The Invisible Bitch-Slap
Adam Smith famously described "the invisible hand" -- how selfish, individual efforts work through free markets to benefit society generally. Fast-forward a couple hundred years, and see how Federal Reserve Chairman Ben Bernanke works through the banking system to screw over the young and the poor to benefit a much smaller segment of society. I call this "the invisible bitch-slap." Here it is in action:
Two million Americans over the age of 30 now live with a housemate or roommate, and shared households make up 18 percent of U.S. households -- a 17 percent increase since 2007.
One group of women sold their homes and bought a house together in Mount Lebanon, Pa., after they all got divorced.
“It made amazing economic sense,” said one of the women, Jean McQuillin.
Why are grownups with real jobs forced to live together? Why can't they afford their own homes? Why does the extended adolescence of virtual dorm life make "amazing economic sense"?
Because housing prices, once inflated during the bubble, weren't allowed to ever find their natural floor. An over-produced asset, which should have become cheap, is instead increasingly unaffordable.
Bernanke has done everything he can to re-inflate -- to re-bubble-ize -- the market for single-family homes. The idea is that if Bernanke can re-ignite the housing market, he'll re-ignite the entire economy. Maybe that's not such a bad idea, if you're already sold on the whole central planning thing. But he's going about it all wrong.
Despite the Crash of 2007, home ownership is still at near-record highs. Pretty much everybody who can afford and desires a home already has one. So if you want to bring new people into the market, prices have to come down. But Bernanke won't let that happen.
It's called "the wealth effect." Bernanke believes that if you make the (relatively) rich feel rich enough, they'll spend more money. Then the increase in demand will trickle down to everybody else, in the form of new greeter jobs at Wal-Mart. That's why Bernanke has also been propping up the equities markets, too. If stock prices are high, people will cash some out and buy things that will create jobs. The fact that most of those jobs are in East Asia seems to have escaped him.
You might remember that Democrats used to deride President Reagan's "trickle down" economic policy. The way Reagan's worked was to cut marginal tax rates and to deregulate the economy, so that people would have good incentives to start new businesses or expand existing ones -- right here in the good ol' US of A. President Obama has taxed, promised to tax, or threatened to tax the bejeebus out of most everything. He's also unleashed a tidal wave of new regulations, mandates, and expenses unseen since the Great Depression. In the first full year of Reagan's recovery, real incomes shot up more than seven percent, and American job creation soared on the back of a swelling GDP. After nearly four years of "recovery," Obama hasn't come close.
So maybe the argument could be made that Bernanke is making the best plays he can with a very weak hand.
Maybe that argument could be made.
But then I look at Bernanke's big play, and I just scratch my head in a depressed kind of wonder. The thinking is that in a country desperately trying to get out from under too much debt, we'll all get rich again if Bernanke can just make additional borrowing cheap enough.
I wish I were kidding, but I'm not -- that's ZIRP and Operation Twist. Cheap borrowing is how our federal government has managed to operate at all these last five or six years, and it's how the Fed has tried to juice the economy in the private sector. Keep housing, commodities, and equities expensive, but keep borrowing cheap. The solution to a giant debt bubble is another giant debt bubble.
We tried something similar back in the Great Depression, when every Smart Mind in the Country™ was utterly convinced that the cure for spreading poverty was to make everything more expensive. And again I wish I were kidding, but I'm not -- that's why FDR allowed labor unions to run wild, and why he had perfectly good food and farmland destroyed. The result: what should have been a temporary dislocation of a stock-market crash was turned into a lost decade of bread lines, needless labor strikes, dust bowls, and general human suffering.
Bernanke earned his chops as a so-called expert on the Great Depression. But here he is, repeating nearly the very same mistakes as FDR. And those younger & poorer folks who are caught in the squeeze of high prices and unobtainable debt? Bernanke's policies are explicitly rigged against them, because they don't (and now probably can't) ever own enough assets to benefit from the Fed's long-promised wealth effects. And Obama? He already got their low-information votes -- twice -- so he is unmoved by seeing them immolated to the Gods of Goldman-Sachs.
It makes amazing economic sense.