Betting On Bernanke’s Folly

Markets soared this morning after two very poor economic reports, new home sales and the Richmond Fed. Traders are betting that the worse the economic data, the more likely it is that Chairman Bernanke will rush out QE3. Whose main effect will be, as usual for QEs in general, to increase asset prices and trash the economy through higher input prices and interest rates.

Given the track record, one really cannot blame traders for betting that Bernanke is an idiot. It seems like something of a lock, although the Fed prizes surprises and secrecy, so it may come up with some new stupidity. After all, it fought the disclosure of its secret bank loans all the way to the Supreme Court, so who knows what new illegal and nutty idea is making the rounds (or even what they are doing). The over-reach of these covert bank loans cries out for more Fed transparency, as the good doctor Ron has been insisting for years. Kudos to Bloomberg for going to the mat with the Fed on this one.

Bernanke’s cohort Paul Krugman was on television claiming that an alien invasion would solve the nation’s economic problems, forcing the government to spend.

“If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months,” he said. “And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better–”

“We need Orson Welles, is what you’re saying,” Rogoff cut in.

“There was a ‘Twilight Zone’ episode like this in which scientists fake an alien threat in order to achieve world peace,” Krugman said. “Well, this time, we don’t need it, we need it in order to get some fiscal stimulus.”

One blogger that I read wondered why someone like this, who doesn’t even understand the “broken window fallacy” has readers, let alone a pseudo-Nobel prize. The answer, I believe, is credentialing. These guys all have PhD.s and prizes to their name, which are awarded by their peers – who think (if it can be dignified by that word) like they do. So we believe them (the root of credential is the Latin credere – to believe) even though the credential-givers and receivers are both locked in the same incorrect paradigm. Since actual results and outcomes do not influence the belief in the paradigm, we continue to drive off the cliff like a herd of lemmings. As Doug Noland observes:

And the PhDs? They stick steadfastly with their doctrine, not for a minute admitting the experimental and theoretical nature of their policy prescriptions. And I see no willingness on their part to question their view that contemporary monetary management is enlightened and superior to the past. There is an element of hubris that gets in the way of objectivity.

I have for years now referred to this theoretical framework – both from an economic doctrine and policymaking perspective – as little more than a sophisticated version of “inflationism.” And we are increasingly witness to the age-old Scourge of Inflationism. And as we’ve already witnessed recently, the inflationists will warn about the dangers of not being bold – of losing resolve. “Don’t repeat the mistakes of Japan!” As it’s been throughout history, it always seems to be a case of “just one more bout of money printing” and government spending – and then we’ll get monetary religion. Did I really hear and read this week that the remedy for our nation’s problems is to be found with one more economic stimulus package coupled with additional measures ensuring long-term deficit reduction?

Fiscal and monetary policies are rapidly losing credibility. Treasury prices may be inflated, but don’t mistake this for confidence in our system’s “core”. It may exist completely outside of the PhD’s sophisticated framework, but the markets and regular folk are feeling the ill-effects of currency debauchery.

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