April 14, 2010

Congressional Freudian Projections

Ben Bernanke attended one of his regularly-scheduled public floggings today, this one before a Joint Congressional Committee overseeing something or other. Some pretty big names were there, including Chuck Schumer of New York, Sam Brownback of Kansas and Ron Paul of Texas. It was more of the same: talk about a "modest recovery," low interest rates from now until the End of Time, "subdued" inflation trends. Schumer wanted to talk about Chinese currency manipulation and theft of intellectual property, Brownback wanted to talk about the national debt, and Ron Paul wanted to hammer Gentle Ben on monetization. This last occurred when Bernanke answered someone else's question by stating that the Fed does not monetize the debt, and Paul reminded him that Quantitative Easing (the process by which the Fed bought up about $1.25 trillion worth of mortgages and $300 billion of Treasuries) was accomplished through money conjured out of thin air, which is to say, printed.

Bernanke conceded the point, but in reality the Quantitative Easing approach did not really have anything to do with the national debt, per se. The conjuration of money by the Fed to stabilize America's ravaged mortgage market was to avoid adding to the national debt, which is a very different thing. The Fed did it because it thought it could get away with it, as opposed to borrowing yet more money and driving this year's fiscal deficit to $3 trillion, that is, roughly 100% of the budget. And we do appear to have gotten away with it, for now at least. I always thought it was one of Bernanke's more clever tricks, to turn the Federal Reserve, in essence, into America's Bad Bank. When you think about it, why not? The Fed isn't really a bank, after all; it occupies the same position relative to ordinary banks as Superman does to mere mortals - it has superpowers, the most important of which is to decide how much money ought to be in circulation. The Fed now has a balance sheet of about $2.3 trillion, or about $1.5 trillion more than it did when the fiscal crisis started in late 2008. A lot of those assets are of very uncertain value, consisting as they do of dodgy mortgage backed securities for which there is really no public market. But again, so what? The Fed can't go bankrupt because it just prints money to balance its books. I don't think the mortgage purchasing program is strictly legal under the Federal Reserve Act (and a lot of other people don't either) but one precedent that was established during the Bush Era is that any government official or agency can break the law with complete impunity. No one will ever call you on it. You don't want to obey a Congressional subpoena, as Karl Rove elected not to do? No problem. Blow it off. You want to torture? Be our guest. Wiretap without a warrant? Eliminate due process? Abolish habeas corpus? No one cares anymore. Knock yourself out.

So under that standard, Bernanke can say that at least he's trying to do something positive. What's a little weird is when Bernanke gets blamed, at all, for the deficit spending. Under that tattered Constitution referenced above, at least last I checked, authorizing and spending public funds are under the exclusive jurisdiction of Congress. That didn't stop Brownback, one of Bush's chief supporters in any war he cared to start, from asking Bernanke to put a stop to the deficit spending. As in, stop me before I kill again! Brownback, as with most Congressional members, counts on the basic stupidity of his electoral constituency and the inability of the public at large ever to follow Congress's trail of destruction. If the public can't figure out that Bush doubled the national debt during his tenure, then so much the better for Republicans. They've been able to reinvent themselves as fiscal conservatives out of the same thin air that Bernanke prints money.

No one ever brings up the subject of runaway defense spending, of course, including Chuck Schumer, vaunted liberal and champion of the little guy. Okay, maybe little hedge fund manager. Yet the question keeps coming at every one of these hearings: what does Bernanke, who appropriates no Congressional budget money nor authorizes its expenditure, intend to do about these huge fiscal deficits? Huh?

It's fitting that Bernanke, who is avuncular, Jewish and bearded, should serve as the projection screen for Congressional dereliction of duty. Schumer and Brownback, and most of the rest of them, are simply talking to themselves when they grill Bernanke about the deficits. Bernanke knows it, too, but he's subtle about his ripostes. To Brownback's question about America's "credibility" with foreign creditors, Bernanke admitted it's a problem going forward, and added that the world is interested to see whether America has the political will to do what has to be done. And Bernanke knows the answer: probably not.

Sometimes when I watch Bernanke drone his way through these dog and pony shows, I'm reminded of that great scene in "The Right Stuff," when the flyboys at the California Air Force base are making fun of Gus Grissom's bailing out from the capsule, and Sam Shepard, as the classiest of the classy guys, Chuck Yeager, puts them in their place by saying, "Ol' Gus, he did alright." Sort of like that. At least Bernanke is trying to get something done, to elevate us from the abyss. As America appears to show signs of hope, his critics' greatest fear is that he might succeed.

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