Super Ben Saves the World from Collapse

While speaking to a group of economists and policy makers on Friday, Federal Reserve (Fed) Chairman Ben Bernanke proudly announced that the aggressive monetary policies implemented by the Fed and the Treasury department “saved the world” from a financial meltdown. (Joe Superman) While markets have indeed responded positively since early March ‘09, it’s not clear whether the rally has been based simply on Fed intervention or on strengthening fundamentals. While some economic indicators have shown signs of bottoming, we have yet to see real sustained growth. (Joe Rogaine) Super Benny has, however, managed several accomplishments which we’d like to discuss below.

He screwed small banks
Late last year, when many large banks were insolvent and broken, Super Benny wielded his power and influence over congress (Joe pull down the wool) and served up a large dish of TARP salad (Joe next Food Network Star), with side dishes of PPIP and TALF from the Treasury (Joe “Bam! Kick it up a notch!”). The central banksters and clueless bureaucrats in Washington not only approved immediate TARP funds and monetary injection into large financial institutions, but also pledged to continue to infuse money should the need arise in the future. Even though the Fed and large banksters helped shape this economic crisis due to lax policies and excessive risk taking in the first place, they have been granted the safety net of taxpayer funds while the smaller institutions continue to struggle on their own. (Joe upside down roly-poly) Additionally, nervous depositors at small banks are pulling funds and fleeing to the safety of the too-big-to-fail empire. (Joe Titanic)

He screwed China
Each week the US Treasury auctions off new debt in the form of Treasury bonds and notes. As demand on the bonds increases, the yield, or interest rate decreases. (Joe Econ 101) Therefore, buyers want as little competition as possible to get the best rate. The Fed announced a plan in March to buy 300 billion of US treasuries in an effort to keep US interest rates low. (The housing mortgage rates closely follow the 10 year bond, for more on this China situation click here) This Fed purchase plan undoubtedly angered China, who is the largest foreign purchaser of US debt. In other words, with each dollar of debt the Federal Reserve purchases, the interest rates on Chinese investments drop. This situation of the Fed buying from the Treasury is similar to when Joe Shareholder asked his Mexican investor friend Jose to help bid up the price on the diamond ring he placed on eBay after JoAnn shot him down. (Joe false start)

He screwed the US Dollar….and Taxpayer…..and Saver
Ben’s plan to avoid another depression is to induce inflation to combat the dreaded economic forces of deflation, which he claims caused the Great Depression. (For reasons why click here) The best way to induce inflation is to crank up the printing press and dump it onto the economy - hence the nickname Helicopter Ben. (For his own words on the topic, click here). Since Ben took the reigns in 2006, the US dollar has slipped roughly 16% and 20% to the Japanese Yen and Euro respectively, with both trading near all-time lows. Inflation on the dollar is essentially a tax on anyone saving money. In Ben’s defense, however, he’s had plenty of dollar destruction help from politicians loading debt on the back of the fragile/exhausted US dollar. The Congressional Budget Office announced on Tuesday that the budget deficit earlier estimated at 7.1 trillion by 2019 has been raised to 9 trillion. Can the US dollar sustain such levels of debt or will it begin a free fall? (Joe Petty, brother of Tom) Will countries continue buying our debt even while it’s climbing to new highs daily? If there comes a time when debt investors decide it’s just too risky to hold US debt, there could be a massive sell off which could get quite scary. (Joe, “stay behind the yellow tape kids, nothing to see here. ”)

So the Fed and Super Benny have stabilized the large financial institutions…..but at what cost? Only time will tell (Joe crystal ball) whether the negative impact on these periphery entities will come back to haunt him (Joe October 31st…..2010, 2011, 2012???). Speaking of Halloween, Joe Shareholder likes this time of year because he offers JoAnn his protection from anything scary that might be lurking out there. JoAnn insists that nothing bad ever happens in Joetown, Ohio. This year, however, Joe can remind her that as long as Super Benny is in charge, plenty of scary things could happen.

Ben Bernanke Vs. Joe Shareholder, inflation vs. deflation

Who is Ben Bernanke and why do we call him "Helicopter Ben"?

Ben Bernanke is the current chairman of the Federal Reserve Bank (Fed), or the Central Bank of the United States. The Fed is responsible for establishing monetary policy, and specifically the interest rate at which banks can borrow money. Currently the rate sits at 0 percent so banks can actually borrow from the Fed at zero percent interest and charge you whatever they want for your housing loans. (Joe, ask not what your bank can do for you, ask what you can do for your bailed-out bank) The Fed holds the rate low during recessions because low interest rates stimulate economic activity.

Inflation vs. Deflation:
One thing the Fed watches closely in determining monetary policy is inflation. Inflation is simply the increase in prices for goods and services. This means that the purchasing power of each dollar you own goes down because your dollar buys fewer goods. Conversely, deflation means prices are falling so your purchasing power actually increases. Therefore, each dollar you have can buy more stuff. (Joe, Manwich by the case-load, emphasis on Manwich by the way)

Deflation can be dangerous however for those in debt. Suppose there's a nice house in Joetown, Ohio that Joe Shareholder would love to purchase for JoAnn someday. In a period of 10% deflation, if Joe buys this house for $100,000, deflation reduces his value to $90,000 while he still makes payments on the original loan of $100,000. We've seen this occur as housing prices nation-wide have fallen. Not only housing, but every outstanding business loan takes a hit as values fall while business owners are paying off loans assumed at higher prices. Meanwhile, these businesses must deal with shrinking revenue because the prices of their goods and services are falling. This scenario increases the chances of defaulted loans and causes a downward spiral within the economy. (Joe, covered slide for kids at the city park)

Ben Bernanke, a leading scholar on the causes of the Great Depression, claims a deflationary spiral was the catalyst for the extended depression in the 1930’s. To avoid another depression, he promotes the idea of flooding the economy with money, or inducing inflation in order to combat the dreaded forces of deflation. (G.I. Ben Bernanke) Will it work? We don't know but we’ll find out over the next couple years. This has never been tried before so we’re in unchartered waters. Is it possible that an entire economy can simply be flooded with printed and borrowed money to avoid a depression? (See previous treasuries vs. Economic growth post)

Economics 101 teaches that prices are established where supply meets demand. If there's low demand for a product then prices need to naturally adjust downward. The resulting deflation, although painful, might be necessary for the economy to fix itself. If demand is manipulated, through cash for clunkers, home credits, energy credits, etc, then the result could just be a delayed recovery at the expense of a huge debt burden to be repaid later. (Joe Beckham…. kick the can down the street)

Currently, Joe is hoping for a nice bout of deflation since he doesn’t own the home yet and couldn’t be happier to see its price fall. Not only that, but Joe figures ring prices should drop too with the onslaught of deflation. Joe has a good friend that sells diamond rings (Joe Weller) that could certainly offer him a good deflationary discount should the need arise. Upon realizing this however, JoAnn is hoping for inflation. Ben Bernanke is suddenly her hero!