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Brace Yourself for a Hard Landing

Bernanke Tightens the Noose


Ben Bernanke has been a bigger disaster than Hurricane Katrina. But the senate is about to re-up him for another four-year term. What are they thinking? Bernanke helped Greenspan inflate the biggest speculative bubble of all time, and still maintains that he never saw it growing. Right. How can retail housing leap from $12 trillion to $21 trillion in 7 years (1999 to 2006) without popping up on the Fed’s radar?

Bernanke was also a staunch supporter of the low interest rate madness which led to the crash. Greenspan never believed that it was the Fed’s job to deal with credit bubbles. "The free market will fix itself", he thought. He was the nation’s chief regulator, but adamantly opposed to the idea of government regulation. It makes no sense at all. Here’ a quote from Greenspan in 2002: “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We have tried regulation, none meaningfully worked.” Bernanke is no different than Greenspan; they’re two peas in the same pod. Everyone could see what the Fed-duo was up to

Now Bernanke is expected to carry on where his former boss left off, using all the tools at his disposal to offset the atrophy that’s endemic to mature capitalist economies. "Stagnation", that the real enemy, which is why Bernanke supports this new galaxy of oddball debt-instruments and bizarre-sounding derivatives; because it creates a world where surplus capital can generate windfall profits despite chronic overcapacity. It’s financial nirvana for the parasite class; the relentless transfer of wealth from workers to speculators via paper assets. Marx figured it out. And, now, so has Bernanke.

Bernanke is just following Greenspan’s basic blueprint. It’s nothing new. Unregulated derivatives trading is just one of the many scams he’s thrown his weight behind. The list goes on and on; one swindle after another. Just look what happened when Lehman Bros blew up. Just weeks earlier, Bernanke and Co. had worked out a deal with JP Morgan to buy Bear Stearns with the proviso that the government would guarantee $40 billion in Bear’s toxic assets. Fair enough. The whole transaction went by without a hitch. Then Lehman starts teetering, and Bernanke and Treasury Secretary Henry Paulson decide to do a complete policy-flip and let Lehman default. Their reversal stunned the markets and triggered a frenzied run on the money markets that nearly collapsed the global financial system.

Why?It was because Bernanke knew that the big banks were buried under a mountain of bad assets and needed emergency help from Congress. The faux-Lehman crisis was cooked up to extort the $700 billion from taxpayers via the TARP fund. Bernanke and Paulson pulled off the biggest heist in history and there’s never even been an investigation.

Bernanke was in the wheelhouse when the subprime bubble blew and carved $13 trillion from aggregate household wealth. Consumers are now so deeply underwater that personal credit is shrinking for the first time in 50 years while unemployment is hovering at 10 per cent. If Bernanke isn’t responsible, than who is?

Take a look at Bernanke’s so-called lending facilities. They are all designed with one object in mind, to support financial markets at the expense of workers. The media praises the Troubled asset-backed security lending facility (TALF) as a way to restart the wholesale credit system (securitzation). But is it? Under the TALF, the government provides up to 92 per cent of the funding for investors willing to buy assets backed by auto, credit card, or student loans. In other words, the Fed is putting the taxpayer on the hook for another trillion dollars (without congressional authorization or oversight) to produce more of the same high-risk assets which investors still refuse to purchase two years after the two Bear Stearns hedge funds defaulted in July 2007. Fortunately, the TALF turned out to be another Fed boondoggle that fizzled on the launchpad. Taxpayers were lucky to dodge a bullet.

Bernanke’s latest stealth-ripoff is called quantitative easing (QE) which is being touted as a way to increase consumer lending by building up banks reserves. In fact, it doesn’t do that at all and Bernanke knows it. As an "expert" on the Great Depression, he knows that stuffing the banks with reserves was tried in the 1930s, but it did nothing. Nor will it today. Here’s how economist James Galbraith explains it:

"The New Deal rebuilt America physically, providing a foundation from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving….

“What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended….. the relaunching of private finance took twenty years, and the war besides.

