Friday, July 19, 2013

From Bernanke's Lips

While I do have one bone to pick with John Allison, I have found his book, The Financial Crisis and the Free Market Cure, to be a source for many insights into our economy and how it works. One point he made just popped into my head as I was reading another silly article.

The article, “Loose Lips Sink Euro Bond Markets in Crisis: Cutting Research,” cites “research” about the effect of 25,000 news releases by eruo-zone governments on the sovereign bond markets. They did a statistical analysis on the words and content of all of those news releases. Real science, right? They found that positive announcements tended to have a positive affect and that negative, confusing, or conflicting announcements tended to have adverse affects on the market, i.e., interest rates went higher. Like I said, real science! There was no indication in the news article if the study considered the effect of lies or self-serving political announcements.

Mr. Allison’s point was that every time the Federal Reserve Board made an economic prediction, it was wrong, significantly wrong. That’s right, Mr. Allison points our that the Fed has a perfect record of understanding what was going to happen. Always, 100% wrong. They have no idea what is going to be the results of their policies.

Think of Bernanke’s pronouncements from 2005 to 2008. He was asked how things were. He said, “Fine.” When housing prices skyrocketed, Bernanke said everything was “Fine.” When it was noticed that subprime mortgages began to fail, he said that the economy was “Fine.” When Lehman Brothers failed, Bernanke said that everything was “Fine.” When the economy went into crisis, businesses failed, people lost their incomes, and asset values collapsed, Bernanke claimed that he saved the world.

So today, everyone is hanging on every word that Bernanke says and the market is going up and down like a yo-yo. People are ignoring that there is little to zero investment occurring that would expand production, that there is little growth in employment (of any kind, let alone highly productive ones) to put the millions who lost their jobs back to work, that government debt is swamping our ability to cover current expenses, or that expanded regulation is close to choking our economy.

Why are people paying so much attention to Bernanke? Well, he does have a lot of power. Speaks well of us U.S. voters, doesn’t it. It is also true that today the government, including the Fed, is a major force, if not the major force, in the economy. That’s not good either.

What are we going to do to change it?

But, also important to anyone living in the U.S. or in some way dependent upon the condition of the U.S. economy (nearly everyone alive, right?): you best remember Bernanke’s track record. If he says that were heading into a drought, you better be ready for a flood and our ships won’t float either

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