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The case against Bernanke

Reappointing Mr Ben Bernanke as head of the Fed is a mistake, as Stephen Roach correctly concludes in today’s FT. It seems though that Mr Roach is missing the point on Bernanke’s current action.

Mr Bernanke has been no better than Mr Alan Greenspan in understanding the driving forces for this, or any previous recessions and bubbles, and Bernanke is a student of the Great Depression, so he should know. A big driver has always been central bank actions, mostly the creation of cheap money – through low interest rates or as now through what they call quantitative easing. Printing money to you and me!
People are gready. Period! If cheap money is around, people will take advantage of it and leverage up, fuelling asset bubbles. Mr Greenspan’s decision to keep interest rates exceptionally low for a very long time in the beginning of this decade, together with the general central banker myth, that they had defeated inflation and the business cycle, drove us into this current crisis. Give bankers excess production material at rock bottom prices and bankers, like any other person, will build products they know will fly off the shelf as they are sold at sale prices. Hence, ARM (adjustable rate mortgages), negative interest payments, loans to NINJAS (no income, no job, no assets), etc. fuelled a real estate boom of gigantic proportions.

Now, Mr Bernanke is doing the same thing again, letting the printing presses run 24/7, fuelling the market with cheap cash and still at NO interest! Whatever happened to TVM (time value of money)? Today it’s zero. If you have no incentive to save from getting any interest you might as well spend it all at once. Of course many reasonable adults will understand that there may be day when a little extra cash in the bank can be useful and will therefore save, or at least not borrow as much. Most people need the incentive though, one that Bernanke should provide. The only thing that is keeping inflation at reasonable levels at the moment is the banks reluctance to lend. Thank God for that!

Germany tried this strategy in the 1920s and 1930s, printed as much money they could, so they could pay down the debt from the first world war. Anyone remember how that ended? Let me refresh your memory: hyperinflation at around 1 million percent – Zimbabwe style, and ultimately the second world war. Now, the world is a bit different, so hopefully we can avoid a third world war, but hyperinflation, or at least inflation well above any central bankers target is most likely to be around the corner. We saw UK recording 1.8% inflation last week, just a notch below its 2% target.

The response to this should be higher interest rates from central banks, which will throw the economy into recession again. If Bernanke ignores inflation and leaves rates low, we will most likely see 1) hyper inflation or 2) new gigantic asset bubbles – and we all know how those stories usually ends – Bernanke (and Greenspan) apparently doesn’t.
Bernanke shouldn’t have been reappointed, but perhaps president Obama doesn’t have much of a choice at the moment.

FT.com / Comment / Opinion – The case against Bernanke

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