Wednesday, June 3, 2009

Super-Bernanke: "We Can Hack It"

Our illustrious leaders assure us that everything is under control:

WASHINGTON (Reuters) - The U.S. central bank will be able to raise interest rates when the time comes to head off inflation, even with a bloated balance sheet, Federal Reserve Chairman Ben Bernanke said on Wednesday.

Bernanke told the House of Representatives' Budget Committee that deciding when to start withdrawing the money the Fed has pumped into the economy to stem its downward spiral would be a tough call to make, but he expressed confidence inflation would be averted.

"We want to be sure that we'll be able to remove accommodation at an appropriate time and an appropriate speed to ensure that we don't have an inflation risk down the road," Bernanke said.

"It's not going to be an easy call but we'll have to balance the risk on both sides -- not going too soon and stunting the (recovery) and not going too late and having a bit of inflation. But we will get price stability after we get out of this recession."

Of course, you don't really expect him to tell you that the time has come to panic, do you? I talked about the basic strategies the FED could use to contract the bloated money supply in order to "fight inflation" some time ago. In addition, the FED has said it may issue it's own debt, which I discussed here and here. I went into a fair level of detail in those posts, so I won't cough it all up again here. All are mentioned as possible solutions by this article. They are not. Suffice it to say, there really isn't much the FED can do in the long haul except raise the reserve ratio. The article mentions in particular having the FED issue its own debt, essentially borrowing money simply for the purpose of taking that money out of the market, kind of like borrowing money and burying it in a hole in the ground, but the FED will have to pay interest on this debt, and eventually redeem the notes or issue even more debt, which will result in even more monetary expansion in the long haul. All scenarios that involve tying up money at the FED also involve paying interest back into the market. These are not solutions. None of these strategies is sufficient to solve the FED's inflation problem. What the FED really needs to do is sell assets. But it has either sold or lent out almost all of its good assets. Its present assets, mostly bad mortgage paper, were bought at face value, far above market prices; they would not fetch anything close to this if sold today. The FED needs the inflation if it is to unload these assets at anything close to what it paid. I suspect the FED will get it, whether that is the intention or not. The fact that the FED is contemplating these tactics should scare us. As I said before, this is banana republic monetary policy. Our economy is increasingly resembling a third world backwater. Expect the same of our standard of living at some point.

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