It was sad to watch Federal Reserve Chairman Ben Bernanke being forced to hold a political press conference for the first time in the Fed’s 102 year history. Bernanke nervously defended the merit of the Fed subsidizing $3 trillion in Congressional deficit spending and $2 trillion in Wall Street bail-outs; but he looked tired and defeated. He should have just apologized that the Fed’s policies had the unintended consequences of exporting American jobs, igniting world-wide inflation, impoverishing seniors and now threatening the destruction of the AAA credit rating of the United States. Perhaps then he could he could have honestly asked Americans: “Please allow Congress to raise the debt ceiling, so we can continue to spend money.”
Bernanke was a Princeton academic before serving as a Governor of Fed from 2002 to 2005, where he gained notoriety for developing the “Bernanke Doctrine”. The professor theorized the world had entered a period of “Great Moderation” where brilliant economists, like himself, could reduce fluctuations such as industrial production, unemployment, and GDP by “1) improved government economic stabilization policy, 2) financial innovation and global integration, 3) improved inventory control and supply chain management, and 4) and economic good luck.”
After the “9-11” terrorist attack in New York, Ben Bernanke gave a speech that reassured bankers and hedge funds the Fed could manage any shock to the economy titled: “Deflation: Making Sure “It” Doesn’t Happen Here.” The professor stated the Fed “has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief”. He stated that “recession, rising unemployment, and financial stress” could be countered by:
1) increase the money supply through the “printing press”;
2) “print money and distribute it willy-nilly”;
3) lower interest rates – all the way down to 0 per cent to “be able to generate inflation”;
4) control corporate bond yields by lending to banks at 0% and accepting bonds as collateral;
5) “devaluation and the rapid increase in money supply”
6) buy foreign currencies on a massive scale to depreciate the dollar;
7) finance the Treasury’s purchase of U.S. companies with “newly created money”.
When Alan Greenspan retired in 2005, Ben Bernanke was appointed Chairman by President Bush. When the credit crisis began in 2008, the Fed boldly implemented all the tools of the Bernanke Doctrine. The Fed drove interest rates to 0% and financed the largest increase in deficit spending in the history of the world. Congress and the Obama Administration were financed to “willy-nilly” spend trillions of dollars on their crony friends and bail-out GM, AIG, Citicorp and others grossly insolvent companies. The good news is that the stock market fully rebounded and big corporations made record profits; the bad news is seniors who rely on interest earnings from bank savings accounts were impoverished, 7.5 million more Americans are unemployed today than in 2008, Fed sponsored inflation is terrorizing poor nations, residential real estate prices are still dropping, and Standard & Poor’s just warned the United States is at risk of losing its premier AAA credit rating for the first time in history.
As further insult to the Bernanke Doctrine; many of those big corporations that benefited from the deficit spending have off-shored much of the work on their government contracts, while rearranging their affairs to game the payment of taxes. General Electric, the largest recipient of Fed bail-out loans, earned $14.2 billion last year, but did not pay a penny in taxes because the bulk of those profits, some $9 billion, were off-shore. This type of big government favoritism of big business also helps explain why U.S. tax collection as a percentage of GDP dropped from 35% before the Bernanke Doctrine to only 29% over the last two years.
It is now obvious that the Fed’s egotistical manipulation of the economy substantially contributed to the credit crisis. The Fed caused interest rates to be set too low for the speculative activities of highly leveraged banks. According to Stanford economist John Taylor, originator of the Taylor rule for setting interest rates, the Great Moderation resulted from the abandonment of government discretionary macroeconomic policies, like the Bernanke Doctrine, and adoption of rules-based monetary policies for setting interest rates.
Chairman Ben Bernanke had good reason to be nervous at his press conference; the Fed’s failures have helped spark a voter rebellion against big government. Recent polls by Rasmussen Reports indicate that 64% of likely U.S. voters now believe America is overtaxed, 72% believe taxpayers not getting their money’s worth from public schools and 57% favor a government shutdown if it leads to deeper budget cuts. Chairman Bernanke’ and the Fed’s days of wildly manipulating the U.S. economy are over.