America's Greatest Financial Scalawag

POITOU, FRANCE - Arnold at West Point... Sherman at Atlanta... Powell at the UN... We Americans remembered our heroes yesterday.

And here at the Diary's headquarters in rural France, we recalled one of the greatest of them all...

Greatest Scalawag

Our July 4th holiday was spent in quiet relaxation, repainting a third-floor bedroom. Unlike chainsaw work, you can let your mind wander when painting without worrying about losing a leg.

And so, our mind left the reservation, where all good patriots are confined, and focused on the rascals and scalawags who made America what it actually is today.

We quickly realized that we were spoiled for choice. Who was the greatest?

Was it Hamilton, who crushed the Whiskey Rebellion and centralized power in Washington?

Was it Lincoln, who launched a war that laid as many as 1 million Americans in early graves?

Was it Teddy Roosevelt, who set the nation on the road to imperial glory when he pushed American soldiers into Cuba and the Philippines?

Or was it Woodrow Wilson, who looked in the mirror and saw Augustus himself?

Alas, the pantheon of political heroes bulges with counterfeits. But since our beat is money, we'll limit our research to the lowlands around Olympus... and the lowlife bars in the vicinity.

Moment of Ersatz

That was where we found our hero on Tuesday... in the pages of The New York Times. Ben Bernanke, the former Fed chief, gave a speech to a group of economists.

For reasons the Times kept to itself - if it actually had any - the paper passed along his thoughts as if they were important.

Ben Bernanke's moment of ersatz glory came as Lehman Brothers went broke and the financial system seemed on the edge of collapse.

In September 2008, people were running around like chickens with their heads cut off. But in his shameless memoir, The Courage to Act, he didn't mention that he had the bloody cleaver in his hand, waving it in front of Congress and warning that if the politicians failed to act on Friday, "you may not have an economy" on Monday...

...which just shows how much he knew about economics and markets.

Panics are useful; they clear away - quickly - bad debts, bad businesses, and bad investments. But nothing of real value disappears.

Houses... shops... factories... cars - they weren't going away. Neither was the economy.

The September '08 meltdown was merely correcting Bernanke's own misguided diddles. You'll remember that Fed policy always consists of the same mistakes...

By 2007, the Fed had pushed rates down too low for too long (Mistake #1). That led to over-expansion, malinvestment, and the misallocation of capital.

And then, when the Fed raised rates to try to "normalize" the credit markets (Mistake #2), it pushed the borrowers over the edge.

Homeowners defaulted on their mortgages. House prices fell. Mortgage lenders and their lenders went broke.

That is what is supposed to happen.

Bubbles should pop. Bad debt should be eliminated; and borrowers and lenders are supposed to learn not to do that again.

Instead, in the panic of '08-'09, Bernanke went straight to the Biggest Mistake #3 Ever Made: He cut short the learning process and stopped the correction.

The Fed Funds rate went to "effectively zero" ... and instead of allowing Wall Street to suffer its errors with dignity, the Fed added some $4 trillion in liquidity - through its "quantitative easing" - to help float the brokers' yachts in their Connecticut harbors.

Rushmore of Finance

Now, it's almost 10 years later. How'd that act of bravery - cutting off the much-needed credit correction - work out?

The New York Times tells us that the richest 10% scored a 27% increase in their wealth since 2007. The top 10% have doubled their share of national wealth since the '70s. And the top 0.1% now owns as much wealth as the entire bottom 90%.

But even now, the middle classes have still not clawed back the wealth they lost in the '08-'09 crisis. The bottom 90% is still down 20% to 30%.

Even in the greatest economy ever - according to the Trump team - the wealth continues to flow to the few, not to the many.

Share buybacks hit a new record in the first quarter. And a report from global charitable organization Oxfam showed that 82% of the wealth generated worldwide in 2017 went to the top 1%. The bottom 50% got nothing.

And in the U.S., household savings dropped to a new low this year - below 3% - while household debt hit a new record high in the first quarter. It is at $13.2 trillion, with debt service payments at nearly 6% of disposable income.

But nobody seems very interested in finding out what is really going on... or why.

Speaking to the American Enterprise Institute think tank, Bernanke neither admitted fault... nor did the Times find any.

Instead, both Bernanke and the Times preferred to focus their attention on the Republicans' ill-advised tax cut.

"It makes the Fed's job more difficult," he told the group, "because what you're getting is a stimulus at the very wrong moment."

A tax cut without a corresponding spending cut is always a fraud. But it is a fraud that most economists - including Ben Bernanke - approve of... if it is done at the right time.

In their view, the feds know when to tighten up and when to loosen up. And now, when the economy is allegedly running hot, is supposed to be the wrong time for a tax cut. The extra spending will cause prices to rise, they say.

Then, when times have changed and a recession has begun, "What will the Fed do?" they ask. It will want to cut rates. But it is required by law to put up rates to bring inflation, caused by the tax cut, under control.

Thus, will its options be reduced and its hands tied. And the coming debacle - for which Bernanke bears more blame than anyone else - will be the Republicans' fault.

And thus does Ben Shalom Bernanke, the "Hero" of '08 and Time magazine's "Person of the Year" for 2009... seek to save his place on the Rushmore of finance - shoulder-to-shoulder with John Law, Charles Ponzi, and Bernie Madoff.

Regards,

Bill Bonner, Bonner & Partners
Vivek Kaul's Diary

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Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.