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It’s Official!

May 8, 2013

Bernanke-Atlantic

The economists and financial pundits have spoken and it is now official: the Fed’s monetary policy has worked! Those who were foolish enough to question the wisdom of our monetary and economic policies through the recent financial bubbles have now been proven wrong. In fact, two of the most notorious non-believers — let’s just call them pagans — have fallen on the sword.

With the equity markets setting new records every passing day and with Europe’s austerity measures pushing them into recession (and, frankly, with no other hope than that the Fed plan will work), it adds up to clear and convincing evidence that massive liquidity intervention did in fact save the day. As represented on “the Atlantic” magazine cover, Ben Bernanke is the hero for masterminding this great recovery.

“Paul Krugman is right” the headlines read — Keynesians win the day. Mr. Krugman is famous for advocating even more easing (liquidity/Keynesian interventionism) than even the Federal Reserve and the Federal government were willing to pour into Wall Street these last five years. I would compare this victory dance to being in the first inning of game one of the World Series and you happen to score a run as a result of a walk, error and a fielder’s choice — and then a wild pitch — and then have the gumption to declare yourself the World Series champions based on the superior game plan!

Keep in mind we have not even begun the process of stopping the flow of liquidity into our economy, nor have we started the process of removing liquidity from our financial system. Wouldn’t success at thos junktures be the true first signs of success that the Fed’s policy were actually working? Let’s stop the easing and free-flow of money and see what happens. If it’s true that, “Fed policy worked, liquidity saved the day, Bernanke is the hero!” then it’s time to stop the unprecedented experiment.

Remember three things I have repeated many times: First, there are both short-term and long-term consequences. It is not surprising that the most massive liquidity experiment in our world’s economic history caused asset bubbles to reoccur. The real question is if we can return to a healthy growing economy in the long term. The second is that there will be some “outside influence” (like war or Europe or fill in the blank) that could easily cause our ’recovering economy’ to suddenly go into convulsions. And the third thing is our next economic event may very well look like something we have never seen before. What might the ultimate outcome of the greatest economic/monetary experiment of all time look like? If I could tell you, I would probably be in a different business. But I think it is a safe bet that the same individuals (Greenspan, Bernanke and company) who never saw the tech bubble or the real estate/derivatives bubbles will not see the next economic event coming either.

As the saying goes, it ain’t over ‘til the fat lady sings.

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One Comment
  1. May 10, 2013 4:59 pm

    The whole debate hinges on a counter-factual argument: do you believe, that without Fed intervention, we would be suffering from an economic contraction as large as the Great Depression of the 1930s? If so, then he saved the world from economic disaster (so far); if not, then Fed activity since 2007-8 probably seems both wild and extreme.

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