As a professional scholar, Ben Bernanke devoted much of his academic life to studying the Great Depression. It is no surprise then, that the cause of the Depression was of particular interest to the current Fed chairman. In the end, Bernanke surmised that it wasn’t so much a particular action that caused the greatest economic downturn the world has ever seen, but a period of inaction, specifically, the time between the crash of 1929 and the beginning of FDR’s New Deal in 1933. He proposed that government was far too slow in taking steps to stabilize the economy and as a result, it took a massive public works program and World War to eventually jump-start the country.
Convinced as he was, when faced with a similar situation he was determined not to make the same mistake as his predecessors. In short, he was determined to stop the markets from failing. Together with Henry Paulson, they provided the framework for the $700 billion bailout of American banks, designed to infuse the market with fresh capital while making the US government a shareholder in the biggest financial institutions in the country.
Fast forward two years and a few things have changed. The majority of the $700 billion has been paid back but the spending hasn’t stopped, nor does Bernanke expect it to. In fact, he expects the United States to enter an extended period of recession, ala Japan since the 1990’s. Coincidentally, Bernanke is an expert of the Japanese economy as well, having studied the rise and fall of the Asian superpower and even lectured at their central bank about how they should have handled the bursting of their real estate bubble.
For a man who wields such an incredible power over the economy, much is expected and demanded. Without getting into my overall opinion of the Federal Bank, I want to talk about what the Fed is doing today to bring an end to this recession. Let me warn you, it is has little to do with real reform and everything to do with regulation and mind games.
By pushing consumerism as the cure for recession, the government contends that we can spend our way out of disaster. It goes like this- Americans lose money because home prices drop and jobs disappear, so naturally what was once spending money becomes a mortgage payment and food on the table. Spread that across the entire middle- and lower-class America and you can see how retailers and manufacturers are going to have a real problem making money. Retailers and manufacturers cut back on hours further exacerbating the problem.
What do you see as the problem in this scenario? The Fed has looked at this and said, “Aha! The problem is people aren’t spending enough money. We must find a way to make them part with their hard-earned dollar.” Alas, the Fed can’t force you to spend money (only Congress can do that, via taxes and the healthcare bill) but they can trick you into thinking that you can’t afford not to spend money. How? By lying about rising inflation to make consumers think their dollar is going to lose value every day that they don’t spend it. I look at this scenario and I see a consumer who has been forced to make difficult choices because of the state of the economy and should be as conservative with money as necessary to survive.
This inflationary method has been called “elegant” by Dean Maki, chief economist at Barclays Capital Inc., who also said “it’s unclear in practice whether short-term moves in inflation expectations really drive real growth.” I’ll go a step further than that: if this move has any impact at all on the economy, it will be a negative one. The last thing we need is for Americans to get themselves into deeper debt because they fear rising inflation.
Bernanke and Obama have prided themselves on stopping a financial crisis that could have been far worse had they not acted to bail out the banks with TARP and stimulate the economy with ARRA. They might be right- it probably would have gotten worse had they done nothing. The question remains: did they do the right thing for the future of America? This is something I have said before but it is worth repeating. America was founded on the ideal of freedom- the freedom to succeed and consequently the freedom to fail. As a father, there have been times I’ve had to let my kids learn the hard way. It’s painful for everyone, but we are stronger because of it.
This is what we are up against today. We have a central bank that is intent on giving away money they don’t have or didn’t earn and they are hell-bent on getting consumers to do the same thing, all in the name of recovery. Here is an idea: let the market decide what inflation is. Let consumers decide when they can and can’t afford a new car. Take the handcuffs off of small businesses and watch them begin hiring again. If they can’t cut it in this environment, let them go under. It’s simple, really. Freedom and liberty have to become the only currency in America.
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