Ben Bernanke: Juggler of Digits

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by Gary North: Bernanke
Fibbed His Way Through ’60Minutes’

 

 
 

At a circus,
there is always a juggler. If he is dressed as a clown, he is not
a great juggler. If he is in a sequin-covered tight suit, he is
the real thing. He is there to impress us.

The juggler
I most remember was a young man who was juggling a bunch of hoops.
He was really good . . . until he dropped all of them in his grand
finale. They came down in disarray. He picked them up and walked
out of the ring. What else could he do? The finale was not so grand.

What if he
had been juggling the world ‘s interconnected banking system?

What if he
had been juggling in secret?

What if he
had dropped all of the rings?

Ben Bernanke
is a juggler. He juggles digits. He juggles them in secret. He does
this act behind closed doors. In public, he is always dressed in
a business suit. Business suits convey a message: “official in charge.”

In public,
he puts on an air of mastery. “Yes, I juggle. I know exactly what
I’m doing. No, there are no videos. No, there won’t be. But, let
me tell you, I can handle any amount of digits that anyone tosses
at me.”

All Federal
Reserve chairman juggle digits, but no FED chairman has ever juggled
so many in a time of crisis. He got no applause in October 2008.
That was because no one got to see just how many digits he was juggling,
and how very, very fast he was juggling them.

Your economic
future depends on the fact that he does not drop those digits at
the wrong moment. So does mine.

I am taking
steps to prepare myself for the day when he drops those digits,
and they pile up on the floor. Are you?

OFF-THE-BOOKS
JUGGLING

The extent
of his ability is indicated in the 21,000 documents released a week
ago by the Federal Reserve System regarding who got how much money
in the 2008 near meltdown.

At the time,
he preferred that the public not discover just how good a juggler
he is. About a third of the $3.3 trillion that the FED lent to the
banking system got reported as additions to the monetary base: the
FED’s balance sheet.

How did the
FED keep almost $2 trillion in loans (credit) off its books? How
were the digits transferred? No one in the media is asking this.
No one in Congress is asking it.

The entire
theory of banking rests on a premise: for every bank credit, there
must be a borrower’s debt, and both must be on the bank’s books.
But there were about $2 trillion in loans made to banks by the FED
in late 2008 for which there was no credit or debt statement. Anyway,
that was what we were told in 2008.

These five
words come to mind: “Bernie Madoff was a piker.”

This was off-the-books
juggling on a scale so enormous that analysts simply cannot seem
to come to grips with it. What the FED says it did contradicts all
modern banking theory. Where did it get the digital money to lend?
If the answer is, “by creating it in exchange for assets,” I reply:
“Then there has to be an entry for each loan. How were these entries
concealed? Where are they recorded today?” In short,
“How
did the Federal Reserve System inject that much fiat money into
the banking system and not leave a trace in its books?”

This should
be the biggest single economic question on earth today. I can think
of nothing more relevant. It should be the question for graduate-level
courses in accounting, in money and banking, and in finance. It
should be the #1 question asked by Congress of a subpoenaed Ben
Bernanke and equally subpoenaed Federal Reserve accountants. Why
issue subpoenas? Because whenever he is not under oath, which is
always, Bernanke has three words in reserve that always stop Congress
dead in its tracks: “I don’t know.” This works every time!

There
is a great video by a pair of Good Old Boys
who make very effective
use of a video clip of Bernanke uttering his Congress-paralyzing
line. If you have not seen this video, you have a real treat in
store.

The mainstream
media’s response to the procedures used to make these off-the-books
loans has been clear: “There is nothing to see here. Move along.”

By the way,
those words from the first “Star Wars” movie – “move along”
– were uttered memorably by Sir Alec Guinness to the mentally
bamboozled Empire stormtrooper. The phrase has become part of the
American language. This development is altogether positive. The
words are right up there with “I am shocked. Shocked!” from “Casablanca.”
When any writer uses that “Star Wars” phrase, we know that he knows
that there is plenty to be suspicious of, but the authorities are
playing pretend. The phrase is used a lot these days, but not nearly
enough.

