There’s a problem with kicking the can down the road
Ben Bernanke, (December 12 2012)
I’ve taken this quote out of context — Bernanke was actually talking about the fiscal cliff, and not monetary policy. But kicking the can down the road is exactly what Bernanke is doing in his domain.
Instead of letting the shadow banking bubble burst and liquidate in 2008, Bernanke has allowed it to slowly deflate, all the while pumping up the traditional banking sector with heavy, heavy liquidity:
It’s been one long, slow brutal grind:
The Fed continues to fight a losing battle, in which it has no choice but to offset any ongoing deleveraging – be it through maturities, prepays, or counterparty failure, or just simple lack of demand for shadow funding conduits – in the shadow banking system.
Trillions and trillions of liquidity later, Bernanke is barely keeping the system afloat:
The reduction in shadow liabilities remains a massive deflationary and depressionary force (and probably the main reason why a tripling of the monetary base has not resulted in very severe inflation). We could have taken the pain in one go back in 2008 — let the failed banks and failed sectors fail, let the junk be written down, and let all efforts go toward rebuilding a more robust system less sensitive to counterparty risk. But we chose to kick the can down the road, and try to reinflate the biggest bubble in history through helicopter drops to the financial sector, the outcome of which has been booming incomes for the rich, and a total lack of growth and opportunity for the poor (except, perhaps for the dubious “opportunity” to join the masses of the long-term unemployment and claim a slice of the increasingly unsustainable welfare pie).
We chose the path of Japan (which has spent the last twenty years depressed) not the path of Iceland (which is emerging from its depression). We chose to kick the can down the road. Like Bernanke said, there is a problem with that. No amount of buying financial sector assets up to an unemployment or inflation or NGDP target — which empirically seems to do more to enrich the financial sector and the big banks than to create jobs — will fix that. The system is rotten, and the debt load is unsustainable.
B is pumping more than I thought, not only is he buying 40 B of MBS and 45 B of treasuries but he is also still doing operation twist for 35 to 40 B extra. At the high side he is pumping 1.5 trillion a year. Actually twist is not pumping but it is money going to the primary dealers which will be used to cause inflation that the fed will not notice.
MIT may as well be sponsoring Bitcoin. In any case, “it doesn’t matter whether it’s Bitcoin or someone else, someone will break the back of this”. (http://www.itnews.com.au/News/325979,is-bitcoin-the-bank-of-your-future.aspx). A global run on central banks will emerge. first very gradually, then rapidly, so that the entire top edge of the financial edifice is defanged simply because people withdrew their support.
Bankers actually believe that what they do is a good thing. This is problem one.
There is no need for credit in a society where each person is responsible for their own life. Without credit, people are forced to live within their means. No money is spent on interest. Prices are now in line with actual costs as there is no financialization costs.
This is called sanity.
“Bankers actually believe that what they do is a good thing.” – although Lloyd Bankfiend takes it further an actually thinks he is doing God’s work.
Re the idea that we would not need credit if we all lived within our means, that’s true, but it would make for a very inflexible economy. E.g. if someone wants to borrow to set up or expand a business, there’s nothing wrong with that is there?
Credit will likely never be eliminated, and almost certainly not in our lifetimes. I agree with anthropologists who say that credit played a very important role in the early development of money.
John, credit is bad, bad, bad, in every way shape and form.
Once you build an economy based on credit, then it seems like it is the way it is. Well, it isn’t. Imagine an economy where the price of commodities is pretty much the cost of human labor contained within. This is what the classical economists were getting at, Smith, Ricardo and even Marx. They saw the financialization process as the pariah of economics.
In a cash economy, cars would cost what people could actually afford to pay. Houses would be the same. This economy is built on a foundation of stealing from the future, not only insane, but obviously unsustainable.
And all of this takes place because there are a group of people who want to sit around and do nothing while collecting the labor-value owned of everybody else.
Banking is theft, no matter how few people understand its true nature.
