Central Banking Tsunami

The economy will grow by three to four percent in 2011, according to Federal Reserve Chairman Ben Bernanke, but unemployment will remain. Meanwhile, according to Bernanke, the horrid spectre of deflation has been averted for the moment. Finally, banks are getting back to basics and making "prudent loans," instead of rash ones that led to the "trouble" of 2008. Really folks, what's this man smoking? ...

Here's an excerpt from an editorial that appeared in Forbes by Reuven Brenner, who holds the Repap Chair at McGill's Desautels Faculty of Management:

Ben Bernanke's Elixir: Mixing Monetary Nonsense ... The long-term impact of what Ben Bernanke is doing is disastrous for the United States. His policies prevent the dollar value of assets on banks' balance sheets from falling, thus keeping poorly managed banks in business. This policy is dragging down the dollar, prolonging the crisis, and slowing down the U.S. recovery.

There's no need to go into any macroeconomic gobbledygook, technical vocabularies of QEs and monetary policy to understand this. And there's no need to delve into elusive debates about just what do central bankers mean when they talk non-stop about how they mitigate undefined "risks." ... The present policies of the Fed achieve one thing: They keep the banks in business by sustaining the nominal dollar value of bank assets. After all, there are only two ways to sustain (or increase) the dollar value of assets on the banks' books ...

The Federal Reserve is currently preventing the dollar-value of assets on the banks' balance sheets from falling; real estate in particular, but also securities traded on the stock market. That is what a zero interest rate achieves: it allows banks to stay solvent and prevents nominal values on their balance sheets from falling ... A side effect of the Fed's zero-interest policy is that it reduces the value of the dollar. The country is in fact becoming poorer. Worse, the banks are not put on firmer footing. Although the Fed is restoring the banks' capital, the policy cannot create competent bankers.

While Brenner's diagnosis is grim, he believes that the Fed's policies have been mitigated by similar policies in other countries such as Russia and Brazil and whole regions such as the EU. He has a point. The central banking economy is worldwide now and all regions are essentially engaged in a "race to the bottom" - debasing their currencies by printing too much - in order to prevent a strong currency from interfering with trade.

Read full article: Right Side News, January 14, 2011

Read translated article (German): Propaganda Front, January 14, 2011