Bernacke Hits the Easy Button

I'm not going to get too into this, but "Helicopter" Ben Bernacke has finally lived up to his name. As an aside, he was given the nickname in 2002 because of a speech he gave about deflation. Deflation used to be a huge problem (it was during the Great Depression when we were still on the gold standard), but now that we're on a fiat money system the solution is simple. If the US dollar begins to deflate we just print money making each individual note less valuable. If we print too much then we cause inflation... which erodes government debt... hmmm I wonder what's going to happen after all of this is over? Anyways, Bernacke used to famous example used by Milton Friedman of dropping money from a helicopter.

Yesterday the Fed, for the first time ever, used a tactic known as quantitative easing. Quantitative easing means that the Fed, to put it simply, creates money out of thin air, credits it to bank's accounts, whereby they are allowed to loan it out at ten times that amount because of the fractional-reserve banking system. What? Pretend I'm the Fed, you're the bank. I don't even print the money, it just shows up in your bank account at my behest. Since you're a bank you only have to keep 10% of the money you have in reserve (this is different than those crazy unregulated "financial institutions" that were 30 and 40:1), so the $100 I gave you turns into $1000 of lending while the $100 sits in your electronic bank account. So what does this all mean? Lots of stuff, but who wants to read about that crap... this is much more insightful:

"We’ve arrived at this unfortunate juncture in our nation’s financial history because of reckless behavior in both New York and Washington D.C. Interest rates were too often kept too low, lending standards were whittled away until they were non existent, and borrowing too much for one’s own good (both corporate and personal) reached the point where it carried no negative stigma. Our nation’s elected officials consistently spent far more than was collected in tax revenue and our nation’s regulators were so poor they wouldn’t have been able to cut it as mall cops.

We learned nothing from the foreshadowing events brought about by the reckless behavior on display at Long Term Capital, Enron, and WorldCom. Bill Fleckenstein neatly summed up the last 15 years in one his best-ever Raps back in January of this year. Anticipating today’s events, Bill wrote, “…initially, in the late 1990’s, we attempted to speculate our way to prosperity via the stock bubble. And then, when that didn’t work, we attempted to borrow our way to prosperity during the real estate bubble. Of course, those two ended the way they did, in an epic disaster, and now we’re trying to print our way to prosperity…” Well said, Bill. Let us all hope the U.S. experiment with pushing the button on Quantitative Easing is more successful for us than it was for the Japanese. But given all the behavior that brought us to this point, we will need to be both lucky and good from this point forward." - Jack McHugh, on The Big Picture