Investing to Wealth

Bernanke outlined today the Fed’s exit strategy. You can read Bernanke’s prepared remarks here at the Federal Reserve website. While he mentioned a handful of tools at the disposal of the Fed, Bernanke was careful to outline a plan in broad strokes rather than specifics. And he also left out any mention of timing because of the obvious fragile nature of the US economy.

Unfortunately, he’s painted into a corner. The avalanche of liquidity that the Fed pumped into the market throws an ominous shadow of inflation or hyperinflation. Personally, I doubt that is going to happen any time soon because even now, deflationary forces are still winning in the US economy. Nevertheless, the worry is that eventually, things will shift from deflation to inflation as the recession ends and we return to a growing economy. So the Fed has to telegraph to the market it is intelligent enough to foresee this and be prepared with a plan. This is basically what Bernanke was trying to do.

Among the tools at the disposal of the Fed is the ability to pay interest on excess reserves in the banking system. Central banks around the world are divided on this and until recently the US did not pay any interest on excess reserves. But since October 2008 it has done so and Bernanke floated the possibility of not only continuing to do so but to increase the rate to remove liquidity from the economy. We’ve already looked at how incredibly skewed things have gotten since this incentive was introduced - Excess Reserves: Bankers Grow Fat While Public Starves.

While this is theoretically sound, the result will be to increase even more the reward for banks to not actually engage in banking activity (that is, lending). Right now, this is would be disastrous because of the dramatic shift in excess reserves which are approaching $1 trillion US dollars. And the complete lack of lending which is choking business activity (see chart in above link).

We’ve been witness to the largest theft from the public to the wealthy oligarchs in history. The US has been for some time now shifting wealth from the majority to a very very tiny minority - just take a look at its Gini coefficient over time. But this is just astounding. In one fell swoop trillions of dollars have changed hands from the public, via a government that is captured by corporate interests and a Federal Reserve who is more a cheerleader than a regulator, to the banking elite.

Maybe I’m wrong about Bernanke. I hope that I am. But his pattern of decisions, from his tenure as a yes-man to Greenspan through to the TARP mess, leaves me with very little hope.