Ben Bernanke will likely go down as the least capable chairman of the Federal Reserve or at least tied with William Miller for that dubious honor. Bernanke has flooded the economy with liquidity in having the Fed support the spending spree started by George Bush and continued fourfold by Barack Obama. A continuing discussion at the Fed is from Bernanke continuing to press for monetizing the national debt by buying long term Treasuries after having bought the securities of Fannie Mae and Freddie Mac and creating a commercial paper facility to buy commercial paper. I wrote in a piece a couple of years ago that the Federal Reserve's policies were destabilizing and adding to the uncertainty in the economy. What the Fed needed to do if it wanted to ensure that the economy would be on the right track and start to grow without inflation would be to adopt a monetary rule and grow the money supply at a rate equal to long term economic growth. Well lately there has been a rash of articles saying the same thing. John Taylor at Standford and Allan Meltzer of Carneige-Mellon have written pieces saying the same thing. Adopt a monetary rule, quit the knee-jerk reaction to contemporary events and focus on the long run. Maybe they will be listen to since obviously someone writing here in fly-over land keeps getting ignored.
Has anyone noticed that the recent election shows democracy in action? Voters are disgruntled with Washington's spending spree, new laws and fiscal irresponsibility. Now the voters are speaking and taking it out on the incumbents - most notable in the Republican primaries. Senator Bennett of Utah and Murkowski have lost. Charlie Crist once the odds on favorite for the Republican nomination to the Senate from Florida left the party to run as an independent due to Marco Rubio. In the Florida governor's race Rick Scott upset establishment's Bill McCollum. Even Arlen Spector who left the Republican party because he would have lost to Pat Toomey still lost as a democrat to Joe Sestak. Tea Party favorites beat establishment candidates in Kentucky (Rand Paul), Nevada (Sharon Angle), New Hampshsire (Kelly Ayotte) and stunningly in Delaware (Christine O'Donnell beat Mike Castle) and New York (Carl Paladino beat Rick Lazio).There are also at least 15 Tea Party endoreses who won House primaries. Many have pointed to the endorsements of Sarah Palin and Jim DeMint in all of this. But mere endorsements do not get people out to vote. Rather it is a general anger in the performance of establishment politicians and the appeal of electing citizens to replace the professional politicians who have done little in their lives except running for political office. The establishment has wrung its hands saying that these novices cannot win. The mainstream media has been running articles on many of the candidates on seemingly odd social statements or past happenings. However, not a word on what truly matters to voters: taxes, growth in federal spending, new legislation on health care, card check, cap and trade, national defense. Conveniently forgotten is the media's relative silence on past digressions by its elected favorites. However, keep in mind that calls to eliminate the departments of education and energy are no longer kooky in the eyes of the public. Ideas to freeze federal spending and roll it back to 2008 levels, to take a hard look at entitlements, to enact a flat tax now look reasonable. I can't hardly wait until November 3 to see if this ripple of a revolution becomes a tidal wave.
I got this from a friend: Congressional Reform Act of 2010 1. Term Limits -12 years only, one of the possible options below: A. Two Six-year Senate terms B. Six Two-year House terms C. One Six-year Senate term and three Two-Year House terms
2. No Tenure / No Pension - a Congressman will collect a salary while in office but receives no pension when they are out of office.
3. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.
4. Congress loses their current health care system and participates in the same health care system that they have imposed on the American people.
5. Congress must equally abide by all laws they impose on the American people.
Serving in Congress is an honor, not a career. The Founding Fathers envisioned that citizen legislators would serve their term(s), then go home and back to work.
The original message also contained the following: "Congress (past, present & future) participates in Social Security - all funds in the Congressional retirement fund move immediately to the Social Security system. All future funds flow into the Social Security system, and Congress members participate along with the American people."
Of course, Congress already participates in social security as well as the Federal retirement plan. So I am not including this in the list above. Moreover, as to pension, I have no objection if the pension is a 401K - which Congress can already purchase rather than a defined benefits pension plan that guarantees the pension amount regardless of market performance.
