Over the last two years, Federal Reserve Chairman Ben Bernanke has begun violating conservative monetary policies by funding a third of the Obama Administration’s $5.4 trillion deficit-spend-a-thon through multiple rounds of money printing, called Quantitative Easing. After thirty years of Fed stability produced declining interest rates, these new Fed actions are scarring off traditional buyers. Fearing the inevitable inflation and higher interest rates, China cut their annual purchases of American debt by 80% last year. Consequently, the Fed for the first time in their 100 year history is now in the dangerous position of being forced to finance 100% of America’s exploding debt. Albert Einstein said: “Insanity: Doing the same thing over and over again and expecting different results.” He obviously was intimately familiar with Ben Bernanke!
To justify his action’s Bernanke said: “We have innovated quite a bit in the last few years, and (it) is always possible we could find new ways to provide support for the economy.” Piously he suggested it was; “critical that fiscal policymakers come together” to deliver spending cuts and tax increases that would lower the deficit without stalling the recovery. This rhetoric reminds me of a saying by P.J O’Rourke: “Giving money and power to government is like giving whiskey and car keys to teenage boys.“
Bernanke was one of the top 50 most published economists in the world and the Editor of the American Economic Review, before being appointed Chairman of the Federal Reserve in 2006. Bernanke wrote numerous research papers on the economic and political causes of the Great Depression. The dominant economic theory for the cause of the Great Depression was Milton Friedman’s monetarist beliefs that the Fed caused a depression in the 1930s by allowing the money supply to shrink during the early years of a recession, instead of maintaining a stable amount of cash in the economy. In a Chicago speech in 2002 on Friedman’s 90th birthday, Bernanke reassured conservatives to gain support for being appointed as Fed Chairman when he looked at Friedman and said: “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
When the “Great Recession” hit in late 2008, Bernanke responded as expected by purchasing a $1.3 trillion in Mortgage-backed securities to prevent the money supply from shrinking. When the economy began recovering in early 2010, the Fed appropriately discontinued bond purchases. But with the Democrats solidly controlling the Presidency and both Houses of Congress, they irresponsibly increased deficit spending and passed budget-busting new social legislation. The stock market that had steadily rose by 70% since the bottom of the recession in March of 2009, dropped by 15% after the March 2010 passage of Obamacare, as investors fled over inflation fears.
Instead of allowing politicians to suffer blame for killing off the economic expansion, Bernanke abandoned monetarist stable money creation policies by cranking up the government’s printing presses with QE-2 a few days before the 2010 mid-term elections and QE-3 two months before the 2012 Presidential election. By November 2012 the Fed’s fire house of cash had driven stocks to five year highs, allowing Barack Obama and the Democrats to achieve a surprising election triumph.
But the Fed’s actions have done more damage than simply frighten foreign buyers of U.S bonds. According to the November’s Wells Fargo/Gallup Survey of U.S. Small Business Economic Index Report“, expectations for future hiring just crashed to the lowest level since the bottom of 2008-2009 recession and small business capital spending expectations have also plunged to 2010 levels. More startling is the drop in the percentage of U.S. payroll to population rate fell from 45.7 to 43.7% in November, the largest month-over-month decline since Gallup began tracking it in January 2010.
With Bernanke already buying the equivalent of 100% of U.S. government debt, he has no more monetary ammunition to respond to the coming recession. I am sure that the Administration appreciated Ben Bernanke’s abandonment of economic stability, so that the Fed could fund enough deficit spending to delay the onset of a recession until after the elections. But if the U.S. economy suffers stagflation from rising inflation and falling economic activity due to the Fed’s shenanigans, Ben Bernanke will own the wrath of the American public.