Bernanke- Still Market Manipulator Extraordinaire

Bernanke- Still Market Manipulator Extraordinaire
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But not in the way he might like.

Last Tuesday saw the release of Federal Reserve’s latest Federal Open Market Committee minutes which brought a halt to the current stock market bull rally.  The reason? From Seeking Alpha:

On April 3, 2012, at 2:00 p.m., the Federal Reserve Board and the Federal Open Market Committee (FOMC) released minutes of the committee meeting held on March 13, 2012. Gold fell about $35 immediately. Silver, oil, bonds and stocks and other commodities all fell. The U.S. dollar rose.

A large number of market participants were expecting QE3. Such investors were neither paying attention to the strong economic data that has been released over the last five months nor were they reading statements from the Federal Reserve.

Quantitative Easing 3, which would be the third installment of monetary base expansion since the financial crisis in 2008, is being craved by Wall Street as it would mean another injection of cheap money.  As the following chart by Ed Yarni demonstrates, the stock market has been kept afloat by mad money printing since 2008:

The following chart from Northern Trust shows the extent at which Federal Reserve credit influences credit within the banking sector:

Chart 1 shows the year-over-year percent changes in monetary financial institution (MFI) credit. Private MFI credit is made up of the sum of loans and securities of commercial banks, savings & loan associations and credit unions. Total MFI credit is private MFI credit plus assets on the books of the Federal Reserve, i.e., Fed credit.

Notice the dip in total credit, which includes Fed credit, and the subsequent dip in private credit at the very beginning of 2011?

A virtual decade of money printing in the face of falling asset prices (often called the Greenspan Put) has warped the financial sector into a literal easy-money junkie.  Today on CNBC, author Harry Dent humorously described this dynamic as “a market on crack only wants more crack”

The Austrian view of depressions which follow the bursting of previous inflation-fueled bubbles is that such downturns are not to be feared and prevented but warmly welcomed.  If further inflation and government spending are pursued in lieu of allowing the market to correct itself, the distortions will continue, fresh malinvestments will occur, and the depression will be delayed for another day.  As Murray Rothbard writes:

Mises, then, pinpoints the blame for the cycle on inflationary bank credit expansion propelled by the intervention of government and its central bank. What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of depression? In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better.

Bernanke may be holding out on QE3 for the time being but as the minutes reveal, he and the rest of the FOMC members stand ready to print should the need arise:

In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, they agreed to keep the target range for the federal funds rate at 0 to 1/4 percent…

If the stock market should continue its downward trend or the economy begins once again to turn south, there is no doubt whether Bernanke will intervene.  Central bankers have one thing and one thing only at their disposal: the printing press.  None of this goosing through printing comes without a cost though as the price at any given gasoline station proves.  Many predict that despite persistently rising food, commodity, and energy prices, QE3 will arrive come June when the FOMC meets again.

The latest stock market sell off is another sign of the vast control just a few men have over the economy.  With so many words, Bernanke and co. can literally dictate how markets around the world will act.  Keynesians and statists, for all their praise of democracy and “rule by the people,” make no protest over a few unaccountable planners running the nation’s money printer.  Their collectivist rhetoric is masked by an overwhelming desire for societal control and totalitarianism.  This is why the likes of Paul Krugman never elude to the true origins of the Federal Reserve or the fact that new money is always funneled through the big banks they claim to despise.  They cry foul over a few wealthy businessmen running the show but simply want them replaced with intellectual superiors fully cognizant and in tune to the need of millions even if, as Friedrich Hayek wrote, such men don’t and can’t exist

The cure for any recession is for market actors to rediscover natural prices; including the price of money.  Central banking apologists hold disdain for such an unrestrained and seemingly chaotic process.  But it is in fact the centralized planning these constructivists endorse which creates distortions and chaos in the markets.  Bernanke has thus far been credited in the press with saving the world in the wake of the financial crisis when, in effect, all he has done is zombify a banking sector already addicted to cheap liquidity.

When the next crisis comes (and it most definitely will), his supporters will be just as clueless to the cause as they were in the fall of 2008.

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James E. Miller is editor-in-chief of Mises Canada and a regular contributor to the Mitrailleuse . Send him mail

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