Bernanke's Confirmation: No! Err... Well....Okay

Ben S. Bernanke, the Chairman of the Federal Reserve Board, is facing some opposition in winning a confirmation for his second term as Chair. As a man who is nearly universally proclaimed as the savior of the American economy from a deep depression, it seems amazing. The mainstream press has been a cheerleader and books have been written extolling his heroics. What is happening?



My own view of the man is spread throughout this blog, especially in my comments on his speech on January 2nd. He practices a science that is tailor made to not learn of causal relationships. He gives the impression of being non-political. He appears to be the ultimate academic bureaucrat.


Bernanke always appears poised and rock solid in his pronouncements and prognostications. This is his view of how a Fed Chair should be. Unfortunately, he appears rock solid regardless of the veracity or wisdom of his statements. Here are some examples: He appeared poised and rock solid when he said that there was no problem with the rise in housing prices a couple years ago. He appeared the same when he said that the problems with foreclosures would have no impact on the economy. He appeared the same when he said that Fannie Mae and Freddy Mac were in excellent financial health. He appeared the same when he and the Treasury nationalized the failing Fannie Mae and Freddy Mac a few days later. He appeared the same when he began nationalizing banks and put a couple trillion dollars into the economy. He appeared the same when he said that events that coincided with injections of money were coincidences. He appeared the same when he said that the probable cause of the foreclosure problem was the use of risky mortgages offered to substandard credit borrowers, even though he knew that the Fed had pushed with the rest of the Federal government for lowering credit standards for mortgages for years. The guy has an appearance that does not connect to the real world.


I also think that any man who accepts the chair of the Fed has to be regarded as having a questionable psychology. This is one of the most powerful, political positions in the world. Anyone willing to accept that much power over his fellow man has problems.


At this point, there is very little suggestion in the mainstream press that the Fed is responsible for the house price bubble. As I mentioned, there is nearly universal acclaim for his leadership in keeping the U.S. economy from depression. Why then is his confirmation being opposed by several Democrats?


The good news is that several democrats are criticizing Bernanke for the bailouts. The bad news is that they are criticizing the bailouts primarily because these politicians think the companies bailed out are unpopular. It is a play of the class warfare card.


It is okay, they think for the Fed to have pumped a trillion or two into the economy. It is okay for him to have wielded the power he has, along with the Treasury.


One set of criticisms of Bernanke is that he gave too much money to AIG and did not add conditions. These criticisms aren’t that Bernanke bailed out AIG, but that he didn’t do it in a certain fashion. Somehow, in his headlong dash to dole out all the money he could create, Bernanke was suppose to make sure that the money wasn’t suppose to be used for AIG’s actual business, which, in this case, was to insure certain investments tied to mortgage backed securities. If AIG failed to meet its contractual obligations, those companies would suffer sever difficulties and many would fail. What was AIG suppose to do with the money? These congressional critics are all for the use of government money as a means of manipulating the economy, confiscate assets, and generally extend the government’s reach, but they are outraged that the money was used for contracted, normal business activities. It is just another example of the attitude of the political climate that the importance of contract is ignored and denied. The worthiness of attacking a person because their actions inadvertently helped a company that can be attacked for political gain.


One criticism that I have heard only a little is that he has lied at several stages of the bail-out. He lied to BoA on the financial health of Merrill Lynch, and then when they found out the depth of the problem he threatened the Bank’s leadership and implied that he would put someone in their place who would do what he, Bernanke, wanted. The man feels as though he may do as he pleases with his power. He lied about the AIG deal and his representatives at the New York Fed told AIG to keep quite (for which the AIG officials are blamed with the suggestion that AIG instigated the deceit, when it was obviously the Fed). He has lied about the role of the Fed in the lowering of credit standards for sub-prime mortgages, implying that it was the nefarious and evil mortgage brokers, who had only their jobs and businesses to loose. The man apparently feels that any statement he makes is acceptable because he is “saving” the country from depression. He must “do all it takes”, which means forcing people to do what is not in their best interest. At best, Bernanke believes in sacrificing others for the sake of “the greater good”. Not to psychologize, but it is just as possible that he just likes the power.