Side note.
Guinness did not say, “There is nothing to see here. Move along.”
He said the far more relevant: “He can go about his business. Move
along.” The trooper replied: “You can go about your business. Move
along.”

Yes, the media
columnists may say that there should be questions raised about the
collateral for $885 billion of these loans, information that the
FED refuses to provide. The
Federal Reserve released this statement on December 3.

The
Federal Reserve also provided credit to several systemically important
financial institutions. These actions were taken to avoid the disorderly
failure of these institutions and the potential catastrophic consequences
for the U.S. financial system and economy. All extensions of credit
were fully secured and are in the process of being fully repaid.

When asked
to provide evidence of the nature of this loan-securing collateral
for $885 billion of these loans, the Federal Reserve replied: “Are
you serious?” Well, not in those words exactly. It did not reply
to Congress at all, so “Up yours, Bozo,” is closer to it.

But all this
is really neither here nor there in the grand scheme of things digital.
The key question is: “How did the FED hide $2 trillion of the $3.3
trillion of loans?”

Don’t ask.
Don’t tell.

SOFTBALL
QUESTIONS

Bernanke consented
to a softball interview by Scott Pelley on the CBS News 60 Minutes
show. It ran on December 5. I reported on that interview earlier
this week.

What Pelley
avoided was any mention of the previous week’s release by the FED
– compelled by law – of those 21,000 documents. None of
this had been reported by the FED. In other words, it was “off the
books.” Analysts knew things were bad – an admitted increase
of over $1.3 trillion on its balance sheet (the monetary base) –
but not nearly so bad as it was.

Bernanke’s
appearance was a smoke screen. He wanted to appear to be on top
of things today, ready to do whatever it takes to preserve market
stability. This includes the FED’s purchase of $600 billion in Treasury
bonds with magic money.

He insisted
that the FED was not printing money, which was only a little lie
overall – nothing compared to the lies of October 2008 –
but this threw Pelley off the scent. This was not the legendary
“Helicopter Ben” of his November 21, 2002 speech promising to print
money. (http://bit.ly/HelicopterMan) No, no, no: the FED will merely
buy T-bonds.

With what?

Pelley failed
to ask.

It will buy
them with newly created digital money, of course. But that was regarded
as too bitter a pill for the viewers of “60 minutes” to swallow,
even with a spoonful of sugar. It was instead: “You can go about
your business. Move along.” He was the victim of Obi-wan-Bernanke’s
mental hypnosis. Congress has suffered from this for years.

Moving right
along, Pelley judiciously avoided asking about what the Federal
Reserve had done, how it did it, and how it had concealed what it
had done. The program was all about what the FED will do next, and
how Bernanke is 100% confident that what the FED does will work.

THE
NEXT TIME AROUND

Here is what
we know at this point.

  1. The Federal
    Reserve was able to conceal $2 trillion in loans to banks and
    companies around the world.
  2. No one
    in the media is pursuing this seemingly impossible accounting
    procedure.
  3. There is
    nothing to keep the FED from doing this again.
  4. The public
    will probably not be told when the FED is doing this.
  5. Congress
    prefers “Don’t ask. Don’t tell,”
  6. No one
    at the FED has been compelled to testify under oath regarding
    unprecedented accounting deception.
  7. Bernie
    Madoff was a piker.

On December
1, MSNBC’s Dylan
Ratigan interviewed Christopher Whalen
, of Institutional Risk
Analytics. Whalen argued that the bailouts in 2008 kept the game
going for the big banks. They are still making their money by setting
up highly leveraged financial deals that are comparable to what
almost brought down the banking system in late 2008.

This is moral
hazard at work: no morals on Wall Street, but lots of hazard for
Main Street. This is always what happens when the big winners know
they will be bailed out by the Federal Reserve and Congress. Heads,
they win big, while we win a little; tails, they win a little less
big, and we lose very big. Nice work if you can get it.

