What is Bernanke trying to do?

Here’s an excerpt from an article I read based on the faults of the Federal Reserve leading into the Great Depression.

“Milton Friedman and Ben Bernanke, stress the negative role of the American Federal Reserve System in turning a small depression into a large one by cutting the money supply by one-third from 1930 to 1931. With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve, especially the New York branch, which was owned and controlled by Wall Street bankers. The Fed was not controlled by President Hoover or the U.S. Treasury; it was primarily controlled by member banks and businessmen and it was to these groups that the Fed listened most attentively regarding policies to follow.

“In Milton Friedman’s work, A Monetary History of the United States, he writes that the downward turn in the economy starting with the stock market crash would have been just another recession. In general, he states the problem was that some very large, very public bank failures, particularly the Bank of the United States, produced widespread runs on banks, and that the Federal Reserve sat idly by while bank after bank fell. He claims that if the Federal Reserve had acted by providing emergency lending to these key banks or simply brought government berry bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks that fell after the very large and public ones did would not have, the money supply would not have fallen to the extent it did, and would not have fallen at the speed it did.”

Based on this I now understand why Bernanke, as was his predecessors Greenspan and Volcker, is so vigilant regarding inflation. They all know and understand that the only way to keep America out of a depression, like the 30s, is by letting Markets correct themselves, the way the Stock Market did in 1929 and he hopes the Real Estate market will today. Once the recession is underway, he is ready to flush the world with liquidity in order to prevent a stagnating or, worse, a receding economy.

He isn’t fighting inflation. His getting ready to fight a depression with inflation that he must account for as well.

The economy and Fed policy seem ready for this:
* Government Spending, the Trade deficit and the national Debt all don’t seem to be a problem, since he knows the mint is ready to push a button and print as many bills as it needs.
* The Fed has halted public indication of M3 – total amount of money in the cash, savings and security market – which clearly indicates that a run of monetary liquidity is imminent.

So what will he do after inflation or even hyperinflation hits? He has three options. (if there are anymore please let me know, I’d like to hear about them).
1) Raise Taxes (risky especially if the government is devoted to lowering taxes).
2) Raise Interest Rates (the “Hidden Tax” since it “creates wealth” for people but more so it pushes incomes into higher tax brackets.
3) By the deflation of the Dollar, either through a devaluation (for instance making every $100 = $1) or by instituting a Gold Standard by which all cash is traded in for gold and used as a peg to the currency.

The Dollar deflates back to its original value (hopefully, as long as they don’t push taxes/rates too far) as does gold, and the process starts over.

Bernanke’s ready for all this. Gold bugs have spoken of it for years. Is this all a hype or as the Daily Reckoning puts it “Does the Empire have no clothes?” after over 90 years in the spotlight?

I lost the source. Sorry.


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