02 March 2011

One To Lecture

U.S. Federal Reserve Chairman Ben Bernanke warned Congress could create financial and economic “chaos” if lawmakers bind together raising the short-term debt limit to fund the federal government with fundamental fiscal restructuring.

And Bernanke is an expert about the causes of financial crisis.  This clown, along with Greenspan, is the primary cause of the housing bubble and its bursting.  The cheap money policy fueled unsustainable growth, and Bernanke was behind that Ponzi scheme one hundred percent
Testifying before the Senate Banking Committee, Bernanke said that he strongly supports Congress making the budget changes necessary to reduce the mountain of debt and rising deficit facing the U.S. in the years ahead. He said the fiscal challenges facing the U.S. is the top long-term priority the government needs to tackle.

And where was he in 2007?  Why wasn’t he preaching this message before America was saddled with all this debt and plagued by deficit spending?  And note how tepid he is even now.  The fiscal challenges facing America shouldn’t just be top long-term priority; they should be top short- and mid-term priority as well.  This level is already unsustainable, is already a problem, but we simply refuse to recognize his fact.

But the Fed chief said he’s worried about lawmakers using the need to raise the debt ceiling as a legislative vehicle to enact budget restructuring, as many Republicans are have urged.

And here we see Bernanke slink back to his Keynesian roots.  Never mind that he just said that we must make solving fiscal problems top priority.  Never mind his newfound sense of responsibility.  We can’t reform the spending process because, you know, Bernanke is worried.  About what, exactly?
A handful of Republican senators, knowing the Fed chief’s concern about debt and deficit levels, tried to leverage that worry into support for a GOP proposal to tie the issues together. But Bernanke returned with a salvo of warnings against linking the two issues.
Major budget restructuring, particularly targeting entitlements such as healthcare, poses a monumental political hurdle. Bernanke said tying the two issues together would raise the risk that the U.S. wouldn’t subsequently be able to raise the debt level and therefore default on its debt. That, he said, would cause a financial crisis and “real chaos.”

It sure would.  The thing is, the chaos, political or economic, is unavoidable at this point.  We mortgaged the future to have what we have.  The payment is due, and we’re short money.  That means we have to cut back.  Period.

Cutting spending is non-negotiable.  And it is not enough to simply cut projected raises in spending levels. We must cut as much as we can, we must eliminate as much as we can, and we must take in as much revenue as we can.  We’ve mortgaged the future and the payment is now due.

“It would be extremely dangerous and likely recovery-ending event,” Bernanke later added.

Yeah, assuming that there was an actual recovery.  There wasn’t, so there are no worries on that front.  If anything, it would make the economy more productive since producers could no longer rely on subsidies to survive.  And welfare recipients would either have to find or create jobs for themselves.  And if tax reform were enacted to more efficient and less intrusive, America would be more productive still.
“For a very long time afterwards, the U.S. would have to pay higher interest rates in the market and that would make our deficit problems even more intractable,” he said.

You know why this would be the case?  Because we would be a higher risk.  And guess what?  We are a legitimately higher risk.  We’re looking at decreasing revenues, higher inflation, and less output.  What investor wants a piece of that?

First, the Fed chief said a new financial crisis would be created as firms that rely on receiving interest and principle from the government are unable to make their own payments. “That would probably cascade through the financial markets,” he said.

And this should be allowed to happen.  They made a bad bet, and they should live with the consequences.  Of course, Bernanke can’t say this anymore in light of all the bailouts in the last three years.  Which, by the way, is why you never bail any business out.  Not only does it eliminate moral hazard, it also creates an unaffordable entitlement effect.
Then, there would be a “massive loss of confidence” in U.S. Treasury securities, the deepest, most liquid market in the world.

And what, exactly, are treasury securities backed by?  Why the full faith and credit of the United States, of course.  They may as well be backed by orange leprechauns that belch gold coins.

And that, folks, is why you never by bonds from the government.  If the government goes into default, the only claim you have is against the promises it made.  With normal bonds, you can lay claim to assets in the event of a default.  The same is not so with the government.

Ultimately, Bernanke is worried that if the proposed budget reforms get passed, or if the government debates long enough about it, investors everywhere will see that the US government’s fiscal position is a total and utter farce.

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