When Will This Boom Go Bust?

In the early 1990s there was a show on UK television called the Harry Enfield Television Programme.

It was a sketch-based comedy that ran for several years.

One of the characters was called Mr. You-Don’t-Wanna-Do-It-Like-That.

On seeing his daughter and son-in-law doing a spot of DIY the old giffer would barge in and say, “You don’t want to do it like that, you want to do it like this.  You don’t want to paint it purple, you want to paint it blue, etc…” – or variations on the same theme.

It was funny at the time, and for all we know it still is.

We were reminded of the character after reading a transcript of US Federal Reserve chairman, Ben Bernanke’s interview with the Financial Crisis Inquiry Commission (FCIC).

The FCIC was set up by the US Congress to supposedly figure out why the 2008 global meltdown happened and what can be done to prevent it happening again.

Recorded interviews and transcripts were released by the FCIC last week.  Well, most of them anyway.

Late last week Bloomberg News reported:

“The Financial Crisis Inquiry Commission… won’t publicly release its full 2009 interview with Federal Reserve Chairman Ben S. Bernanke… The interview is among records being transferred to the National Archives that will be made public in five years.”

It didn’t take long for the FCIC to back down and change its mind.  A transcript of Bernanke’s November 2009 interview with the FCIC has now been made public.

On reading it, it comes across as the biggest attempt at creating a diversion since the D-Day landings nearly seventy years ago.

Let me show you with some examples lifted directly from the transcript:

“One general area you’re going to want to look at is the macroeconomic context…”

“The third explanation, which I’m sure you’ll investigate…”

“Some have argued – and I’m sure you’ll look at it…”

“So that’s the general topic of macroeconomic context, which I’m sure you’ll want to look at.”

“I’m sure you’ll look in detail at housing finance…”

“I’m sure you’ll want to look at the credit-rating agencies.”

“You know, was the Basel framework adequate?  I’m sure you’ll look at that.”

“And finally, under the heading of regulation, ‘too big to fail,’ you’re going to look at that, I’m sure, in great deal.”

“I think the issue of the shadow banking system is very important… and I think you need to think about that.”

“So those are some things you might otherwise perhaps miss.”

“I think you’ll obviously have to look at both the risk management in the private sector and the supervision regulation of the government regulators.  So I don’t think – I’m sure you’ll have to look at those things as well.  But I wanted to point out a few things from a perspective that you may or may not have otherwise looked at.”

Gosh, what a helpful chap Dr. Bernanke is: “Look over there, look in that direction, but whatever you do, don’t look at the Federal Reserve!”

Clearly chairman of the commission Angelides had just about had enough of Dr. Evil’s advice.  By the time we get to page 19 of the transcript:

“All right, I think what we’d like to do is go around and pose questions to you for the time you’re here.”

It would be nice if the FCIC had released a recording of the interview.  We’d like to hear whether Angelides put any emphasis on “you” in the quote above.  In other words, “We’re asking the questions Doc, you provide the answers.”

But at least Bernanke does go on to say, “I fully admit that I did not forecast this crisis.”

Yet this is the man the markets now have full faith in getting the global economy rolling again… rolling into a ditch if you ask us.

However, it’s not long before Dr. Evil is back throwing smoke bombs and creating diversions:

“So that’s something you ought to look into.”

“So I welcome your – you know, your attempts to unravel this.”

And of course, as someone who admits to not forecasting the meltdown, he’s keen to make sure the commission doesn’t believe that anyone did forecast the meltdown:

“But I think notwithstanding the claims of one or two people out there who are now sort of living on the fact that they, quote, anticipated in the crisis, I would still say that the interaction of these things, the ‘perfect storm’ aspect was so complicated and large, that I was certainly not aware, for what it’s worth… but I was not aware of anybody who had any kind of comprehensive warning.”

Really?  Clearly he’s never come across the Austrian School of economics.  Economists such as Ludwig von Mises, Murray Rothbard and others have banged on about it for about 100 years.  Ever since central banking took hold in Western economies.

Which is a bit odd, because we’re pretty certain Representative Ron Paul has mentioned the Austrians once or twice over the years, when Bernanke has appeared before Congress.