I have seen that many people are happy that Bernanke may be rejected. They are joining the chorus, albeit a small one at the moment, in calling for his confirmation to fail. Bernanke should be fired, at the very least. He should not continue in a post that he doesn’t understand and mishandled so badly. I cannot deny that I too would feel good about the Senate sending him home. But. But! BUT! There is a small, okay, a big problem.


If Bernanke, the lying, self-deluded, power craving, freedom destroying, bureaucrat loses his job on Sunday. What happens? Obama gets to appoint a new Fed Chairman. Obama. Obama gets to appoint the person who is quite possibly the most powerful person in the world economy. Obama.


I am afraid. The prospect of Obama placing a person in the Fed Chair frightens me more than Bernanke does.


I have not kept track of Obama’s appointments. But from what I can tell, his people are radical, anti-freedom socialists and fascists. I am not aware of a single competent person. The guy at the Treasury is the one who forced through much of the current economic plan as head of the New York Fed. He came to the government from Goldman Sacks, and he turns out to be a pragmatist of the first order, willing to use government power to control and manipulate. He is not a capitalist. If there are people in Obama’s administration who do not want to actively expand government power, they haven’t made an impact.


So, what can we expect from an Obama appointment that could get through the Senate confirmation process? Anyone who has paid their taxes, including their nannies taxes, who will use the Fed as the means to further corrupt, undermine, and destroy what little remains of our freedom and capitalistic system. Is that better than Bernanke? Bernanke’s one little bitty redeeming piece of character is that he is an academic, as corrupt and pragmatic as that is. He is not overtly political. He is certainly not a supporter of capitalism, and he has shown no willingness to oppose any of Obama’s drive to fascism. Nor will his policies help stabilize and strengthen the economy. But, he is not going to act as Obama’s pawn or tool in the manner that Obama’s own selection would. It is a small difference, but sufficient that I am willing to argue for Bernanke’s return for another term.


If you want to argue that putting Obama’s person into the Fed will make our current situation much worse and that people will rebel against Obama and the destruction of our freedom I am willing to listen. But, I think that it is too early for us to do that. People don’t know any more about freedom and capitalism than they did three years ago. It is still too soon. I think that we can use more time in a slowly deteriorating situation to further our efforts to save our freedom and the United States of America. I want more time.

What is Inflation?

In a discussion of today’s U.S. economy, a serious writer must include inflation. Yes, I am going to talking about inflation. Probably, I am going to talk about it a lot. I guess that makes me a nut, right? I mean only scaremongers and right wing fanatics talk about inflation. Besides, since the early 90’s we have had almost no inflation, I mean only about 2 to 3% a year, which the Fed (the Federal Reserve Board) thinks is close to the right range.

But here is the killer, if you loaned the government $10,000 for a 10-year bond, at a 2.5% inflation rate, you would get back $7,810 of purchasing power. A loss of 22%, guaranteed! If I told you that I was going to give you an investment in which the principle would loose 22% guaranteed, would you like that? (At best, after taxes, the interest paid on the bond would bring the total to maybe $9000. You would still have a loss.)

In addition, any plan to retire ten years later would have to take into account the rate of inflation. None of that sounds as if a “low” inflation rate is a minor deal. And we are talking here about the potential of a higher rate of price inflation in the future, maybe the near future.

Well, what is inflation? That is the question. There are two competing definitions. Actually, if you look practically anywhere on the web, in “official” government materials, or at the writings of mainstream economists, you will find that inflation is defined as “a general raising of prices”. That is, the prices of just about everything in the economy are going up.

Is this definition really helpful? Does it mean something?

Well, maybe you want to know what causes inflation. (Some would argue that a definition should include causes.) This is an area of controversy. We have a difference of opinion. You will quickly find that the sides are drawn this way.

