Gee, nice article from The Washington Post:
Bernanke has become the country's economist in chief, the banker for the United States and perhaps the world, and has employed every weapon in the Federal Reserve's arsenal. He has overseen the broadest use of the Fed's powers since World War II, and the regulation proposals working their way through Congress seem likely to empower the institution even further. Although his actions may be justified under today's circumstances, Bernanke's willingness to pump money into the economy risks unleashing the most serious bout of U.S. inflation since the early 1980s, in a nation already battered by rising unemployment and negative growth.
That's conventional wisdom, of course.
The problem lies here:
Since late last year, however, Bernanke has signaled that even these efforts are not enough. In a January speech, Bernanke acknowledged the limits of liquidity and outlined a broader strategy in which the Fed would do everything in its power to increase credit. And last month, in an extraordinary interview on "60 Minutes," Bernanke conveyed a powerful message with his words about the Fed "printing money" and with his body language, as he toured his home town in South Carolina and declared that he cares about Wall Street only because it affects Main Street -- in part attempting to defuse criticism that the Fed lending was mainly benefiting bankers.
Watch the birdie folks, because when you misdiagnose the problem (or simply refuse to address it) you're bound to come up with bad answers instead of good ones.
"Increasing credit" sounds good if you're in a situation where credit is too tight because lenders can't (or won't) lend to willing and able borrowers. Since we are a credit-driven economy (and always have been, even before The Fed) this appears to be the right answer any time credit decreases.
But what if the reason credit granting is decreasing isn't due to a lack of willing and able borrowers or ability to fund loans, but rather because of saturation of credit demand - that is, all the willing and able borrowers have borrowed all they want, leaving only unable and unwilling borrowers?
If you lend to unable (to pay) borrowers you simply guarantee a loss. If you try to lend to unwilling borrowers your shouts of "free money!" fall on deaf ears.
In neither case can you increase the velocity of monetary transactions, which is at the end of the day Bernanke's entire point in this exercise.
What does this graph tell you?
Note that while government borrowing has certainly expanded (and will even more) so has household, corporate, financial and GSE (which is really household, since that's mortgages) borrowing.
The question that Ben doesn't want to answer or even ponder out loud is "where is the wall?"
Japan found it, and discovered that attempting to "print" one's way out of a severe recession caused by excessive credit doesn't work - it simply transfers the debt to the government but any "recovery" that allegedly comes from this exercise is both short-lived and followed by an even worse decline. The Nikkei was beyond 30,000 when their bubble originally popped and hasn't been anywhere near since. Nor have property values recovered.
All that Japan managed to do is transfer that debt to the government where it has remained like a millstone around the neck of the economy, causing further slowdowns (like the current one) to be far more damaging.
Bernanke seems to think The Depression was caused by "too high" borrowing costs, and that he can manipulate them to avoid this. He has forgotten the basics of lending, it would appear: the cost of borrowing money is not only set by the risk of future inflation, it is also set by the risk of future default. As debt load rises even with a risk-free rate of return of zero (a ZIRP environment as we have now) borrowing costs can and will skyrocket if the debt load is excessive and default risk gets out of hand.
Borrowing costs didn't rise in The Depression due to inadequate liquidity provided by The Fed. They rose due to the risk of default becoming ridiculous as debt-to-GDP levels skyrocketed, and falling GDP just made that ratio worse.
The fact that GDP must contract to sustainable levels when one "pulls forward" demand for 20 years has escaped these people - or they are just too full of themselves politically to admit it. Either way as debt-to-GDP rises lending will be choked off as the cost of borrowing shoots the moon, forcing further downward GDP.
There is no escape from reality; you can attempt to postpone it once again as was done in 2000, but whether Ben can succeed this time, with a far poorer macro environment, is dubious at best.
Unfortunately the price of failure, this time around, could literally mean failure of the United States politically and economically, since in the process of trying to prevent the natural outcome of a credit bubble Ben has shifted a tremendous amount of liability from private parties where it belongs onto the sovereign balance sheet of The United States, setting up the potential for a monstrous (and potentially disastrous) failure.
