Ben Bernanke's Money Machine Is About To Go Into Overdrive

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On October 15th Ben Bernanke, chairman of the Federal Reserve, gave a speech at the Federal Reserve Bank of Boston outlining his views on the economy and asserted that the FED will pursue its dual mandate vigorously: maximum employment and price stability.

Dr. Bernanke (he has a Ph.D. in economics) was a Princeton University professor before President Bush appointed him to the Board of Governors of the Federal Reserve System in 2002. In 2005, Bernanke became Chairman of the Council of Economic Advisors until 2006, when President Bush nominated him to a 14-year term on the Federal Reserve Board and to a four-year term as its chairman. President Obama reappointed Bernanke to another term as chairman this year.

As an economist, Bernanke is supposed to be an expert on the Great Depression. In his writings, he asserts the Federal Reserve allowed the money supply to decline in the early 1930s, causing the economic contraction that began in 1929 to spiral into a deflationary depression. Thus, Bernanke believes the FED made the greatest of all monetary errors, allowing the money supply to shrink, and has vowed in speeches and both popular essays and scholarly articles that the FED should never allow deflation to occur. As chairman of the FED, Bernanke has been true to his word; the FED has flooded the economy with money to prop up the banking system and has forced short-term interest rates to virtually zero to “stimulate” the economy.

Contrast Bernanke’s economic analysis of the Great Depression with that of Murray Rothbard and other economists of the Austrian School of Economics, who blame the Great Depression on the easy money policies of the FED during the 1920s that ignited an unsustainable boom that burst in 1929. Once the bubble burst and the banks were failing because they too were overextended, the federal government first under President Hoover and then under President Roosevelt intervened massively with higher federal spending, higher taxes, unprecedented regulation of the economy, and more cheap money to prop up the economy. The federal government’s welfare state and inflationist policies turned what would have been a deep and short downturn into a Great Depression. (See the extensive bibliography on the Great Depression and the Great Recession of 2008—2009 from an Austrian School perspective.)

Despite the pseudo scientific rhetoric of Chairman Bernanke’s recent speech, his views can be summed up briefly: We at the FED, make no mistake about it, are central planners who have the tools to create prosperity by manipulating short-term interest rates. We will do what it is necessary to increase employment but now that inflation is too low, we will increase the inflation rate. We will create more dollars to give the economy another shot in the arm! In addition, free markets cannot “deliver the goods” — price stability and sustainable prosperity — and therefore, we have the “best and brightest” people monitoring the economy, so we will act accordingly to achieve our dual mandate.

After reading Chairman Bernanke’s speech, I wondered if anyone at the FED reviewed his remarks. On the one hand, Bernanke says price stability is our goal but now that we have achieved it, the FED needs to create some inflation! So which is it Ben: price stability — low inflation of around one percent as measured by some price indexes — or two percent inflation?

If creating dollars can “stimulate the economy,” why doesn’t the FED send each man, women and child in America say $1,000 every few months? If the goal of the economic policy is to have the American people spend more money, why not do it the old fashioned way — send the people newly created dollars directly?

What Bernanke fails to mention in his speech is that slowly failing prices is normal in a free market economy, as the benefits of greater productivity spread to the general population in the form of lower prices. In short, gradual deflation is normal in a free market. Just think of the prices of cell phones, DVD players, computers, etc., and how they have fallen over the years; they have fallen because in the free market greater productivity causes prices to fall even as the FED floods the economy with money.

In his concluding remarks, Chairman Bernanke stated: “the FOMC (Federal Open Market Committee) is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee’s actions are contingent on incoming information about the economic outlook and financial conditions.”

Those nonconventional policies are purchases of long-term Treasury bonds, that is, another way of saying the FED will “monetize” the federal deficit. With the recent announcement that the federal budget deficit was $1.3 trillion for the fiscal year that ended on September 30, 2010, the FED is about to embark on another bout of massive money creation. In other words, Chairman Bernanke is about to become the Rudolf Havenstein of the 21st century. Havenstein was president of the Reichsbank (the German central bank) during the hyperinflation of 19211923.

Murray Sabrin, Ph.D. [send him mail], is professor of finance in the Anisfield School of Business, Ramapo College of New Jersey. He is the author of Tax Free 2000: The Rebirth of American Liberty. Sabrin is a contributing columnist for www.politickernj.com and blogs at www.MurraySabrin.com.

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