Will Congress
go along with bailouts next time? Maybe not. That is what will make
the next few years far more interesting. Always before, Congress
has buckled. But the bailout in October 2008 cost the Republicans
the Presidency in November. The reaction since 2009 – the lack
of recovery – cost a lot of Blue Dog Democrats their jobs in
2010. Congress thumbed its nose at the voters in 2008. Next time,
this will be very dangerous politically. “All those in favor of
Wall Street, please say ‘aye.'”

This leaves
the FED as the nose-thumber of last resort. There is no question
that Bernanke has been able to thumb his nose at Congress, as have
all previous FED chairmen. But he is looking more vulnerable than
any previous chairman. For the first time, the
FED is under fire by a majority of voters.

They have the
Web at their disposal. Going on “60 Minutes” no longer buys Bernanke
much support. CBS is headed for the tar pits, along with the other
networks.

The banking
cartel is still doing well. The man in the street is getting by.
The voters who are sitting on huge losses in their homes’ value
are upset, but they do not know that the FED caused the bubble in
the first place, beginning in 1946. The FED got the ball rolling.
Jimmy Stewart didn’t. Neither did Mr. Potter – not without
backup, anyway. The FED and the FDIC are the backup. “Buy a house
with 3% down – no problem. Housing prices always go up.” Or,
as Bernanke put it in May of 2007,

The
rise in subprime mortgage lending likely boosted home sales somewhat,
and curbs on this lending are expected to be a source of some restraint
on home purchases and residential investment in coming quarters.
Moreover, we are likely to see further increases in delinquencies
and foreclosures this year and next as many adjustable-rate loans
face interest-rate resets. All that said, given the fundamental
factors in place that should support the demand for housing, we
believe the effect of the troubles in the subprime sector on the
broader housing market will likely be limited, and we do not expect
significant spillovers from the subprime market to the rest of the
economy or to the financial system. The vast majority of mortgages,
including even subprime mortgages, continue to perform well. Past
gains in house prices have left most homeowners with significant
amounts of home equity, and growth in jobs and incomes should help
keep the financial obligations of most households manageable.

I can almost
hear Ben belting this out at a karaoke bar: “Since I had the money,
honey, you got subprime!” He still has the money.

Mortgage lending
looked like a sure thing. It wasn’t. When it blew up, the FED bailed
out the big banks. It bailed out the mortgage market by bailing
out the recently nationalized Fannie Mae and Freddie Mac. It bailed
out big companies. Now it will be bailing out the Treasury.

Meanwhile,
the unemployment rate is 9.8%. There have been no parachutes for
workers.

CONCLUSION

Bernanke and
his team will at some point drop the digits. That is statistical
reality. Like the California quake, the Big One is a sure thing.
We just do not know when.

The amount
of FED monetary reserves is now enormous. It will grow over the
next year, as the FED buys T-bonds. There seems to be no reason
for these purchases. T-bonds are paying low rates. There is plenty
of demand for them.

The four largest
banks now hold over half of the bank assets in the American banking
system. The other 8,000 divvy up the rest. Of these, about 100 hold
over 20%. Pareto’s law tells us that the top 64 banks should hold
51% of the assets, yet only four hold 55%. The system is seriously
skewed in favor of the Big Four: Bank of America, Citigroup, J.P.
Morgan, and Wells Fargo. These
are simply too big to be allowed to fail.

As
more and more leveraged assets are being funded by the Big Four,
the likelihood of another crisis increases. With each increase in
contractual complexity, the ability of the Federal Reserve System’s
tenured economists to respond effectively is reduced.

These people
have no ownership. They have “no skin on the game.” We think that
subprime loans abused the mortgage system, with 3% down. Federal
Reserve economists have nothing down. They can be fired, but they
never are. What keeps their judgments accurate?

When the grand
finale comes, it will not be grand. But it will be memorable.

When the digits
start falling, you had better be out of the way.

December
11, 2010

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible
.

The
Best of Gary North

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