Rattling Apart: Captain Carnage and the Bear

Neo-conservative thought has been shown to be a failure at everything else it has attempted – now it is destroying our financial system. Long, hard ride down is ahead, people. The market is now into a dangerous game of Liar’s Poker.

Rattling Apart: Captain Carnage and the Bear | The Agonist

In 2001, as soon as he was made the economic advisor to Bush, I stated repeatedly that Ben Bernanke would be made the Federal Reserve Chairman after Greenspan, and that he would be a disaster. This was based on a reading of his academic work, which was, essentially, a series of attempts to prove that such a neo-conservative system could avoid the collapse that lead to the Great Depression. No Great Depression, no FDR. No FDR, no situation where the rich would have to accept regulation and restriction in return for bailing out. In essence the first problem is the “Great Contraction.” The United States and other nations, to attempt to re-impose the Gold Standard after allowing it to lapse for the First World War, had to at a certain point accept prices at the new levels, or had to dramatically reduce the money supply. They chose the later, creating a massive contraction of the money supply. This was done in the face of a downturn, because it was feared that a downturn would lead to easy money, and this to hyper-inflation of the kind witnessed in Germany, or very high inflation, as seen after the First World War. For them, coming after a two generation period where deflation was the norm during the classical gold standard and the consolidation of the first Conservative Era, globally, inflation was a horror.

Bernanke and others, argued that the Great Depression was not in any way a structural event, but strictly a macroeconomic monetary event. That strictly macroëconomic policy measures could have been used to effect the bailout. There were two major intellectual problems. One of them is the point where monetary policy is “pushing on a string.” Or what Bernanke called “the zero point”. The “bold” steps turn out to be the same sort of maneuvers used in the first decade of this century: finding deep pockets and hiding the losses.

Bernanke’s failures begin as economic advisor to the President and continue in his time on the Federal Reserve. The culminate with his failure to either deal with the liquidity crisis, or to face inflation head on. By allowing the housing bubble, and the financial bubble built on it, to explode he set up the very circumstances. By dragging his feet on raising interest rates, and then by ignoring the expanding monetary crisis, Bernanke has set the stage where neither he, nor anyone else, is in a position to act. With a President who is content to give imaginary orders to imaginary armies, there is no center of power that can move. It also indicates that the opposition party has made a series of gross miscalculations about the situation, believing the rhetoric that things were going well, and that they were getting the best deal they could. They were facing people who were bluffing all the way, and are now realizing that there is no rush to give way on anything.

The “slow” rate raising campaign was a double disaster, it neither headed off inflation nor did it keep credit easy enough. This is because the problem was not the level of interest rates, per se, but what we were spending the money on. As many, many, many commentators, many, many times have pointed out, the US was consuming too much, and exporting too little. The Neo-Conservative happy monsters said that this could go on for ever, giving other people our paper for their oil and goods.

While it is possible that we will emerge from this functional, the likelihood is that we are going to see a continued fall for the next 9 months, as the crisis deepens, a die hard illegitimate executive burns his last brands on our skin, and a feckless opposition folds its cards over and over and over again, allowing ordinary people to bear the brunt of the continued contraction.

We are riding this bucket down a ways farther, because there is nothing to right the equilibrium, and without the stimulus from war spending, on which we are so dependent, there will be no pick up in business activity soon. There will be some increased exports, but not sufficient to take the place of the cratering of housing.

What needs to be done? Re-regulation is obvious. Making the Fed serve elected policy makers is a no brainer. Restating numbers to prevent the white washing of bubbles is essential, a public sense of ownership of the financial system as part of the “high ground of the economy” seems essential. Firing Ben Bernanke is a pink do this to day post it note.

But most essentially there needs to be a change in the basis of money, simply because the obvious stability of real estate assets in the United States will no longer be enough.