Friday, April 9, 2010

Ben Bernanke – Bubble Maker

According to The Wall Street Journal (April 8, p. A4), Fed Chairman Ben Bernanke – in an address to the Dallas Chamber of Commerce- has a plan for reducing the long term deficit. His solution? Cut Medicare and Social Security! Bernanke added that “a credible plan to ensure long run fiscal sustainability would lead to lower interest rates and more rapid economic growth in the near term”.

At the expense of basic social insurance and medical needs for our seniors? No freaking way, sir!

As it is, seniors who live on fixed incomes are struggling with epically low interest rates on their CDs, and money markets. A person with $100,000 in a money market can barely earn $100 a month if lucky, so why would we want to go this high growth route? Jobs? Don’t make me laugh! Those jobs lost are gone, forever, and there’s no incentive for companies to bring them back. (Certainly so long as Americans are tight with their purse strings, and unwilling to place themselves in enormous debt, as they did before the 2008 crisis).

In the meantime, Bernanke is sitting on absurdly low interest rates because he believes they will keep the economy chugging along on a growth trajectory. What those rates are actually doing, as some Fed officials (e.g. in Kansas City) have pointed out – is steering us toward another asset bubble, via cheap money. That is why the stock market is now approaching 11,000!

And yet, Bernanke wants us to feed the Wall Street gullet to pump the DOW up even more – at the expense of cuts to our major social support systems! No way. What Bernanke needs to do is raise interest rates, at least to the 0.5-1.0% level.

What is an asset bubble? How do we recognize it? In the classic bubble some asset, say a stock, displays a price far above what its fundamentals justify. In the case of a company’s stock that would point to how productive it is in real terms – not merely via firing or laying off employees, or buying back its own stock. Almost none of current U.S. stocks exhibits this genuine indicator, and the P-E ratios (price to earnings ratios) are nearly as high as they were before the 1987 stock meltdown. Why anyone would want to buy in this high price environment is beyond me.

In the case of stocks, as prices (P-E ratios) soar to ever higher levels above fundamentals, investors (actually speculators) come to expect they’ll rise at ever faster rates in the future. This is exactly what’s happening now, as Bernanke keeps fueling the current bubble with his ridiculous supply of cheap money via low interest rates (which also drive the desperate into the volatile market since they can’t “get no” satisfaction with their bank accounts or CDs!)

According to rational finance theory- rational investors should recognize that no matter how many suckers are born every minute (according to P.T. Barnum’s famous saw) it will be game over if the P-E ratio, or house prices, or commodity futures hit a critical mass. At that point, collapse is imminent, as we saw with the subprime mortgage meltdown and stock crash in 2008.
Now, working from an ex post factor perspective, the real rationalists ought to realize that the china of expectations driving the bubble is illogical and unsustainable. Of course, rational Fed chairmen should also realize this, and cease tossing gasoline on the fire by keeping interest rates so artificially low they stoke an imminent bubble!

Bernanke is attempting to stoke this demon by keeping the long run risk-adjusted real rate of interest less than the trend growth rate of the economy (now at 2% a year) but he’s like a cat chasing its tail. The trouble is that economic science, for what it’s worth, shows we don’t inhabit such a universe.

Bernanke needs to pull his head out of his butt, and read some of eco-economist Herman Daly’s articles, papers and books, and especially pay attention to Daly’s Index of Sustainable growth. Right now, we are veering far away from that index toward a bubble form of growth that is both malignant and detrimental.

And Bernanke wants us to slice spending for Social Security and Medicare to propel it even more.

That is exactly the wrong solution. As for the deficits, the basis for those is excess military-defense spending which – if Bernanke wants more basis to lay off the entitlements- incited raids on Social Security to cloak deficits. Look back to the Reagan years for when this odious tactic began. At that time, and going into the Bush, Sr. years, an estimated 30% of the deficit was "cloaked" by spending Social Security monies on weaponry.

If anything, Bernanke owes the Social Security Trust Fund the monies that the warrior class and its inept, cowardly congressional pawns raided!

1 comment:

Caleb Shay said...

THANK GOODNESS for an eclectic blog! It is mentally stimulating to come here almost every day and see such varied material!

I would be totally bored out of my gourd or brain dead if I had to read the same stuff every day in a blog based on the idea of "one trick pony"!