Fools and Their Money

How the Fed's "too big to fail" policies led to the greatest debt pile in history...

Bill Bonner, reckoning today from Youghal, Ireland...

Is the Fed really as incompetent as it appears? Today, we take a look.

The Fed’s inflation now vexes consumers… investors… and politicians. CNS:

The average price of a gallon of self-serve regular gasoline in Los Angeles County rose four-tenths of a cent Saturday to $4.754, a record high for the eighth time in the last nine days.

The average price has risen 12 of the past 13 days, increasing 8.6 cents, including three-tenths of a cent Friday, according to figures from the AAA and Oil Price Information Service. It is 2 cents more than one week ago, 8 cents higher than one month ago and $1.21 more than one year ago.

And voters are feeling the pinch. One headline put the increase in monthly expenses per household at $256.  

“Do something” is the word going out to Fed governors. But ‘go easy,’ says the elite. The last thing it wants is a screaming crash on Wall Street.

Yes, the Fed put itself in a vise. On one side is the interest rate suppression and money-printing that has paid the feds’ bills and made the rich richer. On the other side is the Main Street economy, which craves stability, steady prices and honest interest rates. On one side are the 90% of Americans – hard-working families with limited budgets who suffer inflation like tooth decay, painful and debilitating. On the other is Wall Street and the elite, who make the rules… control Congress… and the Fed itself.

And now the vise tightens and the Fed’s ‘credibility’ is about to crack. 

A Guardrail for Capitalism

‘Credibility’ is almost always an invitation to disaster. Alexander Hamilton must have thought his credibility was at stake when he agreed to a duel with Aaron Burr.  The French under Napoleon III thought their credibility was on the line when they went to war with the Prussians in 1870. And it was a matter of ‘credibility’ that kept US boys dying in Vietnam… and later Afghanistan… long after they should have gone home.

What mischief will ‘credibility’ beget this time?  

September 2008 was probably the decisive moment. The Fed’s credibility was in question then too. Ben Bernanke, Fed chief, was center stage… addressing Congress. It was a moment that defined Bernanke as a snivelly little grifter; and it defined the Fed too. Thenceforth, it would play the lead role in the destruction of America’s prosperity.   

The Fed was meant to be a guardrail for capitalism. A bankers’ bank, it was expected to keep its head when others were losing theirs. It was supposed to maintain an atmosphere of calm calculation and reasoned reflection in order to prevent the sort of panic that leads to chaos and unnecessary losses.

But there, on September 10th, was the Fed Chief himself, Benjamin Shalom Bernanke acting as if a giant meteor were about to hit the Rose Garden. He did not seek to restore a mood of quiet deliberation among the nation’s legislators, but to set their hair on fire with visions of Armageddon.   

In short, in order to panic Congress into passing a $700 billion bill that not a single member had read… for reasons none understood… he resorted to the biggest whopper ever told by a central banker.  

With no hint of a smile, Bernanke told Congress that if it didn’t pass its crackpot stimmie bill on Friday, “we may not have an economy on Monday.”

This was plainly absurd and everybody knew it.

Too Stupid to Succeed

The mistake investors, householders, businesses and speculators had made was borrowing or lending too much money. They did so largely because the Fed itself had misled them, holding interest rates too low, for too long… and encouraging debt.

But economies don’t cease to function just because the central bank makes mistakes. Left alone, markets correct errors, which is just what the US stock and bond markets were doing. They were separating the good investments from the bad ones.   

Markets sort out excess debt – quickly and efficiently. The credits are marked-to-market. Debtors default. Debt decreases as intrepid lenders rescue the best of them, while the others are left to sink.

It would have been a huge mistake to step in and stop the rectification process. But that is exactly what Ben Bernanke, an academic economist with no knowledge or understanding of how a real economy works, was doing.

His message was breathtakingly naïve and dumbellish. It was like giving your bank details to a Nigerian you met over the internet… and then waiting for the $25 million deposit to come in. Instead of allowing market capitalism to fix its bad debt problems, Bernanke, Yellen and now Powell came in with what the market least needed – more EZ credit. The Fed’s key interest rate was pushed down to ‘effectively zero,’ where it’s been almost ever since. And then, as consumer prices inevitably rose, the Fed’s key lending rate – in real terms – kept going deeper and deeper into negative territory, so that it is now about MINUS 7.4%.  

Once the Fed was on the case, not a single large lender went broke. Those that were too stupid to succeed became “too big to fail.” Fools and their money stayed together. Reckless managers got their bonuses… and became more reckless. And the excess debt problem became much, much worse. Total US debt almost doubled, from around $44 trillion in 2008 to $86 trillion at the end of 2021.  

What kind of way was this to fight a debt crisis? 

Alas, the Fed learned nothing. It continues to print money at the rate of $20 billion per week. And it promises to do something to protect its credibility. What? Word on the street is that it is going to raise rates! Maybe even 100 basis points! That would bring the rate to MINUS 6.4%.

We get a little dizzy just thinking about it.  

Regards,

Bill Bonner