On the side of an answer that is wide ranging and offers little in the way of a means to reduce the threat of inflation. The best statement of this side that I have found so far is:
http://www.wisegeek.com/what-causes-inflation.htm. You will note that all sorts of actors in the economy can be at fault including producers, raw material suppliers, and others, many others. It just depends. I always wanted to know how one, or even a combination of these different actors could cause price inflation that went on for years. Any one of these explanations has some plausibility if you hold your frame of reference to a year or two. But how do you get commodity price increases that cause consumer prices go on from 1990 to 2007? I do not think it will work. I think that the people who use these answers do not actually look at the nuts and bolts. I think they are willing to settle for plausible. I do not like that because we are talking about people’s lives and goals here. Inflation eats away at what a person and their family are depending upon over the course of their lives, even 2%.

Really, think about this. We have all heard that the price of something is the result of supply and demand. When you think about all of the items in the economy, what you really have is that each buyer is allocating his money among the things that they have decided to buy at that time. If something costs more than it did, a person will have to make do with hoping something else will be less expensive, the amount they purchase of that item reduced, or taken off the list completely. If prices continue to go up, more stuff must be scrubbed from the list, unless more money is found. What we generally understand about supply and demand, reasonably, I think, is that the supply consists of the products we want to buy and the demand consists of what we want, our choices. More people want something and its price will tend to go up until there is more of it, and so on. In general, especially in a mostly capitalist economy, that is a good way of thinking about prices. But, in considering price inflation, we have to think more concretely.

At root, supply and demand consists of the products (goods or services) vs. the actual currency, dollars offered for the item. It is a purely mathematical/mechanical thing. At a specific time a certain amount of a product is available and a certain number of dollars is offered and the price is the dollars divided by the number of products. If in the next time period the number of dollars offered is higher per item of product, the price goes up. If the price continues to go up, the number dollars per product is continuing to go up. If this is true generally throughout the economy, then there has to be an increase of in the number of dollars overall. It can’t work any other way. If you look at the U.S. money supply over the years, you will find a constantly increasing supply of money. You will be surprised at the size of the steady increase. (This would be the dollars in the U.S. There is still more money being pumped overseas. Nor do the money supply figures include money that has been created and then invested, say in residential real estate, or in a business.)

That is the other definition of inflation: an increase in the money supply, which can and usually does, lead to an increase in consumer prices (which, for want of a better term, I call “price inflation”). Thus, we have had significant inflation for most of the last 60 years.
So the question is, where do all of those dollars come from? That will have to be the subject of another post. Sorry. The answer is long, complicated, and tedious.

Having just devoted “serious” time and space to talking about inflation, some may say, “But isn’t today’s problem the threat of deflation?” or “But they say that prices dropped this year, and probably will next year, too!”

Prices may have dropped in 2009. Government reports should not be accepted just because they are from the government. The government is not omniscient. What is always important is for you to keep an eye on the things that you and your family need and want. Did those prices go up, down, stay the same? Your personal situation is what counts for you.

More to the point here is that we can do little to change what is happening today, or even in the next several months. My concern is for 2010 and the next few years. Given that inflation is the increase in the money supply, Obama’s plans do make me concerned about what is going to happen. His spending and deficits will tend to put a lot of money into our economy. New money is inflation.

To anticipate my technical discussion of the government’s manipulation of the money supply, the U.S. money supply is increased by means of increasing bank credit, bank loans. Since the recent crisis began, banks have cut down their lending to near zero. That means that the primary money pump has not been working, and consequently, less new money (there is another way new money is introduced, but that is not as large as bank credit manipulation). I will talk about the banks and credit as time goes on.

We are also seeing import prices going up across the board. The value of the dollar has been falling. There are many dollars overseas, and the amount is continuing to increase. It takes only a slight increase in the portion of those dollars to begin coming back to lower the value of the dollar. That is happening. So the prices of imports have been rising. The dollars coming back are also competing for our domestic production, and will be a source for higher prices of our own goods. There are upward pressures on prices today. I think we will see more and more upward pressure as time goes on. Forewarned is forearmed.