Ben Bernanke, Chairman of the Federal Reserve System, visited the circus in Washington on Tuesday in an attempt to distract financial markets from the ongoing collapse of the modern fiat money system. This was a traditional three ring circus, with Bernanke performing as magician, acrobat, and lion-tamer. Wall Street and the big banks that fund the Congressmen in his audience are hoping that Bernanke the magician will pull more magic out of his hat in the form of more Quantitative Easing (QE). Bernanke the acrobat danced around the ongoing Libor (London Interbank Offered Rate) scandal and walked the tightrope between the Fed’s “dual mandate” of reducing unemployment and controlling inflation. At the same time, Ben the lion-tamer faced the beasts know as “European Debt,” “Bubbles,” and “Recession.”
Playing all three roles was certainly a challenge, but Bernanke is a professional clown and is up to the task. His illusions have propped up the stock market so far, and his audience has every faith that he can continue to balance all of the plates tossed his way. Of course, as the number of challenges increases, the size of the crash at the end of the performance is increased, and unfortunately for all of the clowns in Washington, there is a black swan in the shadows ready to step under his feet.
The hope for new QE has been priced into the stock market for quite some time, and Bernanke’s disappointing performance today is leading to falling stock and commodity prices. The financial media and Wall Street’s sell-side analysts continue to press for more printing, but it appears that Ben will not comply at least until after the election. The Federal Reserve’s role as savior of the banks and exchanges has become more obvious in recent years, and has become something of a political issue. If Ben prints, it will be seen as a gift to Obama and may well help Romney in the polls, as the latter can claim that the Fed is debasing the dollar in a desperate attempt to juice the economy going into the election. A new round of QE would ramp up stock and commodity prices, but as each of the former cash infusions has had an ever shorter half-life, this one may last only a few weeks before markets realize that despite the new money, there is still no new growth and the assets they hold are no better than before.
The Chairman also had to deal with the Congressmens' questions regarding interest rates and the ongoing Libor scandal, in which certain big banks have been accused of manipulating the rate at which they claim to be able to borrow from one another. Ben knows that the whole Libor system is a joke, as it is based on the rates banks report to the British Bankers Association, rather than the rates which they actually pay in the marketplace. The errors of self-reporting are well-known to anyone familiar with statistics, and as an academic economist Ben has plenty of experience in this area. The most interesting thing about the Libor scandal is that while banks are being accused of wrongdoing for manipulating interest rates, that is exactly what the Fed does as a matter of public policy. The main tool that the Federal Reserve has with which to affect the economy is the Federal Funds Rate, an interest rate similar to Libor and in fact the one on which Libor is based. Manipulating this rate by buying and selling Treasury bonds in what Ben does every day. If we had an interest rate that was set by the market, the whole game in Washington would be up, as the government could no longer borrow money at such a low rate. The Congress should be careful what they wish for, because if the American people start to pay attention to how interest rates are determined due to the Libor scandal they might all be out of a job.
Finally, Bernanke had to answer questions on how he was dealing with the various crises that are currently in the headlines: the European debt crisis; the various debt bubbles that are currently expanding in student loans, commercial real estate, and other areas affected by record low interest rates; and the fact that U.S. economic growth appears to be slowing and possibly heading into another recession. Ben can do little about Europe, except hope along with Obama that the Germans suddenly decide that hyperinflation isn’t that bad after all and that they can afford to bail out Greece, Spain, Italy, and eventually France. This has a very small chance of happening, but hey it’s all about “hope” and “change,” right? Bernanke had little to say regarding the bubbles, for as a good Keynesian he believes that any investment is a good investment, and that misallocation of capital doesn’t happen in the “real world.” He promised to continue the Fed’s ZIRP (zero interest rate policy) into the foreseeable future, and in fact came close to admitting that the Fed will probably never be able to let interest rates rise again, since that would cause an almost immediate collapse of the biggest bubble of all, the one in U.S. treasury bonds. He also almost admitted that the U.S. economy is once again in recession, although he and the Congress are doing everything they can to hide that fact from the general public. As the indicators of slow to no growth continue to accumulate, however, this is becoming an increasingly difficult task. Growth figures for the first half of 2012 have been below expectations, and to keep GDP growth above 2% for the year without more QE would require growth in the 3rdand 4thquarters, much higher than anything we have seen in the past few years.
Overall Chairman Bernanke pulled off his act quite well in terms of fooling his audience into believing that “all is well,” although this is not hard to do when dealing with intellects such as Chuck Schumer and David Vitter. The bigger test will be how well he fooled the markets, and especially how well he was able to get them to jump at the scent of new QE without actually commencing it. The Fed is almost out of props with which to continue the ongoing farce, with interest rates already at near zero and the half-life of new money infusions being measured in weeks rather than months or years, but they will continue as long as they can because they know nothing else and cannot imagine a world where they are not “in control.”