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Bernanke Blows Bubbles

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Yesterday the Fed laid out the plan it had signaled months before. In an Op-Ed at the Washington Post, Bernanke laid out his reasoning and self-indictment of the Federal Reserve when it comes to economic influence. First, his philosophy:

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Bernanke's view is that monetary policy, specifically expansionary monetary policy, can promote economic prosperity. The method he proposes is cheap borrowing costs and fictitious paper wealth in the form of an inflated stock bubble. In fact, according to the Op-Ed, this has already worked.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.

Let me not mince words here. This policy has been a boon to the wealthy and the traders and has increased the disparity in wealth between the rich and the middle class. It has served to further the entrench the funding advantage of giant corporations and thus has reduced the opportunity for Small Business to drive economic performance. This is an "All-In" play on the philosophy of trickle down. But it is rife with risk and injustice.

You see, most Americans do not have huge bond portfolios or huge stock portfolios. In fact, while the market has been rising, average citizens have pulled money out of the stock market for 26 consecutive weeks. The stock market is now a traders playground and this policy will make them a lot of money. Please click on this link and look at the chart midway down that shows the performance of the stock market and flows into and out of domestic mutual funds. You will see that the average citizen buys high and sells low. Ben invites you to buy high again. Buy now and we can pump the Dow up a couple thousand points. They you will feel wealthy and buy a car.

In the meantime, Bernanke does not really explain the costs of this policy. He mentions that he wants to prevent the pernicious risk of deflation, but the truth is he has already stimulated consumer inflation though it barely shows in the backwards looking indexes. The Fed likes to use inflation rates that discount the "volatile" energy and food sectors, even though these sectors are among the most meaningful for middle and lower-income consumers. Look what is happening with energy commodity prices. Oil prices are up over 12% since the Fed signaled this policy in August. Look what is happening with food commodity prices. Farm products, processed foods and feeds are up 9.9% in 12 months. Grains are up 33%. Mild products are up 17%. You will see these hit your credit card bill very soon. You are asked to reinvest in the stock market and use your phantom earnings, which the Fed will attempt to guaranty, to cover your increased cost of living and spend more on discretionary items and hopefully houses. Good luck with that.

Ben does not discuss the injustice to savers, those anachronistic Americans that still have a little cash but not a lot. I have been searching for a place to earn more than 1% on my savings with something other than a promotional rate that will adjust downwards again in three months. Average Americans, savers, retired folks who cannot speculate in the markets, are getting creamed by low-income and rising prices while speculators, primary dealers, hedge fund managers and other front-runners are making a killing in trading ahead of the Fed. Savers will earn 1% on their money, pay 15% to 33% of that in Federal Income Tax, netting between 67 and 85 basis points. Then the Fed will hit you with a minimum of 2% inflation and will probably overshoot and give us much more. You lose again if you are not a speculator. This system rewards the entrenched financial power structure and penalizes the hard-working Americans who cannot play that game. It is a reverse Robin Hood subsidy to the rich and is unjust. Will it save all of us by saving the banks? Is that the real game being played? Not addressed by the Fed.