Les Folies Bernanke

The audience is sitting around waiting for the show, when Chairman Bernanke at the Jackson Hole conference will or will not announce QE3, his third effort at resuscitating the U.S. and world economies by printing money. It is bizarre to think that this man, who believes in strange and wonderful ideas of economics, some disproven over 150 years ago, has been given such unchecked power.

Yet here we sit. Of course the failure of the economy to grow is visible to anyone. Less visible is the parlous condition of banking systems around the world, which were the recipients of more than a trillion dollars of handouts from the Fed and waivers of accounting principles that would reveal their true condition. The irresponsible and probably illegal behaviors of these banks are threatening to bring them down, despite the Fed’s best efforts. Bank of America, the largest U.S. bank by deposits, is twisting in the wind as a result of its ill-advised (by the administration) acquisition of Countrywide. Are we facing another Lehman-style crisis? It is far from impossible.

In any event, the consequences of a QE3 are pretty well understood at this point, as we have seen QE1 and QE2. Stock and commodity prices will rise, bond prices will fall and interest rates will rise, there will be a temporary improvement in economic data, followed by a rapid slide when QE3 ends and we are waiting for QE4. What little strength the economy has will be further dissipated and living standards – real wages – will decline. And so it goes.

This situation arises primarily from years of similar monetary abuse by the Fed. What will it take to stop this?

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