What Should Bernanke Have Done?

Oct 16, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

We're having breakfast in a little cafe. It is rainy and cold outside. The cafe is a refuge of warmth and light. Customers stand at the bar, drinking coffee, reading newspapers...talking quietly...most of them are getting ready to go to work.

In walks a tall, young, attractive woman with a big black dog, dripping water onto the floor. "Bonjour," she said to the waiter, bending over the counter to exchange kisses with him, revealing a very tight pair of jeans. "Bonjour," he replied.

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A man sitting close turns to us:

"Nice dog," he says with a smile.

"Yeah...nice," says another.

It was a good day on Wall Street yesterday. US stocks rose as the news turned bad. But in the fantasy world of modern economics, monetary policy and politics, bad news is good news. Buffoonery is wisdom. And cowardice is courage.

"What's with this Donald Trump character," asked a French friend over dinner.

"I don't know," we replied. "But at least he lives in the real world...or at least in his version of it. Not the make-believe world of most politicians. He has actually made money, in a real business. He has hired people and fired people. He has bills to pay. He has enough money so he can say what he thinks. And he hasn't been in politics long enough to keep his mouth shut."

What does Donald Trump think about the stock market?

Investors are "being forced into an inflated stock market and at some point they're going to get wiped out," he told 'The Hill.'

"We're in a bubble right now."

As far as we know, this comment is as honest and accurate as anything that has been said thus far in the race for president.

But no one has a keener knowledge of hand-grenades than the man who has had one blow up in his face. The Donald knows a bubble when he sees one. And he knows what happens when it runs into a sharp object. In the exploding debris of 2009, he was knocked flat. Lying on his back, briefly, he was perhaps the world's poorest man with debts towering over his net worth.

Today, he is back in the chips. US stocks are about 20% higher than they were in 2007. Commercial property is also about 20% higher. In housing, the picture is a little more complicated. The average house may be a bit lower, but property prices in select areas are higher than ever. This is partly because the rich and the insiders are using their ill-gotten gains to compete for prize real estate...and partly because foreign buyers are coming into the market in a big way. The Chinese, particularly, have become major buyers of US real estate. (A report often quoted on the internet says Chinese are buying 80% of the new houses in Irvine, CA. Hard to believe.)

Central banks' holdings are $10 trillion higher. The total of US-based debt and equity is $25 trillion above its 2008 level. And the world is $57 trillion deeper in debt.

In her magical mystery world at the Eccles Building (Fed headquarters) Janet Yellen surveys all this. She has never run a business. She has never even had a job in a profit-making business. She cannot admit that there is a bubble - neither in debt, nor stocks nor in real estate. Judging from her comments in 2008, she probably wouldn't recognize one if it was right in front of her nose.

But at least she - like her predecessor, Ben Bernanke - has the cowardice of her convictions! Bernanke, in his new book, "The Courage to Act," tells us that he "did not want to be remembered as the person whose decisions had led to the Fed's destruction." That's right, the biggest challenge hits the Fed in 80 years and Mr. Bernanke is worried about his own reputation!

He should have been steadfast. He should have let the barrel throw out its rotten apples. Instead, he panicked. He told "the president...we didn't think that the system - and more importantly, the economy - could withstand" the bankruptcy of the big insurance company AIG.

(He didn't mention that AIG owed a lot of money to Goldman Sachs, and that Goldman's former CEO was now in charge of the US Treasury!)

The real economy had withstood the Crash of '29...the Great Depression...WWII...and so forth. It was in no danger from one over-leveraged insurance company. The real economy would have applauded and breathed easier if AIG had gotten what it had coming. But "the system" Mr. Bernanke was not real commerce, industry, and capitalism...he was worried about was the cockamamie debt-fueled fantasy world he and his brethren at the Fed had patched together. Under his watchful eye, it had gone too far. It had bubbled up on debt.

Desperate to bail it out, Bernanke mis-informed the president. And today we have the same 'system' - with more or less the same crony parasites running the same flimflams with more debt than ever.

And now, poor Janet Louise Yellen is in the captain's chair. She must feel the same dread...the same fear. No central banker wants to be at the helm when their bubble ship hits the rocks.

So, she steers for open water.

"Stocks rally as 2015 rate hike appears more remote," says TheStreet.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "What Should Bernanke Have Done?"

Ravi shah

Oct 18, 2015

Thank u dear Bill BONNER for showing us real picture of US and world economy so that we can remain cautious for impending stock mkt collapse.Kudos to you

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Pradeep Kumar Nair P

Oct 16, 2015

I can see Janet Yellen having written a book "The Act of Courage"

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