When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain. - Napoleon Bonaparte
Inject "central" before "banker" and Bonaparte was right. A previous chairman of the Federal Reserve once famously said that the Fed's job was to take away the punch bowl when the party got good. Now Bernanke's Fed has been adding liquor to the bowl. Bernanke has been a major disappointment. Instead of independence, the Bernanke Fed has been the handmaiden of the administration. First, he continued the tradition started by Alan Greenspan in pursuing accommodative monetary policy. Like Greenspan who supported the runup in spending by George Bush, Bernanke did this with the first Bush stimulus package and then with Obama's. Even worse his Fed set up a commercial paper facility to "save" that market, then started buying mortgage backed securities to "save" Fannie Mae and Freddie Mac, and then buying Treasurys to "save" the Federal government. The result has be an explosion in excess reserves which would have caused an explosion in inflation had there not be a recession. Of course, all of this simply prolonged the recession and helped turn it into the Great Recession. I had previously said that hopefully Bernanke was doing all of this in order to get re-appointed and once that happened, he would grow a pair. Well unfortunately, he is still a eunuch. Instead of taking the central bank to being independent, he has kept it the lapdog of the administration pledging to keep buying mortgage backed and Treasurys. Big Ben is the big enabler. Milton Friedman once advocated establishing the "monetary rule" where the money supply would be set at the long run growth rate of the economy. Friedman knew that discretionary monetary policy was destabilizing and led to economic uncertainty. However, if money growth was set and kept on a steady path, then we could have steady economic growth without inflation. Well the Bernanke Fed has been the Great Destabilizer. It has pumped reserves into the system. It has monetized the national debt by buying Treasurys. It has bought paper that the market has spurned. It has kept short term rates close to zero. However, it has not aided the recovery. In fact it has kept the recovery from happening. Obama is actually right in blaming Bush for the bad economy but shares equally in the blame for Bush appointed Bernanke and Obama re-appointed him.
As the president once famously said, "This is a teachable moment." The economy is in the doldrums. Despite all of the pronouncements of recovery, "green shoots" and upturns touted by the administration, the simple truth is what most of us know - the economy stinks.
Most of the growth numbers now are around 2 percent and are not enough to prompt job creation. The "green shoots" of recovery were all transitory, reflecting job growth and spending growth in the government but not the private sector.
Markets and people are not stupid. Temporary stimulus packages and tax cuts do not have a measurable impact on the economy because all parties know that it is temporary. Economic theory tells us that no rational person would alter their spending, consuming or investing behavior because of transitory changes. The empirical evidence bears it out.
Consumers and businesses all know that they must improve their balance sheets by paying off debt, and that is what they are doing. So what is the "teachable moment"? It is that big government spending does not work in taking an economy out of a recession. Call this the death of Keynesianism. As Anatole Kaletsky has said, we now recognize that both governments and markets make catastrophic mistakes, and we don't trust either of them. The only difference is that markets will correct their mistakes while governments will just compound them.
There are still economists like Paul Krugman who say the government needs to spend more to get us out of the Great Recession. But we all know better. The evidence is to the contrary - increased government spending makes matters worse and Americans know it. Two-thirds of us do not support another stimulus package. Stimulus does not work because the government has got to get the money from somewhere to spend. If it gets the money by borrowing in financial markets, then "crowding out" takes place - private investment falls because of the government borrowing. If the money comes from printing it, then the value of money falls in international markets and the potential for inflation rises. In neither instance will private investment spending increase, without which there is no job creation, capital or economic growth.
So how can we end the Great Recession?
It's actually rather simple - enact permanent incentives rather than disincentives. Let's call the program "Liberate to Stimulate." The regulatory burden of government has been estimated to be $1.4 trillion annually, which ironically is the size of the government deficit. Stop the uncertainty and reduce government's reach. Eliminate the capital gains tax and the corporate income tax. Permanently reduce the burden of regulation on business. Roll back health care "reform." Kill cap and trade. Decrease the rate of growth in government spending back to 18 percent of GDP. Simplify the tax code - I prefer the flat tax.
Yes, it is a teachable moment, but it is lost on a president who would rather transform the economy than fix it, and all of us as a result will suffer the consequences.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com