The Greeks had the Delphic Oracle, the Romans had the Sibyl of Cumae, and we Moderns have Central Bankers. Back in 2007, when the economy was humming along on a fume of cheap credit and government mandated sub-prime loans, Ben “Helicopter” Bernanke calmly assured us that there was no Housing Bubble, and if – then it was purely local, and would have no impact on The Economy.
That was five years after Joseph Stiglitz (aka The World Bank VP Even Socialists Can Love) developed an economic model according to which Fannie Mae and Freddie Mac had a 1-in3 MILLION chance of going down the drain, and six years after Paul Krugman (aka The Smartest Man in the Room) praised the Central Bank for preventing a post-dot-com-bust economic crisis by cutting interest rates to historically low levels.
(cue Larry Platt)
As I have pointed out before on this blog, the same people who did not see the 2008 crash coming – and frequently went out of their way to dismiss even the possibility of an economic crisis – are the same who are now claiming that they know exactly how to get us out of this.
Take Ben Bernanke’s testimony before Congress today, where he claims in all seriousness that “in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows.”
Simply amazing. So, after years of really, really low interest rates and excessive lending resulting in people being completely swamped in debt causing a massive stock and housing bubble that finally did what all bubbles eventually do, causing people to realize that there was too much debt and that maybe we should stop going deeper into debt – the only thing that could possibly save us was – really, really low interest rates and more lending?
Makes complete sense: like fighting fire with fire, or hosing down a drowning man, or force-feeding obese people, or homeopathy.
In any case, what happened, happened. Now there are trillions and trillions of reserves out there in the system and even Bernanke and his Keynesian friends know what would happen should all those reserves suddenly turn from cute accounting gimmicks into actual money.
So, what can be done?
According to Bernanke
“The Federal Reserve is also developing plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers. The Federal Reserve would likely auction large blocks of such deposits, thus converting a portion of depository institutions reserve balances into deposits that could not be used to meet their very short-term liquidity needs and could not be counted as reserves.”
I’m not entirely up to speed on central banking gobbledygook, but as far as I can make heads and tails out of this it means that after creating huge amounts of money out of thin air to put onto the balance sheets of otherwise bankrupt institutions, Bernanke would like to make sure they don’t actually turn fantasy money into the real thing, but simply pretend to have money on their books, even though it’s not really there and as a consequence look as if they had money rather than reveal that they are bankrupt.
Helpfully, Bernanke explains it in somewhat simpler terms by saying that “Reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.”
And the best part of his speech today is probably this: “The Federal Reserve is currently rolling over all maturing Treasury securities, but in the future it may choose not to do so in all cases.” Ah, don’t give us any more details on what you may or may not do, oh Wise One. We stupid masses would otherwise fall victim to our Animal Spirits and begin to act in a manner that would make it impossible to for you to steer the world a la Hari Seldon.
Oh well, maybe he’s right. Maybe all this financial voodoo did the trick and got us out of the slump. After all, the stock-market has gone up like crazy since pretty much early 2009:
So, maybe the recession really is over and we are out of it in a nice soft U… except, every time I look at this graph, it reminds me of something I have seen before:
That’s the Dow Jones after the Big Crash of 1929. By early 1930, it was moving up at a rate not dissimilar to the Dow Jones now. What really bothers me, however, is how it continues:
Now, I’m no great believer in graphology and econometrics and all that funky jazz, but – if anybody is trying to convince me that the current upward blip shows an economic recovery, he better explain to me very slowly and in great detail why things are not going to go the way they did after April 1928.
Anybody out there who would like to explain why there is nothing to worry about? I’d appreciate that.
