BAILOUT PLAYS INTO BERNANKE’S DEFLATION FIGHTING THEORY
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IS Ben Bernanke deviously planning to run the nation’s printing presses overtime in order to get out of the jam caused by Wall Street?
Wait, hear me out before you scoff!
I know the guy looks harmless enough. And with Treasury Secretary Hank Paulson by his side, the pair could be a couple of doctors whose diagnosis you wouldn’t dare second-guess.
But back when Bernanke was a mere governor of the Federal Reserve he now leads, he told a group of Washington economists that he’d fight deflation by printing money.
“The US government,” said Bernanke in 2002, “has a technology, called a printing press – or today, its electronic equivalent – that allows it to produce as many US dollars as it wishes at essentially no cost.”
You have to understand, that’s like me saying the government should censor my column. Or a priest saying he’ll get his next sermon from George W. Bush.
It’s heresy for anyone associated with the Fed to say that we can just print money if we get into a jam. That would cause hyperinflation like Germany had in the 1920s. It’s the bane of any economy. It’s toxic.
And a guy like Bernanke, who went to MIT and Harvard and taught at Princeton, didn’t need me to tell him so.
But I did anyway. And Bernanke responded by saying the right thing: He believes in price stability.
Yet, the man did say the stuff about the printing press. And he’s now asking Congress for a massive $700 billion – and probably more later – to bail out banks.
The hope – and that’s all it is – is that the pile of manure that the government gets from the banks will turn to gold some day.
But we all know how that fairy tale ends.
Of course, you are hearing a lot today about inflation – not deflation. In fact, this column has been documenting for a long time how prices have been rising beyond what Washington will admit.
So is Bernanke’s statement about how he’d cope with deflation irrelevant?
Not if you understand Fed-speak.
Bernanke’s predecessor Alan Greenspan used to publicly worry about inflation constantly, even when the prices of things we buy seemed contained. That’s because Greenspan was really talking about asset inflation, namely the rising price of stocks and real estate.
Now that real estate is deflating in price, Bernanke’s printing press suggestion could be one that – perhaps only deep down in his subconscious – he’s holding onto.
It all makes sense.
Let’s say the government takes over all troubled mortgages, pays for them essentially with an electronic entry in its books (today’s printing press) and then just waits for everyone to forget about the whole mess.
We’d be bailing out the banks with Monopoly money.
Nice and neat, until the financial markets get wise. Then – like in Germany – there’d be hell to pay.
Note to Washington: Before you bankrupt the country, try what I’ve been suggesting.
Let people withdraw money from retirement accounts without tax penalty in order to purchase real estate.
It’ll cost the government nothing except the loss of taxes sometime in the future. And it will, at the very least, get some real estate off the market. Maybe even a lot of real estate.
With a reasonably good p.r. campaign, Washington can pretend that the housing problem is being fixed, since what Washington is now proposing won’t get one condo off the market.
Of course, it’s easier just to give away $700 billion when it isn’t your money.
Let me pick nits for a minute.
It has been fairly well documented (and not by me) that Paulson was on the phone last week to Wall Street firms telling them that the federal government was riding to the rescue
That’s when stocks rallied sharply late last week – only to fall heavily the first two days of this week.
I’ve written before how Paulson readily admits that he keeps in touch with “market participants.”
How is that not insider trading?
Why can Paulson call up some firms and deliver to them the incredibly important information that the federal government is about to do something and not tell everyone – including Wall Street firms that are not in the loop as well as the public?
Which brings me back to a very important question I asked last year: When Paulson met with Bernanke hours before rumors of the first of a series of interest-rate cuts in August 2007, did he share what he had learned with these so-called market participants?
Lesser human beings have gone to jail for such phone calls. His role as Treasury Secretary doesn’t give him immunity from the insider trading laws, even if he thinks his motives are noble.