Saturday, December 19, 2009

Ben Bernanke - Person of the Year?

This past week we saw the chairman of the Federal Reserve, Ben Bernanke, chosen as the Time magazine "Person of the Year." By the way, is it me or does the bearded Mr. Bernanke looks a lot like Vladimir Lenin?

No matter...I think that the selection of Mr. Bernanke says a lot about the state of our country.

It seems that our society has turned into a culture which rewards 'bad' behavior which feels good in the short term.

No other Federal Reserve chairman has received accolades such as the Time "Person of the Year".

Yet Mr. Bernanke, who first supported and then implemented policies that inflated the largest housing bubble in US history - which caused a major global financial disaster - is given Time's nomination?

And he has continued his reckless policies - instituting quantitative easing, i.e. printing money out of thin air.

And yes, the stock market is up since Mr. Bernanke began this policy but the US dollar is also down substanially since then and for perhaps the first time in history, nations globally are talking about the "end" of the US dollar.

So why is Mr. Bernanke pursuing this reckless policy of money printing?

The answer is simple - to help his two 'masters' - Washington and Wall Street.

By printing money out of thin air and giving it to Wall Street basically for free, he is helping both bankers and politicians.

First, Wall Street gets "free" money which they can invest into anything and get a return on it. Thus you see most asset markets - stocks, commodities and bonds - all up nicely this year.

But the biggest beneficiary of Bernanke's policies has been the US Treasury. There has been a "wink-wink" silent agreement that much of the 'free' money given to the banks would be plowed into buying US Treasuries to keep interest rates ultra low.

Sounds good...what's wrong with that?

The problem is that you can only go so far in printing money before you run the risk of turning into the modern-day version of Weimar Germany and having a currency which is "just paper."

As I mentioned earlier, foreigners are growing more concerned with US monetary policy each day and are buying only the shortest-term Treasuries.

Most of the longer-term Treasuries are being bought by banks with the Fed's 'free' money. In fact, there is even talk that banks will be "required" to have much of their capital tied up in "safe" long-term US Treasuries!

I can tell you from my decades of experience in the financial markets that the US Treasury market is already in a "bubble." It is perhaps the biggest bubble in financial markets history.

And we have Ben Bernanke to thank for that - trying to fix a broken housing bubble by inflating another bubble in the Treasury market.

If that bubble bursts (and it will eventually), the prices of US Treasuries will drop steeply in value.....

And look who will be left holding the bag (again) with "bad" assets - Wall Street banks, which will be in worse shape than they were in late 2008. And they will again have their hands out for help from US taxpayers.

Bernanke's Time magazine cover will rank up there with the February 15, 1999 Time cover which showed Alan Greenspan, Robert Rubin and Larry Summers - the blowers of the 'tech bubble' among other financial bubbles - as "The Committee to Save the World" and who saved the world from an economic meltdown - temporarily.

Bernanke will be remembered (badly) by the next generation as a man mesmerized by the memory of the Fed's mistakes at a single point in history - 1930-1932 - for whom printing more money was the right answer in every economic situation.


  1. I think your right that it seems we've taken a stance as a country when it comes to rewarding bad behavior. You can't help but come to that conclusion when you look at people we have running the government.

    One thing is for sure, Bernanke is arguably the most powerful man in the world and for that he may deserve a cover. After all, who else has the ability to create out of then air trillions of dollars?