Bernanke's Folly

On June 3, 2009, Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee. At the hearing, according to the Washington Times, Rep. Paul Ryan (R-WI) said that rising Treasury bond yields were

..telling us that there is no free lunch...The Treasury is issuing debt and the central bank is buying it. It gives the alarming impression that the U.S. one day might begin to meet its financial obligations by simply printing money.

To which Mr. Bernanke responded:

The Federal Reserve will not monetize the debt.

Less than a year and half later, the Federal Reserve announced its plan to do just that.  The plan, euphemistically called quantitative easing or QE2, involves the purchase of at least $600 billion of Treasury bonds over the next several months. Essentially, money will be printed out of thin air to pay off government debt.

In a piece in the Washington Post on November 4, 2010, Mr. Bernanke wrote that the Fed's actions will promote economic growth and employment without risking "economic overheating." Citing examples, he wrote:

..lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

In a recent column, economist John Tamny opined on the interventionist and "never disappointing Ben Bernanke" and QE2:

...all demand is the result of production first...We produce so that we can consume...the increased demand that Bernanke presumes is no such thing. That's the case because the wealth effect that he naively believes to exist is non-existent. If shareholders exchange shares of increasing value for dollars in order to consume, the seller's dollar bonanza is naturally matched by the buyer's reduced cash position. These things even out, with no increase in consumption. And the same applies to housing...

Mr. Tamny likens the Fed's efforts to manipulate interest rates -- the cost of credit -- to price controls and disputes the central bank's notion that we don't have an inflation problem, citing the fact the U.S. dollar continues to test new lows against gold and every major foreign currency. QE2 will only exacerbate that condition. Reading the full column is recommended to fully appreciate Mr. Tamny's position.

John Tamny is an astute, unabashed and articulate free marketer and Constitutionalist. American Thinker readers would benefit from (and probably enjoy) monitoring his opinions, especially during these perilous financial times.
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