Much Ado About Bernanke

Yesterday, Ben Bernanke began the first of what will likely be many semi-annual pilgrimages to Capital Hill. Under his predecessor, such rituals amounted to nothing more than political grandstanding, where politicians either baited Greenspan into validating their agendas or blamed him for pet peeve problems, and Greenspan tried to simultaneously appease every politician in attendance, with all on Wall Street painstakingly dissecting his every word. The media actually hyped-up this meaningless spectacle as if Bernanke's success as a Fed chairman actually hung on his performance. I suppose that after the curtain shuts on Act Two today, Bernanke and his Wall Street fans will anxiously await the reviews.

As with Greenspan before him, Bernanke continued to downplay the significant challenges facing a badly unbalanced U.S. economy; our trade deficits, budget deficits, national debt, unfunded liabilities, inflation, lack of domestic savings, under-funded pensions, the real estate bubble, and America's increased dependence on foreign central banks. Instead, he continued to fashion a silk purse out of what really amounts to a sow's ear economy.

When pressed, Bernanke reluctantly conceded some of the structural problems facing our nation, but did so in the context of the burdens we were placing on our grandchildren. This is a typical political tactic, as references to grandchildren create a false sense that the consequences of our actions will be postponed for another thirty or forty years. Most of us do not care about what happens in forty years, least of all politicians, who certainly will not be running for reelection in 2050.

The reality however, is that it is not future generations of Americans that will bear these costs, but our own. Sure our grandchildren might grow up in a poorer America, assuming they do not emigrate in search of greater opportunities abroad, but they will not directly pick up the tab. It is this generation that will be stuck paying the bills, as its forfeits is savings, home equity and any hope of a gracious retirement.

As always, the most ridiculous aspect of the entire farce was listening to politicians gripe about problems they themselves have been instrumental in helping to create. Of all of the ridiculous congressional comments, the most incredible was one in which "big government" was argued to refer only to the number of people government employs rather than the total of its expenditures. With attitudes like that, it is no wonder these clowns spend our money so freely.

Greenspan often prided himself on his ability to speak at length without actually saying anything of real significance. If Bernanke's goal was to follow in his mentor's footsteps then perhaps his testimony was a success. Unfortunately the same will not likely be true for his tenure as Fed chairman. Greenspan left him quite a mess and my guess is rather than clean it up, Bernanke will simply try to sweep it under an already extremely lumpy imported rug.

In his prepared remarks Bernanke assured congress that he would pursue the Fed's dual mandate of price stability, full employment, and moderate long-term interest rates (actual that's three, but its close enough for government math.) The greatest irony however, is that had such a mandate been proposed originally, the Federal Reserve Act never would have been passed. At inception, the Fed was simply charged with providing for "an elastic currency," which meant expanding the money supply during periods of economic growth and contracting it during periods of recession. Its current "mandate" has simply rendered the Fed as nothing more than an engine for perpetual inflation. Unfortunately for all of us, this is one goal it never fails to achieve.

February 16, 2006

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