are not interest rates already at historic lows? Is not the economy’s current malady the result of too much debt…not too little? How the heck will giving people a little more rope to hang themselves with do anything but make things worse?
Apparently, the Fed doesn’t get it. The consumer has enough debt. They don’t want more. They no longer want to spend. They want to save.
On Scientific Management of the Economy and Going for Broke
The Fed, with its latest plan, is rewarding spendthrifts when it should be rewarding savers. Particularly since real economic growth comes from saving and investment not borrowing and spending. But saving and investment takes discipline, prudence, and patience. It takes work.
Of course, there’s no need for such inconveniences when there’s scientific management of the economy. Unfortunately, scientific management of the economy is not conducive with a free market economy…of which we haven’t had for nearly a century. Obviously, this goes counter to the popular ideal that espouses the grand virtues of free markets and democratic capitalism.
Yet how can the Federal Reserve be anything but a revulsion to free markets when they control the economy through fixing the price of money? And how can the Federal Reserve be democratic when it’s run by an unelected – appointed – Board of Governors?
If the Soviets, armed with their Five-Year Plans and the Theory of Productive Forces, were unable to come up with the proper price of toothpaste and toilet paper does a board of appointments somehow have the omnipotent insight to properly fix the price of an economy’s most important commodity – its money?
Nonetheless, that’s what they’re doing. If they can lower the price of money by reducing interest rates just a little bit more, they surmise, the people will spend everything they can borrow and, before you know it, the good times will be here again.
Maybe this worked in the past to quickly rebound from a typical garden variety recession. But this economic lethargy is everything but typical. For the economy’s not being dragged down by an oversupply of goods; rather, it’s being dragged down by an oversupply of debt. That’s why encouraging people to add more debt to the already existing ocean of debt is not helping the economy…it’s hurting it.
“I don’t think he [Bernanke] will ever give up,” said Former Federal Reserve Vice Chairman Alan Blinder. In other words, he’ll go for broke.
for Economic Prism