But perhaps the most stunning aspect of the transcript is that it’s not until page 73 that the commissioners bring up the question of the Fed’s interest rate policy.

As I’ve written many times, the rate of interest is the most important signal in any economy.  Simply because it’s so versatile and useful… it represents the price of money, it signals the demand and supply for money, and it acts as a risk indicator to investors.

The rate of interest tells the market how much money is.  The rate of interest lets investors know whether the market wants more money or less money.  And it also tells investors how risky an investment is in comparison to another investment.

Clever huh?

Trouble is, when you’ve got central banks pulling levers and pushing buttons, and artificially changing the interest rate on a whim, the market becomes distorted.

The Fed lowers interest rates and so people don’t save, they borrow instead.  Now, it could be argued that’s fine to begin with.  The problem comes when the rate is fixed too low – or too high – for too long a period.

In a free market for interest rates, the rate of interest would adjust automatically.  It may only stay at a particular level for a few hours or a few days.  It most certainly wouldn’t only move up or down on the first Tuesday of each month – that’s when the Reserve Bank of Australia (RBA) meets and changes interest rates.

In a free market for interest rates, the interest rate would constantly adjust to take into account the demand and supply of money.

So given the importance of interest rates in an economy, and given that Dr. Bernanke is in charge of the body that sets interest rates in the United States, you’d think the FCIC would devote much of the interview to… interest rates.

But no.  Banks and derivatives was their game.  It seems Bernanke’s diversionary tactics paid off.

It wasn’t until page 73 that Commissioner Holtz-Eakin asked:

“I want to ask the flip side of John’s question on the actions that could have been taken and just to toss you the softball to sort of just address this narrative…”

A softball!  What about a hardball?

For goodness sake, this far into the interview and he only throws the Fed chairman a softball.  Anyway, the commish continues:

“…that it was the Fed/Treasury policy and these actions that made this worse.  And I think you know this story: Rates too low for too long, creating a housing bubble, failure for supervision oversights, standards on mortgage origination… and then the things explode.”

After blathering about and the commissioners cracking jokes about softballs and balls of wax(!) Dr. Evil replied:

“I think the Fed – the Fed made some mistakes… I don’t think that our interest-rate policy was a big source of the problem, both because I don’t think it was obviously the wrong policy…”

And then he goes back to the diversions again… lack of regulation… lack of supervision, and so on.

In fact, early in the interview Bernanke states:

“So I guess my own view is that if the system had been adequately stable, had strong enough supervision… it could have dealt with this problem or other problems without collapsing.”

Those comments pretty much say it all.  And it confirms everything we already knew.  That not only are the central banks directly responsible for the current financial crisis, but they are directly responsible for its continuation and descent into the next one.

Dr. Bernanke couldn’t be more wrong if he tried.  Sure, derivatives and subprime mortgages and excessive risk all played a part, but they weren’t the cause, they were the effect.

The cause of banks creating and pyramiding risk is down to the central banks.  It’s their game of manipulating interest rates and creating and supporting a fiat money system that’s to blame.

If central banks didn’t exist and if governments didn’t manipulate markets for their own ends, the kind of massive global economic disruptions that are now taking place wouldn’t happen.

In a free market, excessive risk taking and attempts at manipulation would be identified much earlier, and not by regulators either, but by consumers and market participants instead.

As long as central banks exist you’ll continue to see massive imbalances in the market.  You’ll see excessive risk taking, and constant periods of boom and bust.

The proof is there for you to see.  And it’s all within living memory.  A massive boom from the early 1980s to 1987 followed by a bust.  Then another boom until 2001… followed by a bust.

The boom started again in 2003 and bust in 2007/2008.  Early 2009 saw the beginning of the next boom… that’s where we are now.  No prizes for guessing what will happen next.

And don’t expect the central bankers to warn you about when it will happen… because they’re the ones pulling the levers and causing it.
Regards,

Kris Sayce
for Money Morning Australia

Tagged as: banks, Ben Bernanke, FCIC, Fed, interest rates, market, rba, Treasury