Don't Be Stupid with the Economy

The US Senate's decision on approving Ben Bernanke
for a second term as chair of the Federal Reserve Board is coming down
to the wire and the Wall Street crew is once again pulling out all the
stops. To get the 60 votes they need for Senate approval they are
reaching into the treasure chest of tall tales they used to push
through the troubled asset relief programme (Tarp). They are once again
telling the American people that the world will end if we don't do
exactly what they want.

The main story they are pushing is that if Bernanke is not approved then the markets will panic
and send the economy tumbling. Both parts of this story deserve some
serious scepticism. First, there undoubtedly will be some uncertainty
in the financial markets if Bernanke is not reappointed. Markets like
continuity. A new Fed chair means a break in continuity. Therefore, we
can expect to see some decline in the stock market, probably about the
same as we get when there is a worse-than-expected jobs report.

focusing on day-to-day movements in the stock market is no way to make
economic policy. For practical purposes, the daily movements in the
market have no impact on the economy. Furthermore, there is no way to
move the economy away from its current Wall Street bubble-driven growth
path to one built on a productive economy without at least some
temporary decline in stock prices.

Such a decline is inevitable
if for no other reason than the fact that Goldman Sachs, JP Morgan and
the rest account for a substantial portion of the value of the stock
market. If we can never do anything that even temporarily hurts stock
prices then we can forget about reining in Wall Street.

the bond market, which is far more important for the economy than the
stock market, has been rallying in recent days as Bernanke's nomination
faces increasing difficulty. Bernanke's troubles may not be the case of
this rally, but they have not prevented the 10-year Treasury rate from
falling considerably.

It is also worth pointing out that one
supposed source of bad news - a declining dollar - would actually
benefit the economy. The country has a huge trade deficit because the
dollar is over-valued. If the dollar were to decline as a result of
Bernanke not being reappointed, it would give a boost to our exports
and cause domestically manufactured products to displace imports.

troubles don't seem to be depressing the dollar at the moment, but if
the Wall Street fear mongers and their allies push this line, we should
realise that they are once again spouting nonsense. A lower-valued
dollar is good news for the economy.

To briefly summarise the
case against Bernanke, at the top of the list is the fact that his
failures at the Fed (both as chairman since 2006 and as a governor
since 2002) brought the economy to the brink of a second Great
Depression (Bernanke's assessment, not mine). Anyone else who had
failed so completely at their job would be fired in a minute.

Only in Washington and on Wall Street could such a disastrous record be rewarded with another term in office.

the focus of his bailout was to return Wall Street to health while
leaving the rest of the country reeling. Bernanke rightly tapped the
Fed's virtually unlimited resources to keep the financial system from
collapsing, but he gave money to the banks at below market interest
rates with no strings whatsoever.

They were able to use this
money to restore themselves to health, but were not required to do
anything about compensation practices, risky trading, or helping
homeowners facing foreclosure. Nor were their shareholders and
bondholders required to incur any losses. In effect, Bernanke gave a
huge gift from the taxpayers to the Wall Street boys who were
responsible for the crisis in the first place.

Finally, to help get the Tarp passed back in October 2008, he told Congress that the commercial paper was shutting down,
which meant that even healthy companies would not be able to borrow the
money needed to meet their payroll and pay other bills. This would have
quickly led to an economic collapse.

Bernanke did not tell
Congress that he was planning to set up a special lending facility to
directly buy commercial paper. He announced this facility the weekend
after Congress approved Tarp. It is not the Fed chairman's job to lead
Congress up the garden path. Nor is it his job to bail out Wall Street
at the expense of the rest of the country. It is his job to prevent the
growth of dangerous bubbles. That's three really big strikes.

Bernanke should be sent out to enjoy his Time "Person of the Year" status in retirement.

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