Henry C K Liu: Monetarism enters bankruptcy

Last week, Dick Cheney gave an interview in which he pronounced the Bush regime's economic policy to have done a decent job, and asserted that the financial. banking, and economic crises had only begun in the middle of 2008. In his latest article, Henry C K Liu demolishes Cheney's spin, discussing in detail the onset of the crises in July 2007.



But the actual thrust of Liu's article is to devastatingly critique Federal Reserve Chairman Ben Bernanke's handling of the crises. (Stirling Newberry began referring to Bernanke as "Captain Carnage" over a year ago.)  Using some extensive quotes of Bernanke speaking before various august forums, Liu shows that Bernanke was completely blind to the onrushing train wreck just mere days before the collision. In July 2007, Liu writes, the commercial paper market collapsed.


    Only after the commercial paper seizure hit LIBOR did the Federal Reserve belatedly realize that the credit market was not clearing efficiently. Half of the world's outstanding finance of $150 trillion, which includes financing for derivative trades, is routinely tied to LIBOR rates. The risk of global recession from widespread toxic infection of the entire credit market caused by rising defaults of US subprime loans was creating panic in the market. The Fed and the Treasury, official guardians of a stable financial market, were the last parties to know that a systemic crisis was about to implode and had only hours to act from their offices in New York when government officials were told by the management of major US financial institutions that they would be unable to meet their global obligations when markets opened in Asia. . . .


    Warnings had been publicly aired months before the credit crisis imploded in July 2007 by a few lonely voices that the subprime mortgage bubble would burst and its effect would spread globally, granted that such warnings had been summarily dismissed by the establishment media. (See Why the sub-prime mortgage bust will spread, Asia Times Online, March 17, 2007.)


Liu explains how Bernanke's misplaced faith in Milton Freidman's monetarism led Bernanke - and the rest of us - into catastrophe. Liu inlcudes one extended quote from Bernanke's presentation to the Federal Reserve Bank of Kansas City's Annual Economic Symposium at Jackson Hole, Wyoming on August 31, 2007, six weeks after the credit crisis broke out in mid July, which includes this outrageous Bernanke pronouncment:


    Economic theory suggests that the greater liquidity of home equity should allow households to better smooth consumption over time. This smoothing in turn should reduce the dependence of their spending on current income, which, by limiting the power of conventional multiplier effects, should tend to increase macroeconomic stability and reduce the effects of a given change in the short-term interest rate. These inferences are supported by some empirical evidence.


 A near mythical faith in economic theory is one of the most glaring faults of most economists today. Unfortunately for us, it appears that only cataclysims in teh real world can shake that faith.



Even worse, Bernanke and the Friedmanites have placed us in a position where even a properly applied Keynsian stimulus will no loner work:


    Bernanke, by his blind faith in the power of misguided monetarist measures to deal with a global credit crisis created by decades of runaway monetary indulgence, has unwittingly neutralized even the antibiotic power of Keynesian fiscal countermeasures against demand deficiency in a monetary bust from excessive debt. Deficit financing in a recession does not work without a reservoir of fiscal surplus from a previous boom. . . .


    With runaway "supply-side" voodoo economics keeping wage income in check during the boom phase in corporate profits, the resultant overcapacity from demand lag resulting from low wages shuts off investment opportunities for productive expansion and forces the excess money supply into speculative manipulation of debt, giving birth to restructured finance and sophisticated, circular hedging of risk. . . .


    Unfortunately, the rescue approach by the George W Bush administration led by Treasury Secretary Henry Paulson and the Bernanke Fed has been focused on saving distressed financial institutions by providing taxpayers' money to restructuring bad debts and de-leveraging overblown balance sheets. This approach inevitably pushes already stagnant wage income further down, with more layoffs and ruthless renegotiation of already draconian labor contracts, to cut operating cost. All this does is to reinforce the downward market spiral by transferring financial pain to innocent workers while not helping the economy with a needed revival of consumer demand.


    Trillions of dollars of good taxpayer money are being thrown after bad debts concocted by unprincipled financiers into a crisis black hole. This money will have to be repaid in coming years by taxpayers while supply-siders are clamoring for tax cuts for corporations, on capital gains and for high-income earners. This means the future tax bill to pay for the Greenspan put will be borne by low- and middle-income wage earners. Thus far in this financial crisis, the Bernanke Fed has sown the seeds not for a quick recovery but for a decade or more of stagflation for the US and the global economy.

I believe there is a way to escape from the disaster Liu so ably describes. The financial system of the United States has been pretty much nationalized. All uses of credit for anything other than investments in real economic activity must be ended. No more financial derivatives, no more credit default swaps, no more foreign exchange trading, no more floating interest rates, no more futures based in the Standard and Poors 500, or any other market index. Credit must be strictly and ruthlessly directed into a massively mind-blowing program of throwing the United States into the future. For example, if we are truly to terminate our dependence on imported energy, we must end the dominance of the internal combustion engine as a prime mover in transportation. That means getting Americans out of their cars. But to build urban rail transit systems to the service density needed in the 39 largest urban areas (where nearly half of all Americans reside) requires $3.4 trillion just for construction of the railways and stations. Then we need to procure the rolling stock.

Or, to get the U.S. to 20% of electricity provided by wind power by 2030 requires building 100,000 2.5-5.0 megawatt wind turbines at a cost of over $1.0 trillion. That should be scaled up to 50% wind power by 2020, for another program of over $3.0 trillion. Another $1.0 trillion is required to revitalize and reroute the national transmission grid to accommodate the emergence of wind as the primary source of electricity.

The employment impact of these programs is measured by the tens of millions. Unemployment will not be a problem.

These are the types of massive infrastructure programs that credit should be used for. Nothing else.

Subject Meta: 

Forum Categories: 

Policy Can not Get Us Out of the Depression

The Right Monetary and Fiscal Policy Can not Get Us Out of the Depression

DIE ZEIT: Can the right monetary and fiscal policy keep the US out of a recession?

Alan Greenspan:

"Probably not. Global forces can now override most anything that monetary and fiscal policy can do. Long-term real interest rates have significantly more impact on the core of economic activity than the individual actions of nations. Central banks have increasingly lost their capacity to influence the longer end of the market.

Two to three decades, ago central banks were dominant throughout the maturity schedule.

Thus, the more important question is the direction of long-term real interest rates."

Alan Greenspan
The Great Irony of Success
© ZEIT online, 30.1.2008

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

This Age of Turbulence People Want an Exit Strategy Out of Credit,
An Adventure in a New World Economic Order.

A Specific Application of Employment, Interest and Money

Press release of my open letter to Chairman Ben S. Bernanke:

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.

Yours Sincerely,

MC Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1776 - Annuit Cœptis.