Bernanke steals $666 from every AmericanMarch 14, 2008
When money has no intrinsic value, its worth can only be measured in what people are willing to trade in exchange for the money. Therefore, the total value of all money in circulation can not increase unless the total supply of goods and services which define their value does as well. When the amount of money in circulation increases at a rate disproportionate to production and productivity gains, prices are slowly bid up by more dollars chasing fewer goods. The new dollars are able to buy existing goods, but they only have value because they steal a tiny bit of it from each dollar already in circulation. In other words, when Ben Bernanke gives the financial industry $200 billion in emergency aid, he is stealing about $666 dollars from every American. This bail out will not help anybody outside Manhattan, in fact it will hurt many people in the “real†economy who desperately need that money to pay for the increasing cost of food and energy. It’s unfortunate that many analysts are comforted by the mistaken belief that a slowing economy will help reduce the pain felt by ordinary Americans struggling to feed themselves and their children. Inflation is not caused by economic growth and prices will not fall when the economy slows. These common misconceptions are founded in a fundamental misunderstanding of economics and the cause of our current commodity rally. Increased global demand and speculation play a role, but they take a back seat to inflation. Rising commodity prices do not cause inflation, they are the result of inflation. Food and energy and everything else are not becoming more expensive, money is becoming cheaper. Rising prices are a symptom of inflation, not the definition or the cause of inflation. When the Federal Reserve bails out financial institutions and maintains unjustifiably low interest rates, the economy is flooded with new cash that circulates among the people; cheap money distorts market information and changes behavior, resulting in more loans and more debt. In other words, if central banks around the world continue to fight the economic slowdown with bail outs and rate cuts, prices will only rise even faster.
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Sir:
You either have little knowledge of economics, or are being
deceitful to advance an agenda. Sorry if this sounds harsh,
but you are needlessly sensationalizing a story you don’t
appear to have much understanding of.
Printing money and lending it does not directly correspond
to taking the same quantity out of each American’s pocket,
not in this case.
For one, the loans are backed by assets. Even if the money
is not payed back the transfer of assets will bring the
money supply back to balance.
Two, once the loans are payed back, the money supply is back
to where it was before the Fed stepped in.
Three, the amount of money that /does/ come out of each
American’s pocket is a function of the inflationary affects
this induces on the economy. You simply cannot divide $200
billion by 300 million people and say that’s how much this
bailout has cost us. It’s much more complicated than that.
And if this is truly a loan, and not a handout, then there
should be minimal inflationary pressures.
Generally I share your outrage at bailouts, but if this
is going to be an extremely short-term Fed measure, and
the loans are being backed by assets, and there is every
expectation that the loans are going to be repaid, then
this is probably a wise decision. It appears that there
is currently a temporary meltdown in the willingness of
the financial market to lend. If this does play out to be
a short-term phenomena that is primarily psychological
then the Fed move is appropriate. If this is more than
just a temporary psychological phenomena, however, but a
structural correction, then the Fed is just delaying the
inevitable, which will just make the correction draw out
over a longer period. Time will tell how deep of a hole we
have dug ourselves into, but it’s too early to go around
screaming that the sky is falling just yet.
In terms of the Fed’s recent supply of liquidity to commercial banks, the second set of comments has some validity.
But the first comment is ALOT closer to the point when it comes to today’s bailout of Bear Stearns. The ultimate collateral for the loans the Fed is making are the hugely devalued assets of Bear Stearns. The Fed is very unlikely to be repaid anything like in full. So the lending to Bear will be inflationary.
The effect on inflation is, however, the least of this scheme’s evils. Far worse is the moral hazard it reinforces and the perversion of the fed’s mandate. The Fed’s proper role is to encourage price stability and full employment. To some extent this would support the Fed’s role in preserving the smooth functioning of capital markets.
Traditionally the Fed has been relied upon along with the FDIC and OCC to regulate commercial banks and to protect the interests of depositors of commercial banks. Today’s bailout of Bear Stearns (engineered as it was with JP Morgan Chase as an intermediary) is just wrong. Both because the main beneficiary’s of this action will firms that lent to Bear Stearns and (probably to a lesser extent) the shareholders and managers of Bear Stearns). These parties should not be protected. They should lose their respective investments, lending, jobs, salaries and bonuses.
Some will argue that allowing Bear Stearns to fail would destabilize the capital markets. This is nonsense. Bear Stearns isn’t that big. In fact, letting it fail might be a first step to institutions being able to calculate and then start to come clean about the true value of their holdings. That would initially cause some serious turbulence. But it would allow markets to function again faster than they will with zombie firms like Bear Stearns (and Heaven only knows how many others) to stagger around distorting the financial landscape.
The corporate socialists will claim that letting Bear Stearns or any financial institution fail will bring us back to the depression. In fact, the wisest course of action the government, the Fed and others could steer would be to ensure that explicitly federally insured deposits and investments are protected. The rest – including loans to and investments in financial institutions (even Freddie Mac and Fannie Mae) should be fall to their true vlaue, which, in many cases, will be zero.
Another piece of Fed inspired stupidity that seems to be making the rounds is for the Fed to accept as collateral for lending to commercial banks failing mortgage loan portfolios. If the lending is made against a rigorous mark to market assessment of the value of those portfolios, it is sensible. But you can bet that the Fed’s hair-brained scheme will take the portfolios at their (vastly inflated) face values.
Don’t apologize for being harsh, let’s have a blunt discussion, that’s what we’re trying to do here. I can’t help but point out the word “if” kept finding its way into many of your sentences, I don’t think your continual hedging was an accident.
You should know, Bear Stearns is technically bankrupt, they have a negligible capital base and a horrible inventory of assets and when they are unable to repay this loan ultimately they will surrender their worthless assets and the Fed will absorb the loss. You can compare it to a sub-prime loan — are the banks going to recover all their loses from the seizure of foreclosed homes? Of course not, and neither will the Fed. Bear Stearns is not suffering from a liquidity problem, they are suffering from a solvency problem, as are many other financial institutions.
The only thing I would add to DJR’s comment is the concept of fractional reserve banking — the exact amount of new money that will be pumped into the economy as a result of this “loan” or any other is definitely not a simple calculation, but if anything it will likely be greater than $666 per American, rather than less.
Are Bear Stearns assets really worthless?
Does the loan to Bear Stearns give the Federal Reserve of NY and JPM Chase rights to their assets? What is the real risk of loss for the Fed and JPM?
Even if the B&S’s place of business in Manhattan were all that’s at stake something real can be gained for a mere abstract creation of credit.
“Backed by assetsâ€â€¦..that IS the root of the problem. If they were able to move those assets they wouldn’t be in trouble. The cause of the sub prime fiasco is inability of the market to value those assets, as well as the inability to sell them. So, if you have assets of not defined value that you can not sell, what those assets are worth for?
America will fall because the people will kneel before tranny, in fact the american people are kneeling right now. bowing to the money changers instead of throwing them out of the temple.