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Post details: Person of the Year

Person of the Year

Time Magazine has selected the Fed Chairman Ben Bernanke for Person of the Year, ostensibly for his lead role in putting out the financial inferno of 2008. TIME's timing was a bit of an eyebrow raiser, though. Bernanke is in the middle of the Senate confirmation hearings and the aura of the award will surely blunt the sharp edges of some inquisitive questions.

Portraying the Fed chief as the monetary Superman who fights the meltdown monster with the collected works of John Maynard Keynes in one hand and an industry strength moneyblower in the other is impressive on the surface. What the celebratory article failed to mention was how much the spending fireworks would cost the current and future taxpayers. There doesn't seem to be much logic in fighting excessive debt with more of the same. After all, you don't see many overweight people cured by a French Fries diet, do you? But who in their right mind would even consider expanding the enormous debt burden even further? Hmmm, let's see. The ones who produce the debt and who profit from it? Bingo - that would be your friendly Wall Street leeches.

Yes, leeches - not the fat cats as they were once misnamed by President Obama. Obese felines are relatively harmless creatures. Denizens of financial marshes, on the other hand, have some truly insidious ways of sucking money out of unsuspecting taxpayers. Here is one. The Fed interest rate is currently about 0%. That means banks can borrow truckloads of essentially free money, buy the US treasuries at 3% and have virtually risk free stream of cash. Do you think you or your local Ma and Pa store could take a sip from this financial fountain of youth? Nope. But imagine it. You would borrow $10M from the Fed and deposited at 3% you'd collect a pleasant $300,000 annual income. Cool, isn't it? If we could all do it, we'd all be bloody rich. No sweat. So why can't we? Well, because some people are kind of more equal than others.

However, this planet is not exactly renowned for free lunches and at the end of the day, somebody has to pay for all the bubbly drinks. Well, guess what. It is the taxpayers who pay for the interest that the banks collect on the free money they borrow from the Fed. All taxpayers without an exception. A single mom taking care of her sick kids, a pair of retirees that depend on their lifelong savings, a family of four struggling to make ends meet. They all chip in. I wonder what financial genius invented this subtle artifice whereupon we all support the excesses of a few. I imagine him as Dr. Evil with a top hat and a fashionable walking stick in his emaciated hand.

There is a reason why the financial share of GDP has more than doubled over the past 30 years. Bankers found many slick ways how to siphon off money from the economy. And I am not talking about front running, insider trading, exotic derivatives or the fractional reserve system which lets them leverage the deposited funds. One of the most powerful mechanisms they use for lining up their pockets is compulsive bubble blowing, of which the late housing miracle is a textbook example. It works in two easily understandable phases:

Phase I - Bubble Up: During the growth phase the asset prices appreciate nicely as more and more suckers are lured into the incipient Ponzi scheme. A functional and vigilant Central Bank would respond to such trends by restricting the money supply. That of course would take some serious cojones. Hitting the breaks while their golfing buddies are frolicking on the gravy train is not the job for the faint hearted. That's probably why Ben Bernanke vigorously twiddled his fingers while the mortgage industry made a killing on bonuses, fees, commissions and profit shares. In retrospect, he did make some claims about not seeing the bubble, but I find that hard to believe. Any non blind person who has looked at the historical housing prices chart around 2005 must have seen the gargantuan hurricane developing high above overheated financial oceans. When you have to push poor fruit pickers without any documented income into half a millon Mansions just to keep the market afloat, then it is your job to see that something is distressingly wrong. But who could have resisted the sweet music of the new paradigm, right? Housing market only goes up. It was like selling a tornado insurance under the assumption that there are no tornados. The insurance premiums were rolling into their accounts so effortlessly. What a truly great business it had been! Until a tornado hit.

Phase II. - Bubble Down: OK, so now the bubble has burst. Time for free markets to exercise their Hayek given rights! You'd expect that the people who pocketed the profits and in some instances committed severe financial fraud should be the ones to eventually absorb the resulting losses, right? Wrong! Get the hell out of here you hopeless romantic. Not so in Ben Bernanke's world. In the midst of catastrophic hysteria, he threw money around with a foolhardy abandon and without a coherent justification, effectively sending a very clear message to Wall Street: It is OK to gamble aggressively, gentlemen, for should anything happen, I've got your back. Such tender loving care is normally known as "moral hazard" and represents a negation of sacred principles of free markets: those who reap the rewards are the ones who carry the risks. Yet, a year after the world teetered on the edge of an unfathomable abyss, the bankers are about to reward themselves with record bonuses - partly due to the anxious generosity of the Central Bank and partly due to a change in accounting laws that allows them to mark their assets to some cocaine induced fantasy. It's kind of like you claiming that your net worth is $1,000,000 because you have this obscure and rare photocamera that your old man once bought at a flee market and it might be worth a million bucks on eBay in 100 years. This taught a whole generation of young Americans a sobering lesson in cynicism. Thanks a lot, Ben.

