Busted: Bankers and The Global Economy

June 6, 2008

Stability Over the Medium Term

Ben Bernanke, during an address at Harvard University, looked longingly and lovingly at the 1970s. He tried to make the case that monetary policy failed miserably during that time. The result was high inflation in the early 80s.

Bernanke then concluded that high inflation can seriously destabilize the economy and that the central bank must take responsibility for achieving price stability over the medium term. Strangely, the Federal Reserve, as the central bank of the United States, failed then, has failed since then and has failed during this last term during mortgage bubble and bust. While publicly admitting a yearly inflation rate of 2 to 3 percent, the reality holds an average inflation rate from 1980 through 2007 of 10%. Since then, the inflation rate has shot past 20%. Naturally, the authorities that run the country have denied this truth, sticking to the popular idea of a 3% inflation rate. So much for stability over the medium term.

Comparing today’s economy with 1970 is like comparing rotten apples and rotten oranges. Both were sweet while they were ripe and ready to eat. Beyond that, there is no real comparison.

To make a short point, government profiteering, corporate legislation, banking and financial conduct as well as the commodities and futures market put these two seasons in time into very different categories.

Bernanke seemed to gloat as he stated, “I would be remiss if I failed to mention the contribution of monetary policy to the improved productivity performance. By damping business cycles and by keeping inflation under control, a sound monetary policy improves the ability of households and firms to plan and increases their willingness to undertake the investments in skills, research, and physical capital needed to support continuing gains in productivity.”

The Federal Reserve has recently stepped in and completely short-circuited any natural cycle of business or economy by infusing huge amounts of credit into the system with the intent of reducing the pain. The results of the Federal Reserve magic pill so far have only served to put the banking and financial industry into a temporary state of suspended animation in an effort to avoid the perception of total collapse. Bernanke thinks that he has succeeded.

Whether the Federal Reserve is entirely responsible or not, Bernanke seeks to hold on to that responsibility. Since that is the case, the Federal Reserve has failed dismally.

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