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Source link: http://archive.mises.org/11306/correction-mr-bernanke/

Correction, Mr. Bernanke

December 23, 2009 by

In his speech at the Economic Club in Washington DC on December 7, the Fed chairman, Ben Bernanke, detailed his expectations of the future course of the US economy. Below, I comment on the various parts of Bernanke’s speech. FULL ARTICLE by Frank Shostak


DD December 23, 2009 at 9:49 am

Always a pleasure to read Frank’s articles. Such a great ability in explaining and introducing Austrian Capital Theory by analyzing current policies.

Keep those articles coming.

Matt December 23, 2009 at 2:45 pm

Slightly off topic, but I finished reading TIME’s “Man of the Year” piece on Ben Bernanke.

What stood out to me above all else – beyond the expected cheerleading and unprovable claims (think how worse things would be if Ben hadn’t acted!) – was the tidbit about Mr. and Mrs. Bernanke having recently refinance their Capitol Hill home after their adjustable rate mortgage reset.

Oh yes, Mr. Bernanke is right on top of this crisis.

(Apologies if this has been pointed out here before)

Shay December 23, 2009 at 5:48 pm

“But how does Bernanke know that such policies have averted a global financial meltdown?”

I think his logic goes like this: A major depression should have occurred by now, I took actions, a major depression didn’t occur, therefore I stopped a major depression.

I think it’s sound logic, because it works for me: I believe that tigers would overrun my yard (central location in major US city), I have a tiger-repelling rock on my kitchen table, no tigers have overrun my yard, ever, therefore my tiger-repelling rock works.

Lot December 23, 2009 at 8:02 pm

Sometimes I worry that Austrians don’t appreciate how relevent the Foreign Exchange is to our theory. I think this is mostly due to the fact that the Foreign Exchange isn’t supposed to exist. We’re supposed to have real money, but that’s not our reality anymore. So I humbly offer this supplement:

For the record, we are just getting started and we’re about to get hit again relatively now-ish.

Here: http://ichart.finance.yahoo.com/z?s=%5EGSPC&t=2y&q=l&l=off&z=m&c=EURUSD=X&a=v&p=s

The Euro/USD essentially tracks the inverse relative value of the dollar.

We can see that before the last crisis began, the relative value of the USD made a sharp correction upwards (as the Euro/USD is the inverse). This occurred because of the leverage caused by the lower interest rates. Speculators perceived that prices needed to correct (as the market was technically in a correction at that point, August-September), so there was a great raising of cash and necessarily a purchasing of bonds. This drove the value of the dollar higher (artificially) and then crashed prices even further down, as the leverage began to unwind.

However, to “correct” this situation, the Fed established an incredulously corrupt indirect bidder plan. Here, foreign central banks, as well as ours, have been purchasing US debt to keep the interest rate artificially low. The corrupt part is in their presentation of this as, “strong demand for the dollar.” This is disturbing because the largest owners of our debt have been telling us the exact opposite the entire time. However, this purchasing has caused speculators to perceive and imminent upwards correction of the dollar. Deutsche Bank (who is essentially THE currency trading organization) has promised/predicted to correct the dollar from 1.50 to about 1.28 relative to the Euro. Technically, they are right about that relative valuation because nobody is able to prove the central banks are doing what they’re doing. Therefore, it appears that the value of the dollar truly is gaining.

The real tragedy is that the central banks will perceive their own technical mistake as deflation and then announce that they must do more to combat deflation. This is how the Fed will miss its cue to raise interest rates and reign in the excess reserves. Also, government pressuring of the banks to lend money (as if that’s not EXACTLY what just caused this) will play a big role as well. Hence, after this next terrible correction, we will begin to see hyperinflation and the entire time, the Keynes camp will only gain support.

Anybody following corporate news knows that things have absolutely not improved. Unemployment has slowed, but that’s only because we’re running out things to be unemployed from. Earnings estimates are still being cut or “affirmed,” but at the post-cut levels.

How America has allowed the Fed to get away with making the same mistake three times in a row now, only to have it backfire before our eyes each time – is beyond me. Thank God they have their secrecy/independence/ability to make deals that betray every American with other banks.

With that unsettling news, I leave you with this:

Here it comes!

Dave B December 23, 2009 at 8:33 pm

Great articulation of an Austrian viewpoint in regards to the Bernanke situation Frank. I really appreciate your articles and all of mises.org

Aaron December 23, 2009 at 9:23 pm

Has anyone else noticed that whenever Bernanke talks he sounds like he’s really worried/about to cry

iya December 23, 2009 at 11:10 pm

Are the $2.2 trillion what they paid for the assets, or the current bid?

Since the “best supervisor is profit and loss”, one can estimate the Feds damage or benefit by checking if Bernanke can turn a profit on his investments or not.

David Dzidzikashvili November 19, 2010 at 10:57 am

The United States Central bank’s $600 billion bond-purchase program is another nail into coffin… The people can not borrow, now the government’s borrowing on behalf of the people… Does anyone realize that the borrowed money has to be fully (+ interest %) paid back at some point?

Although the Fed’s Treasury bond-buying program is intended to revitalize the economy in part by lowering interest rates, lifting stock prices and encouraging more spending, but usually it does the opposite. After all of the spending, can’t we see that it does not create economic benefits that it was supposed to create? General belief is that the extra spending would lift incomes, profits and growth… But we’ve seen numerous examples and facts that it does not and it has not! We’ll see the results from current policies all throughout 2011 and 2012 (and beyond)…
All this will do is increase inflation rates, this is basically economic suicide for the country! Printing more money to pay the government’s debt has never been a viable solution… Look at the countries that have tried it and failed. The Fed can not possibly fix all the economy’s problems, so there has to be another approach, other policy instruments utilized, we’ve been using the same borrow and spend tactic for too long and the results are not even close to the original plans…

We need a fiscal program that is viable and sustainable on short and long term, we have to put complete freeze on out of control spending and immediately start implementing cuts (and freezes) at all levels of the government. The economy is very fragile and not on the recovery path yet, the available data does not suggest that we are recovering in any way… And if we keep ignoring all the vital signs of economy, the recovery process won’t even begin in 2011 or 2012…

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