Friday, November 5, 2010

Bubble Ben, the Bubble Maker

It seems like all Ben Bernanke can do is blow bubbles. He joined the Board of Governors of the Federal Reserve System in September 2002 and served until June 2005. The effective Federal Funds rate was 1.75% at the time of his arrival. By July 2003, this rate was 1.00%. The effective Federal Funds rate remained at 1.00% until July 2004.

Bernanke not only supported this exceedingly low rate during the year it served as the Federal Reserve target, he provided a large portion of the intellectual support for such a policy. Remember Bubble Ben was an historical expert of the Great Depression and former head of the Princeton Economics Department.

The consequence of the Federal Reserve policy? Bubbles in both the stock market and the housing market.

He then went off to become the Chairman of the President’s Council of Economic Advisors, another tough executive position with lots of leadership challenges, where he stayed until January 2006 when he was appointed as the Chairman of the Board of Governors of the Federal Reserve System, the second most powerful executive position in the United States government.
In February 2006, the effective Federal Funds rate was 4.50%. Now, of course, Bernanke’s major concern was inflation, so the effective Federal Funds rate was pushed up to 5.25% until July 2007 after the bubble had already burst. He stayed too long at the dance! The Fed Funds rate dropped below 4.00% in January 2008 and below 3.00% in February 2008.

Once the financial crisis spread Bernanke saw the Fed Funds rate drop below 1.00% in October 2008 and by December 2008 the effective Federal Funds rate dropped below 25 basis points where it has remained ever since.

Now we have another “Spaghetti” experiment called “Quantitative Easing 2, where we have Bernanke saying that the Fed will buy up to $900 billion in United States Treasury securities over the next eight months or so. (See “Bernanke’s Next Round of Spaghetti Tossing”, Also see

Mr. Bernanke, “Bubble Ben”, is erratic and subject to panic. He seems calm and rational and “in control” but his actions imply something else. His volatility in response to what he considers to be a crisis, whether it is a financial collapse or inflationary pressures is not consistent with outstanding leadership qualities. But, why should we expect such leadership qualities from someone who has only been tested in the confines of the economics department at Princeton?

The problem is that what Bubble Ben is doing is impacting the whole world. The American stock market is booming. Commodity markets are booming. The price of gold hit an all-time high. The bond market is soaring…”A bevy of household names rushed to sell cheap debt on Thursday after the Federal Reserve said it would pump at least $600 billion into the financial system…At least $12 billion in high-grade bonds came to market making it one of the busiest days in nearly two months.” ( And you can expect a lot more high-grade companies coming to the market to issue more debt in coming days.

And the value of the dollar is tanking. Against major currencies, the value of the dollar is down by about 7% since late August.

The expectation is that massive amounts of dollars will flow out of the United States into, especially, emerging nations. “The US Federal Reserve’s decision to pump an extra $600 billion into the economy has galvanized emerging market central banks into preparing defensive measures…China, Brazil and Germany criticized the Fed’s action on Thursday, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows.” ( The expected outflow is already resulting in substantial stock market gains in emerging nations.

This move by the Fed is certainly not going to foster good feelings and co-operation among the leaders of the world as they get ready to “go-to-meeting” in Seoul, South Korea for the assembling of the G-20.

This surge in capital flows is being called “inappropriate and short-sighted” by many countries and the move is seemingly resulting in additional currency tensions and a high risk of capital controls and trade protectionism. This is not just a “textbook” exercise. This is real stuff. As Martin Wolf has said in the Financial Times, America is exporting inflation to the rest of the world.

The rest of the world is not going to stand by and let this happen.

But, this leads into another point. The United States is contributing to its declining influence in the global economy. The United States will not be dropped from its leadership position in the world, but other nations are becoming relatively important and are becoming more and more assertive in standing up to the United States in more and more important issues.

With this action the United States is making the unity of the G-20 impossible. America has taken its stance. It is solely focusing on its navel. Why should other countries bow down to it anymore?

In fact, if this action does anything, it seems that it is drawing these other nations together to possibly counteract the Fed’s actions.

For those nations that want to see the United States weakened, the Federal Reserve is playing right into their hands. In fact, I cannot think of a policy that would be more helpful in reducing the influence of the United States in the world as the one the Federal Reserve has set out on.

We can joke about “Bubble Ben” and how he likes to blow bubbles. Unfortunately, bubbles don’t last. Bubbles pop! And, when they pop many, many people suffer.

Unfortunately, there seem to be lots of bubbles forming and they seem to be spreading throughout the world. What is really going on here?

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