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 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 25-Sep-2008
Ben Bernanke's Great Historic Experiment is at the brink

Web Log - September, 2008

Ben Bernanke's Great Historic Experiment is at the brink

Desperation sets in as credit markets continue to seize up.

I've posted over 1,200 articles on this web site over the years, and I've often expressed amazement about what's going on, but I think that I can safely say that it all pales to insignificance compared to what's been happening in Washington this week. The overwhelming insanity leaves me breathless unless I can shut it out of my mind. The phrase "rearranging the deck chairs on the Titanic" comes to mind.

Things are being said and done this week that will go down in history. Things have been said that will be repeated over and over, like Herbert Hoover's "Prosperity is just around the corner," his constant mantra as the country sank deeper and deeper into the Great Depression.

There are many lists of dumb-sounding statements from officials speaking in 1929. How about: "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." - Andrew W. Mellon, U.S. Secretary of the Treasury, December 31, 1929.

Today's Secretary of the Treasury, Henry M. Paulson Jr., joined Fed chairman Ben Bernanke to testify before the Joint Economic Committee of Congress on Wednesday.

Actually, it wasn't just testimony. Ben Bernanke was haggard, grim-faced and ashen. His opening statement was a desperate plea, begging Congress to spend $700 billion to Bail out the World (BOTW), so that the world could be saved:

"Notably, stresses in financial markets have been high and have recently intensified significantly. If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse. ...

While perhaps manageable in itself, Lehman's default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit--where available--to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets--a flight to quality--sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth. ...

Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."

But the congressmen were very skeptical. They demanded answers to questions that Bernanke couldn't answer: "Is $700 billion the actual cost?" "What's so urgent that we have to pass this bill this week?" "Suppose we pass the bill -- are you sure it will work?"

In fact, they made it clear that the public is VERY negative about the BOTW bill. One pundit said that constituent calls to congressmen were running 99 to 1 AGAINST the bill.

TED spread, Feb 06 - Sept 09
TED spread, Feb 06 - Sept 09

Meanwhile, the credit markets continue to seize up. One measure of how bad things are is called the "TED spread," the difference between 3-month interest rates for Treasury bills and European dollar bank loans. (TED = Treasury vs Eurodollar).

As you can see from the graph, there were three previous crisis points: August 2007, when the credit crisis began; December 2007, when the Fed began its aggressive liquidity programs; and March 2008, when Bear Stearns had to be rescued.

Now, in September, 2008, the credit crisis is worse than ever. We've already had the nationalization of Fannie Mae and Freddie Mac, the bailout of AIG, the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America, and several other related changes. Wall Street is already unrecognizable from where it was just a month ago, and the credit crisis is worse than ever.

The Bailout of the World (BOTW) is Ben Bernanke's last desperate attempt to stave off a new Great Depression.

Related Articles

Bernanke's Great Historic Experiment
As his Great Historic Experiment collapses, Ben Bernanke scrambles to save his reputation: Who "lost" the economy? The finger-pointing is getting intense.... (15-Jan-2009)
Ben Bernanke's Great Historic Experiment is at the brink: Desperation sets in as credit markets continue to seize up.... (25-Sep-2008)
Fed Chairman Ben Bernanke defends his Great Historic Experiment before Congress: The Fed-led rescue of Bear Stearns last week was closely questioned... (7-Apr-08)
A historic day in Ben Bernanke's Great Historic Experiment: In its biggest move yet, the Fed bails out a collapsing Bear Stearns.... (15-Mar-08)
Bernanke's historic experiment takes center stage: An assessment of where we are and where we're going.... (27-Aug-07)
Ben Bernanke's Great Historic Experiment: Bernanke doesn't believe that bubbles exist. His Fed policy will now test his core beliefs.... (18-Aug-07)
Ben S. Bernanke: The man without agony : Bernanke and Greenspan are as different as night and day, despite what the pundits say. (29-Oct-2005)
Federal Reserve congratulates itself on jawboning policy: Fed says it propelled the economy upward merely by promising to keep interest rates low.... (17-Sep-04)

I've criticized many bizarre beliefs and statements that Bernanke has said before -- especially that the 1930s Great Depression could have been avoided if the Fed had lowered interest rates sooner, or that jawboning affects the economy, but fundamentals don't.

But the centerpiece of Ben Bernanke's life has been his Great Historic Experiment, and the failure of the Great Historic Experiment must be apparent, even to him.

The plea he made to Congress today was an act of desperation, on two levels:

He enjoys at least the consolation that he'll be able to blame Congress for the disaster.

One more thing:

When I wrote my 2003 book, Generational Dynamics: Forecasting America's Destiny, I never really understood how Congress could have passed the Smoot-Hawley Tariff Act in June 1930. The law was opposed by President Hoover's administration and overwhelmingly by economists at the time. But it was several months after the 1929 stock market crash, and Americans were blaming high unemployment on foreigners stealing jobs away from Americans. The public demanded that the law be passed. The Smoot-Hawley act didn't didn't help the American economy, but it crippled imports from other countries, especially silk from Japan. Japan was already suffering economically anyway, but this act shut down its silk industry. It infuriated the Japanese, who invaded Manchuria and China in subsequent years, and bombed Pearl Harbor a few years after that.

Assuming that the current political trend continues -- if the BOTW bill is delayed or watered down -- it will be seen as a disastrous move by Congress, and may even be seen as the CAUSE of the crash, just as many people see the Smoot-Hawley Tariff Act as the CAUSE of much of the misery of the Great Depression.

On Wednesday evening, President Bush made a televised address to the nation, outlining the danger and calling on Congress to pass the BOTW bill. His speech contained warning language that hadn't been heard publicly before. It's not clear yet whether the speech will spur the public to support the BOTW bill, or whether it will cause people to become even more anxious and panicky.

From the point of view of Generational Dynamics, of course, the BOTW bill won't have any effect one way or the other, whether it's passed or not. The financial calamity is coming. (25-Sep-2008) Permanent Link
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