http://www.moneyandmarkets.com/Issues.aspx?Ben-Bernanke-Destroyer-of-Worlds=
-1988
Ben Bernanke: Destroyer of Worlds
by Jack Crooks 07-19-08
I love readers' comments at the end of online articles and blog
entries. I recently came across one at the end of an article regarding
general Federal Reserve policy that simply said:
"Ben Bernanke is like the death star. Destroyer of worlds."
For those of you not up on movie trivia, the comment is referencing
Star Wars. In the film, the bad guys build a manmade space station
meant to destroy an entire planet in a single attack.
And while Bernanke's official job description isn't destroying
planets, some might argue that he's at least destroying the U.S.
economy.
That opinion may have gained greater sup****t this week after
Bernanke's two days of Congressional testimony.
Accompanied by Treasury Secretary Henry Paulson and SEC Chairman
Christopher Cox, Big Ben paid lip service to the panel of Congressmen
bombarding him with questions. While Bernanke gave the normal
reassurances about the state of the economy and inflation, the subject
of giving the Fed additional regulatory responsibilities made for a
heated discussion.
The best quote came from Senator Jim Bunning. When it was his turn to
address the Fed Chairman, he noted, "The Fed is the systemic risk."
Both that reader comment and the Congressional testimony point to the
same thing ...
People Are Sick and Tired of the Fed's Decision
To Fight Economic Fire with Molotov Cocktails!
Almost any economist will tell you that every boom period is followed
by a bust period. And typically, the larger the boom, the larger the
bust.
But it seems like lately the Federal Reserve is disregarding the
historical boom-bust cycle, doing everything in (and beyond) its power
to keep the good times rolling.
Sounds nice, but there comes a point when the economic system needs to
cleanse itself. Hence the subsequent bust to every boom. Excesses need
to be worked off; idle capital goods need to be redistributed or
repurposed; the fat needs to be trimmed.
By making every effort to sustain the boom when it's already naturally
run its course only delays the inevitable; the impending bust will
feel all the more painful. Think about fighting fire with Molotov
Cocktails.
Many analysts, including myself, are beginning to believe the Fed
needs to stop fighting the fire with bailouts and cheap money.
Instead, they need to tighten up and let the market process work
things out from here.
Right now, the Fed is no doubt in bailout mode. Just look at the
obvious Bear Stearns backstop a couple months ago and now the Fannie/
Freddie fiasco. And who knows how many other firms the Fed has saved =97
so far =97 by opening up the vault doors to nearly everyone.
Have a look at the following set of charts. This first one shows the
total borrowings of depository institutions (banks) from the Federal
Reserve from 1980 until 2006:
Total Borrowings 1980 - 2006
You can see a major spike to roughly eight billion dollars of
borrowing in 1984, likely due to the economy's recovery from recession
in years prior.
This spike in total borrowings was also coupled with a brief surge of
inflation (of similar pro****tions to what we're experiencing today)
after Fed Chairman Paul Volcker brought the inflation rate down from
13.5% in 1980 to as low as 3.2% in 1983.
Now, this next chart shows the exact same series of data, only this
time I've included up through June of 2008 ...
Total Borrowings 1980 - current
As you can see, the period up through June 2008 completely dwarfs the
amount of borrowings in any period before it. In fact, it makes all
other periods look like a flat line!
The spike to more than $170 billion dollars of borrowings reflects the
newly created auction facilities.
What This Means for the U.S. Dollar ...
Bernanke recently admitted that the U.S. dollar needed to work off
some of the excesses from the rally that began in the mid 1990s.
That's part of why the bear market has extended so deep for the buck.
The dollar has done that =97 and more.
But the charts I just showed you prove that the dollar is not nearly
out of the woods yet.
Basically, if the Fed doesn't change its attitude and stop feeding
debt creation, asset prices will spiral higher, and more pain will be
crammed into the closet until someone or something knocks the door
open.
Bottom line: The buck is ready to fight back =97 if and when the Fed
realizes they need to HIKE interest rates just as they did in 1984
when they had another inflation scare after bringing rates down too
soon.
And, oh yeah, I hear it every day =97 "It's an election year and the Fed
couldn't possibly use interest rate hikes to teach some lessons."
I say they could, and should. I say we stop giving politicians a free
pass, and start making them earn our votes.
Best wishes,
Jack
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