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Thursday, August 27, 2009

“Helicopter Ben” vs. “Deflator Ben”

President Obama’s timing of announcing Ben Bernanke’s reappointment as Chairman of the Federal Reserve may not have caused the distraction from the news regarding the federal deficit in which he had hoped. As the federal deficit approaches $1.6 trillion and the debt draws near $12 trillion, Obama has decided to stick with the man who played a significant role in causing this financial turmoil. The starting quarterback has thrown three interceptions, and the score is 21-0 in the first quarter. With no viable backup, the Obama Administration is sticking with their “starter.” However, it is clear that there must be a change in the game plan.

It’s too early for “Hail Mary” passes, and Ben Bernanke is not Roger Staubach. Bernanke’s panicked approach to monetary policy indicates he is afraid of “the bear”…the bear market that is, which is not to be confused with the legendary Chicago Bears’ “46 defense.” Perhaps it is time to slow the tempo of this game down, manage the clock and run the ball. This is not an impossible feat as any member of the 1992 Buffalo Bills who played in the famous “comeback game” will attest. In addition, a one-dimensional offense does not work on the football field or the playing field of economics. Dan Marino was one of the greatest passers in NFL history, but he does not own a Super Bowl ring. “Helicopter Ben”… take a lesson from “Air Marino.”

If Ben Bernanke does not wish to go down in history as the worst Federal Reserve Chairman, he must incorporate a multi-dimensional offense and tough defense in his strategy. When asked about managing asset bubbles, he once said “even if the Fed could identify bubbles, monetary policy is far too blunt a tool for effective use against them.” Bernanke believes that it is easier to clean up the mess after the bubble bursts. It is safe to say that Marv Levy would have preferred to be ahead 35-3 in that famous 1993 playoff game, as the odds for winning would have been much better.

Catch-up football and the Federal Reserve’s strategy of printing money to keep up with government spending have an interesting parallel. Both have very long odds for success. Bernanke is considered to be an expert on the history of the Great Depression, yet his policy does not take into consideration history’s greatest lesson – a nation cannot spend itself into prosperity.

Perhaps Bernanke should seek out a new nickname. How about “Deflator Ben” instead? One of the main reasons why the nation is in perilous financial shape is due to appalling economic policy that does not focus on production and does not use deflation as a remedy to a recession. Bernanke’s predecessor, Alan Greenspan, played a huge role in the crash of 2008 by using low interest rates to induce spending and borrowing whilst outsourcing much of that debt to China and Japan. This policy may have lessened the impact of the previous recession; however, it greatly sharpened the impact of the current demise.

Production is the way out of a recession. The Federal Reserve’s giveaways to induce borrowing and spending will only lead to inflationary nightmares and will make the U.S. dollar worthless. The average American need not plunge farther into debt on account of weak purchasing power.

The price of capital and labor must fall, which will lead to lower prices for goods. When the price of producer goods begins to fall faster than prices for consumer goods, the wheels of the correction process will be rolling. In due time, consumer spending will pick up and market equilibrium will be achieved.

If the answer is so simple, then one must wonder why Ben Bernanke and politicians do not see such a simple solution. Elected officials fear deflation because it is self-correcting. Politicians must sell the illusion that they are needed to “fix” things for people. After the housing bubble burst, prices fell and banks contracted lending. The government responded with financial bailouts which not only prolongs the misery, but stifles the opportunity for capital to be deployed to more opportunistic sectors of the economy. Bailouts, tax credits and all of the other “goodies” politicians give away curtails deflation, and doing so opens the door to more catastrophic consequences in the future.

If Bernanke does not wish to see a repeat of the crash of 2008, he will not repeat the mistakes that were made in “correcting” the recession in the early 2000s. This time, it may not take five years to see an explosion. Economists who are predicting positive GDP growth and cheering over the fact that this ugly recession may be coming to an end is a very hazardous, short-term view. The concern should be on the inflationary impact of the actions taken to “soften the blow” which poses the possibility of a double-dip recession. Will “Deflator Ben” come to the rescue?

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