Federal Reserve’s Ben Bernanke Finally Realizes U.S. Economy’s Problem

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” The latter is a rare bit of logic which emanated from Ben Bernanke last Friday, our failed Fed Chairman who’s deftly mastered the art of walking, talking about economics, and being wrong at the same time.

The shame here is that Bernanke didn’t reveal the same kind of modesty during his confirmation hearings back in 2006, not to mention in 2008. Nearly three years ago Bernanke, brain bursting with false “insights” about what caused the Great Depression, chose to ignore the simple and truthful words uttered at the this year’s Jackson Hole central bankers’ bash. Sure enough, we’re all worse off at present for our hubristic Fed head doing as those vain sorts who lust for high central banking positions always do, which was to act in ’08 and beyond when he should have done nothing.

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That’s the case because despite his protests otherwise, Bernanke is the problem at present. Economies naturally heal, they do so thanks to non-interventionist policies from governments that remove the barriers to production, and importantly none of this should involve central banks.

In previous decades inflation was properly defined, as in inflation was nothing more than a devaluation of the unit of account; in our case, the dollar. It’s an unfortunate legal reality that the Fed has a dual mandate to keep inflation low in concert with low unemployment, but then if dollar-price stability – meaning no inflation – were the goal of the Treasury/Fed two-headed monster, unemployment would naturally be low at all times. Sadly, something as simple as dollar-price stability was never Bernanke’s goal, nor was it the Treasury’s in 2006 or 2008.

A long-time adherent of the somewhat modern – and widely discredited – view that inflation results from too many people working and producing, Bernanke was able to trick enough Republicans into believing that he felt inflation was a monetary phenomenon despite an extensive paper trail which revealed opposite beliefs. Easily gulled apparently, at the time of Bernanke’s nomination conservatives and Republicans explained to those of us who see the dollar value of commodities as the best measure of monetary error (if they’re rising, money is cheapening) that Bernanke largely felt the same way. Thus Bernanke was confirmed as Fed Chairman, and a financial crisis and long-term downturn rooted in monetary error was born.

Though his incorrect view of inflation informed his actions from the very first day, once 2008 hit with the resulting economic downturn, Bernanke foisted on the nation and world the discredited Phillips Curve in hyperdrive, which once again says inflation is always and everywhere a function of too much economic growth. And with the economy foundering, Bernanke, also captive to the logically impossible view that money creation itself drives economic growth, started printing money with the clear consent of the equally hapless Bush and Obama administrations. The thinking then and now was that if the economy was weak, inflation must be quiescent, so print away. The painful results are all too obvious.

Gold, the most devaluation sensitive commodity known to mankind, has more than tripled on the watch of a Fed chairman who doesn’t think the value of the dollar is an inflation input. And with gold (NYSE:GLD) having skyrocketed, stocks have fallen; the S&P 500 down 6% since Bernanke’s arrival versus the aforementioned tripling of the gold price. Investors buy income streams when they invest, but with the dollar in freefall incentives to commit capital have been reduced, and stocks reflect that reality.

Clues from Ben Bernanke’s Speech Continue to Fuel Markets>>

And while the U.S. economy’s hidden genius has always been a freedom to succeed and fail, Bernanke told all dim enough to listen that if U.S. banks (NYSE:XLF) were allowed to go under that we’d suffer the mother of all Great Depressions. That lending never faltered in 2008 thanks to 80% of lending occurring away from banks didn’t deter this most headstrong of Fed Chairmen. Not only would he impose an economy retarding devaluation on the economy, his fingerprints were all over bank bailouts that by definition restrained the growth of the economy for failures being propped up at the expense of successes.

Lastly, despite the Bank of Japan’s (NYSE:EWJ) inability to revive economic spirits with a zero rate policy, Bernanke burdened us with that too to keep credit “cheap.” Apparently the failure of every other price control scheme since Pericles was lost on our allegedly erudite Chairman, which means credit will paradoxically remain tight for all but the largest of corporations. Of course, if the Fed weren’t distorting the cost of credit, rates set by the market would serve as a lure for the very savers so essential to capital replenishment, but Bernanke is nothing if not totally convinced of how correct he is; economic realities proving otherwise be damned.

It’s bad enough that the U.S. and the world have to suffer this most hopeless of central bankers, but even worse, Bernanke has taken a page from President Obama’s playbook whereby he regularly shifts the blame for the results of his mistaken policies to others. Spiking commodity prices that always occur amid monetary debasement? Those are “transitory”, and the fault of Chinese and Indians so obnoxious as to want to eager join the first world in terms of economic growth. No acknowledgment from this most oblivious of central bankers that commodities haven’t spiked as much in currencies that have outperformed the wilting dollar such as the Swiss franc.

Sluggish growth? That’s apparently been caused by a Japanese earthquake; this despite the widely held view among the Keynesians with which Bernanke is aligned who say war, natural disasters and all other wealth-destroying calamities are in fact stimulative due to the inevitable rebuilding that occurs.

And then perhaps the biggest howler of all, Bernanke believes the debt ceiling debate and uncertainty over it is what also set our economy back. Of course the problem with such an assertion is that the markets weren’t spooked at all about a debate the resolution of which was long in advance priced by investors. After that, how a debate that solely centered onjust how much we’d grow the government could hold back the economy given Bernanke’s odd belief that government spending helps it is quite simply contradictory.

On a happy note, as evidenced by the Fed Chairman’s modest statement mentioned at the beginning of this piece, it seems he’s finally woken up somewhat to the Fed’s logical inability to fix our problems. That’s progress, and now all we need him to do is to scrap the programs he’s already foisted on us so that the individuals who comprise our economy can more readily start producing. Baby steps, but the day the Fed figures out that it is the problem is the day true recovery can begin.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading.

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