Ben Bernanke’s biggest dilemma
Posted on 23 September 2011 with 1 comment from readers
With global financial markets entering a major correction phase Fed chairman Ben Bernanke has not helped much this week with operation ‘twist’ but he is caught in the horns of a big dilemma.
First, the more stimulus is applied the less effective it becomes. Secondly, the political wind is blowing in the opposite direction with members of Congress telling him not to do it in a letter this week and the leading contender for the presidency next year saying this would be ‘treacherous’.
Third, the Fed is running out of tricks and does not want to waste its final ammunition. Hence waiting and letting markets fall to a new level before doing QE3 or more money printing makes sense if you are Ben Bernanke.
Shaken and stirred
By then folks will be so shaken by events – how quickly they forget in less than three years what this pain feels like. That shot of QE3 will be like a wounded person’s call for morphine, and callow democratic politicians will know when to shut up.
But the first problem still remains: QE3 is very unlikely to work. Indeed, the Republicans fears about money printing and blowing up the system are very valid and the argument for having a real recession to reset the US and global economy is commonsense.
You cannot artificially magic prosperity for all for all time, for everybody. It does not work that way. You will create a system that is over-burdened with debts and deficits until it does finally collapse. Look at Greece.
The trouble is that we could already be past that point of no return, and that is Ben Bernanke’s real conundrum, his biggest dilemma. What on earth does he do then?
1 Comment posted by readers:
Ed: “The trouble is that we could already be past that point of no return”
In my opinion, we are beyond the point of no return! So what does the Bernank do then?
My guess is that he will try a bigger, bolder and more desperate move in a vain effort to create 2.5% to 3% inflation as quickly as possible. That will fail, just like all his other “experiments” have failed. In his mind, all that is required is to create 3% inflation, and that will help with job creation; this is 1960s’ thinking at its best. Someone needs to tell him that the US economy is a very different animal than it was 30 or 40 years ago.
Each of his prior experiments has resulted in greater instability and market volatility than we have ever had; further, each have twisted (no pun intended!) and contorted the US economy and the global financial system to the grotesque and dangerous positions that they currently are in.
One more silver bullet left, Mr. Bernank, then as John Mauldin says, it’s “End Game”.