“A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around." ("No Return to Normal:Why the economic crisis, and its solution, are bigger than you think" James K. Galbraith, Washington Monthly)

Bernanke QE is a joke. He’s just creating a diversion so he can shovel more money into insolvent banks, pump-up the stock markets, and recycle Treasuries. Otherwise why would Obama’s Chief Economic Advisor, Lawrence Summers say this:

"In the current circumstances the case for fiscal stimulus… is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase — probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration." ("A Bailout Is Just a Start", Lawrence Summers, Washington Post)

QE is monetary policy writ large and–by Summers’ own admission–it won’t work. It won’t reduce unemployment or spark a credit expansion. That’s why total consumer spending is falling, retail sales are flat, and wages are beginning to tank. Everywhere businesses are trimming hours and cutting salaries. Bernanke’s $1 trillion in excess bank reserves has had no material effect on lending, credit expansion or jobs. It’s been a dead loss. Here’s Damian Paletta of the Wall Street Journal:

"U.S. lenders saw loans fall by the largest amount since the government began tracking such data, suggesting that nervousness among banks continues to hamper economic recovery.

Total loan balances fell by $210.4 billion, or 3 per cent, in the third quarter, the biggest decline since data collection began in 1984, according to a report released Tuesday by the Federal Deposit Insurance Corp. The FDIC also said its fund to backstop deposits fell into negative territory for just the second time in its history, pushed down by a wave of bank failures.

“The decline in total loans showed how banks remain reluctant to lend, despite the hundreds of billions of dollars the government has spent to prop up ailing banks and jump-start lending. The issue has taken on greater urgency with the U.S. unemployment rate hitting 10.2 per cent in October, even as the economy appears to be stabilizing.

“The total of commercial and industrial loans, a category that includes business loans, fell to $1.28 trillion at the end of September, from $1.36 trillion at the end of June. The outstanding total of construction loans, credit cards and mortgages also fell. ("Lending Declines as Bank Jitters Persist" Damian Paletta, Wall Street Journal)

Bernanke, Summers, Geithner and Obama have all misrepresented quantitative easing (QE) so they can improve the liquidity position of the banks without the public knowing what’s going on. The fact is, the banks are not "capital constrained" by lack of reserves. Therefore, extra reserves won’t lead to increased lending. Billy Blog clarifies how the banking system really works and how that relates to QE: "Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualization suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending. But this is a completely incorrect depiction of how banks operate. Bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards.”

So, if bank lending is not constrained by lack of reserves, then what does QE actually do? Not much, apparently. All quantitative easing does is exchange one type of financial asset (long-term bonds) with another (reserve balances). "The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns." (Bill Mitchell) The net result of Bernanke’s meddling is just this: Quantitative easing and the lending facilities have kept the price of financial assets artificially high, which has minimized financial sector deleveraging. (Financial sector debt is currently $16.4 trillion, nearly the same as it was a year ago. $16.3 trillion) In contrast, households have lost $13 trillion which has thrust the middle class into an ongoing depression. The soaring unemployment and viscous credit contraction are the result of the Fed’s policies, not economics.

Tightening the Noose

The Fed is engaged in various covert-strategies to recapitalize the banking system. At the same time, Bernanke, Summers, Geithner, and Obama have stated repeatedly, that they’re committed to slashing the long-term deficits. This means that they plan to reduce liquidity and push the economy back into recession so they can launch a surprise attack on Medicaid, Medicare, and Social Security.

Last Thursday, Bernanke announced that he will begin to tighten the noose as early as March 31 2010, when the Fed ends its $1.65 trillion purchases of agency debt, mortgage-backed securities, and US Treasuries. That’s why stock market volatility has picked up since the Fed released its December 16 statement. Here’s a clip:

"In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010,… These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral."

By April 1, 2010 the mortgage monetization program will be over; long-term interest rates will rise and housing prices will fall. When the Fed withdraws its support, liquidity will drain from the system, stocks will drop, and the economy will slide back into recession. Obama’s second blast of fiscal stimulus–which is a mere $200 billion dollars –won’t make a lick of difference.

The Obama administration and the Fed are on the same page. There will be no lifeline for the unemployed or the states. Those days are over. Now it’s on to "starve the beast" and crush the middle class. Maestro Greenspan summed up the Fed’s approach in a recent appearance on Meet the Press when he opined, "I think the Fed has done an extraordinary job and it’s done a huge amount (to bolster employment). There’s just so much monetary policy that the central bank can do. And I think they’ve gone to their limits, at this particular stage."

Indeed. Brace yourself for a hard landing.

MIKE WHITNEY lives in Washoington state. He can be reached at