I lived in a Communist system where any time a bank or a big corporation ran into trouble, the government printed more money and shoved them down their management's incompetent pockets. That system collapsed spectacularly. Supporting inefficient entities eventually turns into a liability. The laws of physics guarantee that you cannot extract value from a finite system forever. All the bonuses that were doled out to AIG, Freddie Mac and Fannie Mae executives, although their firms were technically bankrupt, have been completely wasted. All the billions we poured down the black holes of Wall Street balance sheets will be missed somewhere. They won't be used to build new schools, laboratories, bridges, superfast trains or alternative energy sources. Has Bernanke never heard of misallocation of capital?

The crisis of 2008 was a unique chance to straighten our financial system. This was the window of opportunity to crush the risky casino style culture and return to sound and simple banking. Bernanke could have banged his fist on the table, fire the officers whose only expertise was "dancing while the music was playing", he could have wiped out the shareholders and bondholders who financed this pyramid scheme with eyes set on unrealistic returns, and let the insolvent giants fail. He could have scrapped the ulcers off the financial system and build a foundation for the new one. One that would be nurturing the economy, rather than living off it like a parasite. He could have created new government backed entities that would guarantee financial operations until the healthy parts of the system stabilized. That would be my Person of the Year. Someone who can come up with creative solutions. Instead, numerous bailouts later, the unemployment is still standing at 10% and our states and cities are in a worse shape than a year ago. Bernanke didn't really stave off the next Depression. He merely kicked the can a little bit down the road. Our over-reliance on debt has not been addressed. If anything, it was made worse.

The interests of taxpayers and financiers have historically been at odds. Financiers are deeply vested in the credit expansion as they profit immensely from the ensuing growth, sustainable or not. Regular taxpayers, guys like you or me, do not get to taste the pork of the economic boom. The average salaries of middle class workers have been fairly constant for the past several decades. Taxpayers prefer a stable system because their money is on the line if something fails. In this dilemma, Ben Bernanke stood firmly on the side of financiers. So much so that he could have easily been dubbed Anti Robin Hood - the one who takes money from the middle class and forks it over to the ultra rich. The past several years saw one of the largest wealth transfers from taxpayers to financiers and in more general terms from those who live within their means (their savings are the main pray of the zero interest rates) to those who live beyond their means (the debts are the main beneficiary of cheaper currency churned into existence by printing presses).

Sound money is the cornerstone of a stable society. If we are to systematically build our personal wealth and make solid financial decisions, a dollar earned after a hard day's work must retain its value over time. Unfortunately, the Fed's inflation friendly tinkering has been focused on overextending the money supply to cover up for grave investment mistakes made by highly leveraged institutions. Over the past few years the value of our currency kept declining and that turned people into wild speculators trying to chase the inflation beating yields in the rigged casino of equity markets. On Bernanke's watch the dollar index plummeted and the price of gold has soared. That doesn't mean that gold became so much more valuable all of a sudden, it is still but a meaningless yellow metal; but its price is telling us how much purchasing power our money lost through the Fed's reckless policies.

Bernanke's playbook seems to offer very little beyond the vicious cycle of spend, consume, pollute and plunder. Despite the fact that our planet has obviously limited resources and despite the fact that at some point just paying off interest on the accrued debt becomes a real drag on the economy. Both private and public. The fact that our children will have to pay for our profligacy by living in a fiscally stifling environment should give a pause to every parent. Today's teenagers, kids, even infants will have to cough up some dough for our borrowed lifestyle, for the ridiculously overpaid public jobs that don't produce any tangible value, for all those Licensed Commissioners of Mindless Paper Pushing living high on the hog. And all of that because Dr. Bernanke has a love affair with debt and cannot (or does not want to) see the bigger picture. In a sense, the Fed Chairman is acting like a parent who parties deep into the night, and when the hangover wears off in the morning and the bills come due, he charges the expenses to his children's credit card. How exactly that makes him Person of the Year is beyond me.

I can only imagine what Time magazine will come up with next. Bernie Madoff for Investor of the Year?

Comments:

Comment from: a friend [Visitor]
Nicely done, Honza
Permalink 10/05/10 @ 21:57

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