The Scariest Thing About Bernanke A monetarist and a mathematician walk into a bar...

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by Bill Rounds: Privacy



trouble with the world is that the stupid are cocksure and the intelligent
are full of doubt."
~ Bertrand Russell

hundred percent."
~ Ben Bernanke, on his confidence that the Fed will control

Lately, I can’t
help but reflect on Ron
‘s End
The Fed
(ETF). It’s been over a year since I finished
the book, yet I keep pulling it off the shelf. Throughout, Paul
writes insightfully about politics and money in America.

Like this part
about the Bernank:

Some people
have been surprised by Bernanke’s irresponsible conduct of monetary
policy. There was no reason to be surprised. He was on record
promising unlimited amounts of inflation should the need arise.

If Greenspan
was cocky about the genius of central bankers, Bernanke is even
more so.

Paul – unlike some
– is careful with his words. You don’t get many sexy sound-bytes
out of the Rep. from Texas.

So when he
says Bernanke is worse than Greenspan (my interpretation, based
on this and other passages in ETF), it’s noteworthy.

To be sure,
moral hazard flourished under his predecessor. The notorious "Greenspan
put" offered an implicit backstop to banks and kept monetary
conditions plenty loose.

Bernanke and
the current monetary regime, though, are taking things further.
They are determined to keep rates lower than any time in history,
indefinitely. This will lead to pervasive malinvestment, bank bonuses,
and price inflation. Meanwhile, retirees will continue to collect
pitifully low income on their CDs.

But don’t worry;
Wall Street bonuses are safe. Any bank that can’t make money in
this environment should have their damn head examined. Borrow money
at 0%, buy higher-yielding assets. Dip into various gov’t giveaways,
let the bonuses flow, change accounting rules to conceal losses.
Rinse, repeat.

Financial sector
profits are back up to 42% of all corporate profits in the United
States – an absurdly high level. None of this should come as
a surprise I guess, with Bernanke, William Dudley, and a few others
at the helm of the Fed.

Clearly, "the
" has even less of an issue with moral hazard than
Greenspan did, and under his leadership the Fed is even more determined
to "ease" monetary conditions.

Robbing the
middle class and savers blind and enriching the banks are just unfortunate
consequences of what’s good for the economy – or so they’d
have us believe. I see it more as a direct transfer of wealth.

Why Bernanke
is such an economic nightmare

One big reason
the magnificently-bearded one is so frightening is his arrogance.
With a track record as miserable as Bernanke’s, a cavalier attitude
is a job requirement. Big Ben is not a humble man, despite pretenses
that suggest otherwise. Watch
his 60 Minutes interview if you haven’t yet.

There’s also
the nagging fact that the core of the Fed’s mission can be summed
up thusly: "Shoveling money to the banks fixes anything."
It’s just absurd. If you must devalue the dollar and goose spending,
just send everybody a check for $100k and get it over with.

More extreme
than Greenspan

During the
Greenspan era, Ron Paul spent years sparring with the Fed over monetary
policy. Yet in ETF, Paul describes a sort of understanding
with that Fed Chair:

He [Greenspan]
was always aware of exactly where I was coming from… Although
frequently annoyed, increasingly so as the years went on, he never
seemed quite as annoyed or dismayed as Ben Bernanke is with my

After all,
Greenspan was once a proponent of the gold standard, as he famously
outlined in Gold
and Economic Freedom
, an essay he wrote in 1966 for Ayn
Rand’s Objectivist newsletter:

In the absence
of the gold standard, there is no way to protect savings from
confiscation through inflation. There is no safe store of value…
Deficit spending is simply a scheme for the ‘hidden’ confiscation
of wealth. Gold stands in the way of this insidious process. It
stands as a protector of property rights. If one grasps this,
one has no difficulty in understanding the statists’ antagonism
toward the gold standard.

philosophy clearly changed over time as he adopted a more pragmatic,
bank-friendly approach. I’m sure he had plenty of guidance from
the establishment, as well. But at least he held some insight into
the other side’s argument.

Bernanke is
a different animal altogether. He’s a purebred monetarist, weaned
on liquefied greenbacks from birth – all the bad parts of Milton
Friedman; little of the good.

If the Fed
under Greenspan represented a shift towards moral hazard, under
Bernanke it is taking crony-capitalism to new heights.

This economic
vandalism is why some analysts are calling for $5,000 gold. I suspect
the Fed’s mad experiment will be halted before then, which would
likely mark the end of gold’s bull run this time around.

But is $5k
gold really possible? Absolutely.

Remember, we’re
only on QE2. If they can get away with it, I am sure the Fed –
under the leadership of Bernanke or otherwise – will eventually
orchestrate QE3, 4, 5, 6, 7, 8…

At some point
many, myself included, expect gold to go parabolic. We haven’t seen
that yet. The mania phase of this bubble has not even started yet.
When it does, smart money will begin selling metals into strength.
I’d guess that’s still a few years off, but things may change.

P.S. A recent
by Paul Krugman sums up much of what I see as wrong with partisan
economics today. He lashes out against the "free market fundamentalists"
for propping up zombie banks. Mr. Krugman should know better. The
central and private banks are anything but "free-market";
in a true free market, banks would be allowed to fail and
bond defaults would be allowed to occur. You can’t call the banksters
"free market" anything. It’s ridiculous.

If Mr. Krugman
wishes to learn about true free market economics, I suggest he revisit
Hayek, Hazlitt, Mises, and especially Murray Rothbard. Readers interested
in learning more about the Austrian school of Economics should start
at, where you can view
books by these authors (and others), free.

with permission from Wealth

23, 2010

Sharp [send him mail] writes
about finance and stocks for
He blogs at

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