Now that Helicopter Ben has officially handed over to Janet Yellen at the Fed, we should take stock of where we’ve been since the shock waves of 2008 and the big factors potentially shaping 2014 and beyond.
A Tribute To Bernanke – Responsibility Under Cynical Reality
You may be surprised that I have commendations for Ben Bernanke. I do empathize with his dilemma of being caught in office in extraordinary times, with the reality that one can only accomplish what is necessary given the set of circumstances, and not what is the correct or ideal thing.
(1) In retrospect, Ben Bernanke was the only one who acted with conviction in those wretched days of September-October 2008. While Paulson, Geithner, and the elephants and donkeys in Congress were engaged in a haranging ruckus, the reality of doomsday could not sink in due to mutual skepticism about each other’s integrity and credibility. Bernanke’s outsider image and heretofore quiet rectitude became a tour de force. His simple statement “I am absolutely sure of it” brought silence to the circus. The “it” he referred to was the total collapse of money and financial markets and the capitalism we built. To prevent “it”, he insisted that we must succumb to the unthinkable and unsavory act of dousing money like water onto incinerating financial garbages, as the only way to flush them off or diluting them from contaminating the entire money and funding supply. It was a cynical way to prescribe a cure that was the problem to begin with.
In 2011, I wrote (in the Story Of Gold – 2) : “… in an unprecedented period of money explosion (from late 1990s to 2008) … money was not just supplied directly by the Fed, but the market amplified money & credit (M&C) in huge doses through the activities of securitization and derivatives trading. With off-balance sheet exposures, the financial institutions on Wall Street were routinely leveraged up to 60-80 times, as we ran up to the financial tsunami of 2008. When prices on assets fell and as credit counter-parties go under, the amount of “money” to be settled far exceeded the M&C then available to the Wall Street players — hence, G&C (government & central bank) had no choice but to create more M&C, just to keep money-market instruments from collapsing in a domino and into a black-hole, resulting in an even more horrific scenario of money implosion.”
(2) Obviously, Bernanke’s reaction during the crisis required courage (some say balls, which is not quite the same thing). In Chinese medicine, there is a theory that, under certain extreme circumstances, one has to treat poison with poison. In this case, the Fed holds only one half of the monetary equation, with the other half residing in the Administration and Congress. With over a decade now of annual trillion dollar federal spending deficits, the debt bubble has taken on a life of its own. Quantitative easing, by whatever names it may have been called, becomes an automatic process that the Fed has to undertake, short of “pulling the plug” on Uncle Sam (which it can theoretically and legally do). But like blood transfusion or heroin abuse, creating money (the Fed’s IOU) to pay for Uncle Sam’s IOU (US treasury debt) is a shell game that cannot go on indefinitely without someone getting hurt badly. Therein lies the kernel of the current reality — who might that “someone” be? Given the political reality, it won’t be the military, it won’t be the receipients of government handouts, and it won’t be through taxing the rich. If we cannot find means to address the runaway debt, we may end up orchestrating wars and instability in the world, in order to wriggle out of the spiral. It is time to ask the questions: What is this for? Why might it be necessary? Is it worth it? Is there a better way?
I think it is quite poignant that Bernanke chose to leave the Fed at this time. Not to be confused with his predecessor Greenspan’s “timely” exit, Helicoptor Ben made sure he began the tapering process (reducing the amount of money pumped into the banking system automatically every month from $85 billion to $65 billion) before leaving Washington. That is both to dispel the idiocy implied in his nick-name and to remind the country that this QE thing (he calls it “credit easing” and other technocratic jargons) cannot go on and on. He knows to “turn it on”, but he knows to “turn it down” and has begun to do so. He sends a clear signal that someone will have to “turn it off” eventually. I hope history will remember him kindly, but that is an uncertainty because he did create a Pandora’s Box with a questionable future, albeit under a cynical set of circumstances.
The MIT Club?
Another factor certain to affect the financial destiny of the world is the power and influence of the swarm of technocrats who came out of the Economics Department of MIT in recent years. Mario Draghi (ECB), Stanley Fischer (Israel central banker who now serves as Yellen’s deputy), Mervyn King (ex-British central banker), Larry Summers (ex-Treasury Secretary and top candidate for Fed Chairmanship before Yellen was chosen) and Ben Bernanke were all from MIT.
I will discuss that at another time.