Bernanke Can’t Do It Alone

Ben Bernanke will testify for Congress this week, and they’ll ask him tough questions.

Bernanke isn’t my vote as witness most likely to turn into Al Pacino and start screaming, but it sure would be nice if that, or some other trigger could make us step back and look at the economy from scratch. Congress in particular could use a long look in the mirror. (Presumably an undertaking that would not end in a mass puke, unless it’s somewhere provided in rules and precedents.)

The free market (the concept, not the CEO’s) should get a pass, for a simple reason– there isn’t one. I’m not sure how many Volkswagen Beetles it would take to hold in printed form all the federal and state laws, regulations, interpretations and rulings that the financial industry is constructed from (along with government debt), but I’d bet it’s more than one. It’s a free market only when compared to Lenin’s tomb.

The Federal Reserve and Chairman Bernanke in contrast, deserve the grilling Bernanke will get– but are they the most deserving?

There’s a fuzzy, wish fulfillment theory that the federal deficit doesn’t matter– or at least doesn’t make the top five– a rare but unfortunate instance of functioning nonpartisan agreement.

A deficit with a constant rate of growth somewhere near the growth rate of the economy may or may not matter, but a deficit with an accelerating rate of growth in a shrinking economy in a country that doesn’t care is likely to matter a lot. As in any overly creative household that starts with wealthy foundations, it could take some time for the mattering to become a matter of clear unrestrainable fact.

Although to me Federal Reserve mandates don’t make sense, in postulating for the moment that the mandates are meetable, I’d suggest the Fed can no longer fulfill them anyway in the face of our quietly obscene fiscal laxity. The Fed can’t realistically be independent of size and demand at Treasury auctions for long (like decades, for example).

If Ben Bernanke decides it’s best to minimize his support for the Treasury, the potential scope of his “independence” is already determined– relating to what’s already on the fiscal plate– perhaps not exactly like a child who defies a parental directive to clean his plate by leaving one spoonful of peas disguised in dispersion, but not exactly unlike it either. The Fed can monetize, it can let interest rates soar, or in the end maybe both. That’s not exactly superhero omnipotence.

Laurence Gonzales in his book Deep Survival, titles a chapter on being lost “Bending The Map”. When we’re lost, our identity itself instinctively comes into question, making us prone to panics of emotive self-delusion, with a bias for quickly moving forward and thoughtless repetition, not for backtracking or stopping to think. The bending the map metaphor for human reaction to being lost is also a good metaphor for our mental map of the Fed.

The Federal Reserve is both blamed for the current economy, and widely expected to be the instrument of a rapid and happy emergence into the sunlit clearing. That the Federal Reserve is a small, secretive planning committee that’s thought of as consistent with “free markets”, while the committee’s deliberate creation of fluctuations and unpredictability are parsed and rationalized as clever policy, is the ultimate, deluded, century long “map bend”.

The scary part of the bending the map metaphor is what it implies for the future. It should be clear that we’re thrashing around in the forest, thoughtlessly repeating mistakes– looking for the Federal Reserve to solve problems that it’s far more likely to cause. But in translating the lost person bias to a lost society bias, it implies that to question central banking as a foundation of the economy (and so in a sense, human life itself), will be like questioning our future existence– and not with a cheery camaraderie while sitting by the campfire with a cooler of beer, but while lost and weakened and under stress.

By Les Lafave

Abolish The Federal Reserve –

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