How do you propose eliminating credit? It isn’t something that has been created in modernity. It’s been around since the beginning of time. My thesis: outlawing credit will just drive it into the black market.
I don’t believe you can eliminate credit any more than you can eliminate war, or murder, or any of the other practices that define pathological human behavior, BUT, you can attempt to control it.
The creditor/debtor relationship is no different then master/slave. This needs to be seen for what it is. The problem is that too many people profit off of this relationship in the quest to get something for nothing, the ultimate form of social dysfunction.
The problem with credit is that it always ends badly. This has been known since Orf lent Dorf three cockroach wings @10% and, as a result, lost his cave and best club to Orf in foreclosure.
Usury was against the law in most societies over the ages from damn good reason!!
Usury was against the law, but that didn’t mean it didn’t exist…
Aziz – Usury might have existed, but it wasn’t promoted by governments like it is today. Heck, even governments borrow from the banks and pay interest. Credit is everywhere, and it brought down the 1920’s, leading to the Great Depression, and it led to the current Great Depression II.
The reason? Everybody wants something for nothing. I don’t think they’ve invented that yet.
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Because ‘you cannot fool all of the people all of the time’. (A Lincoln, 16th US President)
Noel Falconer – an interesting essay re Lincoln. Perhaps the Lincoln history is just more propaganda?
The above article blames Bernanke. Isn’t the truth that Congress won’t countenance enough stimulus, so the idiots that make up 99% of the population look to the central bank to do something. Unfortunately there is a limit to what central banks can do before they engage in “last resort” and very defective policies like QE.
With countercyclical stimulus quality is more important than quantity. Even if Krugman had got his figure, I doubt with this Congress and President it would have really been effective. More handouts to Wall Street rather than productive ventures is my guess.
I agree with you. I personally believe the banks should have received no stimulus and the banks who lent the money to people who could not repay, fail.
Then the Government could have used the stimulus money to fix the infrastructure, build gas processing plants improve ports for export, export all this shale gas. But that is too logical.
Bankers told lies to congress, and effectively extorted money.
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The LaRouche people seem like they are obsessed with Andrew Jackson, as if they’re radical nationalists who only approve of ‘domestic-owned’ as opposed to “foreign-owned” Presidents…
The LaRouche people are an enigma.
If you read the paper, How Andrew Jackson Destroyed the United States, you’ll find that Jackson was run by Aaron Burr, John Randolph, and others, chaining us back to the British system, and the original material from JQA and others, blows out of the water the myth of comparing the Fed with the Bank of the US. Its all original documents, telling the untold story. The bank run by JQA and Biddle was building the nation and breaking us free. You’ll be shocked how the history actually unfolded.
How about self-owned?
People sit down at this meal [the economy] and can’t understand why they are having difficulties eating their 2″ thick steak having but three spoons.
In this part of the cycle [totally dysfunctional system], the only thing that works is stealing as much as possible from the many to prop up the [as eloquently stated by Charles Hugh Smith the other day on his blog, Of two Minds] few and their paper assets.
It’s just constant lies and theft and will be until the they finally give-up.
impermanence – “It’s just constant lies and theft and will be until the they finally give-up.”
Or until they own it all. Then they’ll want a title in front of their names, and we’ll all be bowing to Lord Blankfein and the Earl of Buffet.
bwr, the good news is that you really can’t own anything. So, it’s a pretty temporary arrangement.
Eventually, people figure this out and the “owners” are quickly relieved of their stuff. After all…
…impermanence is swift.
Huang Po d.850 CE
Who is the “our” in his thinking? Certainly not me!
Here’s why people like this are wrong:
Unsustainable level, painfully slow deleveraging, and ignored by central bankers.
So all the economic gains were illusory and were the result of printed money?
Who received the benefit of this printed money? Did they buy real property? If so it should be seized.
Im glad to have found this post as its such an interesting one! I am always on the lookout for quality posts and articles so i suppose im lucky to have found this! I hope you will be adding more in the future…
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