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

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

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

Lately, I can’t help but reflect on Ron Paul‘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.

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

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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 Bernank" 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.

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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 questions.

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.

Greenspan’s 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.

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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 editorial 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 Mises.org, where you can view books by these authors (and others), free.

Reprinted with permission from Wealth Daily.

December 23, 2010