Ralph Benko, QE2, Federal Reserve, Business News, Politics, Obama News, Obama Watch, Tea Party News, Ben Bernanke
Ralph Benko has written an excellent piece in Forbes.com about the disastrous looming effects of QE2, that’s the Fed’s plan to buy $600 bil or more of its own bonds, using printed money, to attempt to stimulate the economy. The Freedomist has covered this move by Ben Bernanke from the start, but Ralph Benko gives extra clarity to the dilemna this move by Bernanke will produce:
Fearing The Reaper: QE2, The 1970s And Rerunning The 1930s
Ralph Benko, 12.01.10, 01:10 PM EST
Slaying the dangerous myth that money creation is economically stimulative.
Is Ben Bernanke’s second round of quantitative easing (dubbed QE2), meaning over half a trillion dollars injected into the financial sector, a calculated use of inflation as a broad-based bailout? Floyd Norris suggests so in his Nov. 25 New York Times piece “Gold Fever: Pondering the Causes.” He writes:
[I]magine the late 1970s came back. We used to call that period “stagflation,” and no one has fond memories of it. Those of us with money would be poorer, because the money would buy less. It would be even worse if we had lent the money for a number of years at the current low interest rates.
But the borrowers would be much better off, and just now they are the ones in the worst trouble. People with homes that now seem to be hopelessly underwater would find they could sell and pay off the mortgage. Banks would discover they had fewer bad loans than they thought they did. Unemployed people could afford to move in search of work.
Norris’ wistful hope that a dose of inflation will produce growth instead of stagnation romanticizes the abilities of the Federal Reserve (and very likely mirrors its thinking). But remember the 1970s? Jimmy Carter thrashed around fecklessly with a misery index of high unemployment and high inflation, blaming conditions on a “malaise” of the American people. The inflation rate produced by Carter’s ( CRI – news – people ) early Fed was around 6% on its way to double digits. The Dow Jones industrial average stood stagnant in the 900s. (No typo.)
Pop culture-wise this age of inflation had us singing along to borderline nihilist classics. Remember “Don’t Fear the Reaper,” sounding like extolling joyous suicide? “Seasons don’t fear the reaper/ Nor do the wind, the sun or the rain. We can be like they are.” Recall “Dust in the Wind”? “All we do/ crumbles to the ground though we refuse to see.”
Bernanke is playing with fire. Congressional thought leader Mike Pence, influential popular commentators such as Sarah Palin and our world trading partners have reacted with outrage to Bernanke’s QE2. Debasing the dollar may give the economy a cheap high. The hangover will be devastating.
Bernanke is a scholar of the Great Depression. Lord Robert Skidelsky–a preeminent scholar of the era, the definitive biographer of John Maynard Keynes and no right-winger–has this chilling criticism in his 11/22 Project Syndicate column:
What was wrong with the Fed’s policy was the so-called quantity theory of money on which it was based. This theory held that prices depend on the supply of money relative to the quantity of goods and services being sold. …
Keynes wrote at the time: “Some people seem to infer…that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States today, the belt is plenty big enough for the belly….”
Now the US, relying on the same flawed theory, is doing it again. … The failure of the G-20’s Seoul meeting to make any progress towards agreement on exchange rates or future reserve arrangements opens the door to a re-run of the 1930’s. Let’s hope that wisdom prevails before the rise of another Hitler.
“Before the rise of another Hitler.” Strong criticism indeed!
As for wisdom prevailing, Carter gave way to Reagan who courageously backed Paul Volcker’s painful but successful effort to “slay the dragon” of inflation. Obama is bringing to the fore respected voices, some of them colleagues and professional associates of this writer.
Many of these voices are calling for monetary policy with intrinsic integrity: multilateral gold convertibility. These voices were long ignored during the decades in which the Fed, inspired by Paul Volcker’s example of rectitude, avoided the moral hazards of purely discretionary monetary policy.
Proposals to look at the classical gold standard now are being taken seriously. On Nov. 29 Indiana Congressman and presidential contender Mike Pence called for just that in a major speech before the Detroit Economic Club. Even wistful technocrats, like Norris, are beginning to invite respectful consideration of a gold convertible dollar. Floyd Norris:
I think (gold) reflects first and foremost a dismay at the current state of the world economy, and a conclusion that the elites who are running it do not know what they are doing.
Or, as a friend of mine put it, “You are buying gold because it is the alternative to this collection of stupid politicians around the world.”
It is not easy to have a calm discussion about gold. There are people who all but worship it and there are people who view it as a barbaric relic of an earlier era.
Like Carter, and Carter’s Fed, begetting Reagan, Obama and Obama’s Fed, are bringing forth a calm discussion of gold. Abundant data indicate that it is a very reasonable policy prescription, one recommended by many sober-sided pragmatists. Admittedly imperfect, it aptly has been termed by monetary scholar Lewis E. Lehrman as the “least imperfect” of monetary policies.
Finding “the alternative to this collection of stupid politicians” is beginning to appear as a most responsible course of action.
Meanwhile: Chairman Bernanke?
We fear the Reaper.
Ralph Benko is a senior advisor to The American Principles Project, an associate of The Lehrman Institute, and author of The Websters’ Dictionary: How to Use the Web to Transform the World.