A new Fed chapter: bond fire of the insanities
You already know what a bonfire is. How about a bond fire?
When you vote for president in 19 days, you aren’t really voting for Obama/Biden or Romney/Ryan. The real tickets are Obama/Bernanke and Romney/NotBernanke.
Let’s face it, the vice president has very little effect on your life. The Federal Reserve chairman, a job Ben Bernanke has held during the whole financial crisis, affects you enormously.
President Obama will keep Bernanke as chairman of the Fed if he’s re-elected. Romney has said — more than once and even in opposition to one of his advisers — that he’d get rid of Bernanke, a former Princeton University professor and author of the Fed’s very dangerous money-printing policy.
So it really comes down to whether or not I want Bernanke to continue picking my pocket so he can use the yield I’m not getting from my savings account to bail out banks and help the folks on Wall Street continue to make money through stock-market speculation.
When you look at it that way, Romney without Bernanke as head of the Fed is more in tune with the needs of the middle-class wage earner and saver than Obama is with Bernanke.
I think Romney is going to win — hands down.
An economy as bad as this one is just too difficult for an incumbent to overcome.
But a Romney victory would cause some very unique problems. Bernanke, you see, has more job security than any civil servant ever has. That’s because the financial system will get a shock when he or his successor stops printing money.
So I don’t confuse you, the money-printing operation goes by the innocuous name of Quantitative Easing — QE to its friends. It is very easy to explain: The Fed prints billions upon billions in extra currency and then uses that mad money to purchase securities that real investors don’t want.
Lately, the Fed has been buying securities that are made up of mortgages. Before that, QE had an appetite for government bonds.
By making these QE purchases the Fed has — so far — been able to keep interest rates down despite the fact that inflation is picking up.
At some point, however, the Fed is going to have to sell most of the securities acquired through QE. And there are a lot of these securities. Right now the Fed has about $3 trillion of securities in its possession. Half of that amount is mortgage-backed bonds, but that number will be growing by about $40 billion a month under the latest Fed scheme that was announced last month.
What would happen if Bernanke was suddenly tossed out of his position at the Fed and the next guy doesn’t take a hankering to QE3? It’s like the departing occupant of a house leaving a big ugly dog behind. What does the new owner do?
For the record, Romney can’t just toss Bernanke to the curb; the chairman’s term doesn’t end until January 2014. And there is no precedent for the Fed leader to tender his resignation when a new guy wins the White House.
And even after his chairmanship is over, Bernanke could (awkwardly) remain a regular member of the Fed board for another six years — although his influence would be greatly reduced.
In a cartoon world, the Fed would just put a trillion dollars or so of the bonds that are on its balance sheet in one big pile — perhaps on the pitcher’s mound at Yankee Stadium — and light a match. It would be a hell of a bond fire.
That, however, can’t be done, since it would turn the US dollar into the toilet tissue of all currencies. (And not the soft quilted kind, either.)
To keep that analogy going, the pile of dough Bernanke is accumulating will turn into one big pain in the ass sometime in the next few years. Handled correctly, the sale of those QE bonds might not drive interest rates and prices higher.
But if the Fed tries to unload those bonds too quickly, some really nasty stuff could happen.
So, do I want a president who will unhitch himself from the mad scientist?
Sure do! Bernanke’s ready for the speaker circuit. The Romney/NotBernanke ticket will just have to figure out the problems as it goes along.
Social Security recipients found out this week that they will be getting a seasonally adjusted, hedonically measured, geometrically weighted 1.7 percent increase in their 2013 checks.
That turns out to be about $21 a month — about half the increase folks got this year.
I’ll explain what hedonics and geometric weighting are another time. You should already understand seasonal adjustments.
But the bottom line is: Inflation — which determines increases — is a bothersome number for Washington, and there are magical ways our government economists can make it disappear.
So seniors will just have to live off the interest they get from their savings accounts.
Oh, that’s right — Washington is already cheating them in the interest game as well.
Read the full story here.