Class Warfare Blog

March 10, 2013

Mr. Bernanke, Just Stop!

What do you call it when something’s price goes up and up and up for reasons having nothing to do with its value. I call this a “bubble” because at some point, some degree of panic is going to set in that those things aren’t really worth that much money and a sell off will occur with virtually all (and maybe more) of the value gained evaporating.

The first time this happened, as I recall, was the Dutch tulip mania which at its peak in the early 1600s, single tulip bulbs were selling for more than ten times the annual income of a skilled craftsman. The crash was spectacular. This also was about the same time that financial markets were being devised. (Interesting, no?)

Our most recent bubble was the housing bubble of the mid 2000’s with house prices going up and up and up, because demand was being created out of whole cloth, namely through people who shouldn’t have been getting loans but who were getting loans, very, very easily.

Currently, we see the Dow Jones Industrial Index hitting all time highs and the stock markets going crazy. But business kind of sucks, so what is going on? The economic is moribund. Millions are out of work and the stock market is going crazy? WTF?

Ah, now it makes sense. In order to “stimulate” the economy, the Federal Reserve System is making enormous amounts of money available at zero or even negative interest. (Negative interest occurs when the interest rate is less than the rate of inflation.) This money is being shoveled in the direction of banks, who aren’t lending it to businesses because businesses don’t want loans as they don’t have any customers (here anyway, they are hiring overseas). So the banks are taking that money and investing it in the stock market where they are getting a non-zero return on investment. Free money for the banks, courtesy of the Fed!

In other words, the Federal Reserve is funding a stock market bubble! When it crashes, I am sure that all of the employee pension funds invested in the stock market will take a hit, but all of the banks and wealthy people will get bailed out … just like they did the last time.

And one must ask where the Fed gets the money to do this. This is quite amazing. They make it up. When a bank borrows $100 million, they electronically send the number “100,000,000” to that bank’s account and voila, the money exists. They don’t even have to “print money” as the saying goes, they just make it up out of electrons!

Mr. Bernanke, just stop!

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6 Comments »

  1. Steve, could you explain to me precisely how the Fed Reserve works. As much as i understand its a private institution, right? The Reserve Bank of Australia (for example) is an actual department of the Ministry of Finance, but that’s not the case in the US, is it?

    Comment by john zande — March 10, 2013 @ 12:08 pm | Reply

    • There is an interesting history. Our founding banking fathers wanted nothing to do with a National Bank, but a bill got slipped though anyway and voila! Yes, it is private with the right to “print money.” I think there are very good reasons to both not have and to have such a bank. Recently there have been large swings of both good and bad from its actions. If it were part of the government, it would be more political, but at least we would get to see the books!

      Comment by stephenpruis — March 10, 2013 @ 1:46 pm | Reply

      • Interesting. I see Bernanke being praised… but Greenspan was also praised, wasn’t he? Reagan and his bubble economics has a lot to answer for.

        Comment by john zande — March 10, 2013 @ 2:01 pm | Reply

        • All of the economist (maybe save Paul Krugman) seem to live in a bubble, a hypothetical world which has its own rules baked in, rules that preserve the status quo and the privileges of the monied interests.

          Comment by stephenpruis — March 10, 2013 @ 7:28 pm | Reply

          • Indeed. I think that’s why i like reading Robert Nielsens posts so much. Heartening to see such a young guy focusing on right economics.

            Comment by john zande — March 10, 2013 @ 7:34 pm | Reply


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